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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996
REGISTRATION NO. 333-10407
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ON COMMAND CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 4841 77-0435194
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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ARTHUR M. AARON
VICE PRESIDENT, ACTING GENERAL COUNSEL AND SECRETARY
3301 OLCOTT STREET c/o ASCENT ENTERTAINMENT GROUP, INC.
SANTA CLARA, CALIFORNIA 95054 ONE TABOR CENTER
(408) 496-1800 1200 SEVENTEENTH STREET, SUITE 2800
(Address, including Zip Code, and Telephone DENVER, COLORADO 80202
Number, including Area Code, of Registrant's (303) 626-7000
Principal Executive Offices) (Name, Address, including Zip Code, and Telephone
Number, including Area Code, of Agent for Service)
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Copy to:
ROGER H. KIMMEL
CHRISTINE FOURNIER
LATHAM & WATKINS
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 906-1200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and upon
consummation of the transactions described in the enclosed Information
Statement/Prospectus.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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ON COMMAND VIDEO CORPORATION
3301 Olcott Street
Santa Clara, California 95054
(408) 496-1800
NOTICE OF CONSENT OF STOCKHOLDERS IN LIEU OF MEETING
PURSUANT TO SECTION 228 OF THE DELAWARE GENERAL CORPORATION LAW
On August 12, 1996, the Board of Directors of On Command Video
Corporation ("OCV") approved an Agreement and Plan of Merger (the "Merger
Agreement") providing for the merger (the "Merger") of On Command Merger
Corporation, a newly formed Delaware corporation ("Merger Sub"), with and into
OCV. Merger Sub is a wholly owned subsidiary of On Command Corporation ("On
Command Corporation"), a newly formed Delaware corporation. On Command
Corporation has entered into an acquisition agreement (the "Acquisition
Agreement") to acquire (the "Acquisition") all of the outstanding capital stock
of Spectradyne, Inc. ("Spectradyne"), a wholly owned subsidiary of
SpectraVision, Inc. ("SpectraVision"). SpectraVision and its domestic
subsidiaries, including Spectradyne, have filed a petition for relief under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code").
In the Merger, it is currently expected that each issued and
outstanding share of OCV Common Stock will be converted into the right to
receive the following: (i) approximately 2.84 shares (the "Initial Shares") of
On Command Corporation Common Stock ("OCC Common Stock"), (ii) such additional
number of shares of OCC Common Stock, if any, to which holders of OCV Common
Stock may be entitled pursuant to a formula based upon the working capital of
Spectradyne at the time of the consummation of the Acquisition (the "Reserved
Stock") and (iii) warrants to purchase, on a cashless basis, approximately
18.61% of a share of OCC Common Stock (the "Series A Warrants"). Pursuant to the
Acquisition Agreement, as consideration for the acquisition of the capital stock
of Spectradyne, upon the consummation of the Acquisition On Command Corporation
will issue to the creditors of SpectraVision pursuant to a distribution plan to
be adopted by the Bankruptcy Court (i) an aggregate of 8,250,000 shares of OCC
Common Stock, less the aggregate amount of Reserved Stock and (ii) warrants to
purchase for cash an aggregate of 2,625,000 shares of OCC Common Stock for cash,
at the same exercise price applicable to the Series A Warrants. The Initial
Shares to be issued to holders of OCV Common Stock will represent, in the
aggregate, 72.5%, (of which shares representing approximately 57.2% will be
issued to Ascent Entertainment Group, Inc. or its wholly owned subsidiaries
("Ascent")), and the shares of OCC Common Stock to be issued to creditors of
SpectraVision will represent, in the aggregate, 27.5%, of the total number of
shares of OCC Common Stock to be issued pursuant to the Merger Agreement and the
Acquisition Agreement, assuming no holder of OCV Common Stock exercises its
appraisal rights and before giving effect to any Reserved Stock and the exercise
of any warrants.
The Board of Directors of OCV has determined that the Merger is in
the best interests of OCV and its stockholders. Accordingly, the Board of
Directors has unanimously approved the Merger Agreement and the transactions
contemplated thereby. Certain stockholders of OCV, including Ascent, Robert
Snyder, President, Chief Executive Officer and a director of OCV and Richard
Fenwick, Sr., a director of OCV, who own, in the aggregate, approximately 86.5%
of the outstanding shares of OCV Common Stock, acting pursuant to Section 228 of
the Delaware General Corporation Law, have consented in writing to the adoption
of the Merger Agreement and to the consummation of the Merger. Holders of OCV
Common Stock who have not consented to the adoption of the Merger Agreement and
who (a) deliver to OCV a written demand for appraisal of their shares of OCV
Common Stock and (b) meet certain other statutory requirements, will be entitled
to have the value of their shares appraised in accordance with Section 262 of
the Delaware General Corporation Law.
The Merger Agreement and the Acquisition Agreement are described in
detail in the accompanying Information Statement/Prospectus and its annexes. You
are urged to read all of these important materials carefully.
By order of the Board of Directors
Santa Clara, California
/s/ Arthur M. Aaron
-----------------------------------
October 7, 1996 Assistant Secretary
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
SUBJECT TO COMPLETION, DATED OCTOBER 4, 1996
ON COMMAND VIDEO CORPORATION
INFORMATION STATEMENT
ON COMMAND CORPORATION
PROSPECTUS
This Information Statement/Prospectus relates to the proposed merger
(the "Merger") of On Command Merger Corporation ("Merger Sub"), a wholly owned
subsidiary of On Command Corporation ("On Command Corporation"), with and into
On Command Video Corporation ("OCV") pursuant to an Agreement and Plan of
Merger, dated as of August 13, 1996 (the "Merger Agreement"), among On Command
Corporation, Merger Sub and OCV.
Simultaneously with the Merger, On Command Corporation will acquire
(the "Acquisition") all of the outstanding capital stock of Spectradyne, Inc.
("Spectradyne"), a wholly owned subsidiary of SpectraVision, Inc.
("SpectraVision"). The Acquisition will be effected pursuant to an Acquisition
Agreement, dated as of August 13, 1996 (the "Acquisition Agreement"), among On
Command Corporation, Ascent Entertainment Group, Inc. (together with its wholly
owned subsidiaries, "Ascent"), SpectraVision, the Official Creditors' Committee
for SpectraVision, Spectradyne and the other domestic subsidiaries of
SpectraVision. See "The Transactions."
This Information Statement/Prospectus also constitutes a prospectus
of On Command Corporation with respect to (a) 21,750,000 shares of common stock,
$.01 par value per share, of On Command Corporation ("OCC Common Stock"), (b)
such additional number of shares of OCC Common Stock, if any, to which holders
of OCV Common Stock may be entitled pursuant to a formula based upon the working
capital of Spectradyne at the time of the consummation of the Acquisition (the
"Reserved Stock"), which On Command Corporation expects will not exceed
approximately 650,000 shares of OCC Common Stock in the aggregate, and (c)
warrants to purchase, on a cashless basis, 1,425,000 shares of OCC Common Stock
(the "Series A Warrants"). In the Merger, each issued and outstanding share of
OCV Common Stock will be converted into the right to receive (i) approximately
2.84 shares of OCC Common Stock, (ii) such additional number of shares of
Reserved Stock, if any, to which holders of OCV Common Stock may be entitled and
(iii) Series A Warrants to purchase, on a cashless basis, approximately 18.61%
of a share of OCC Common Stock. See "The Transactions."
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND
US A PROXY. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN OCC COMMON STOCK, SEE "RISK FACTORS" BEGINNING
ON PAGE 17.
In connection with the Merger and the Acquisition, application has
been made to list the OCC Common Stock and the Warrants on the Nasdaq National
Market System under the symbols "ONCO" and "ONCOW," respectively. This
Information Statement/Prospectus is first being mailed to holders of OCV Common
Stock on or about October 7, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement/Prospectus is October 7, 1996.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION........................................................................................... 6
SUMMARY......................................................................................................... 7
The Companies............................................................................................... 7
The Transactions............................................................................................ 8
Stockholders' Consent....................................................................................... 10
Exchange of Certificates.................................................................................... 10
Interests of Certain Persons in the Merger.................................................................. 10
Appraisal Rights............................................................................................ 10
Anticipated Accounting Treatment............................................................................ 11
Opinion of Allen & Company.................................................................................. 11
Listing of OCC Common Stock and Warrants.................................................................... 11
Certain Federal Income Tax Consequences..................................................................... 11
Risk Factors................................................................................................ 11
Comparative Market Prices and Dividend Policy............................................................... 12
Summary Pro Forma Financial Information..................................................................... 13
Historical Summary Selected Financial Information........................................................... 14
RISK FACTORS.................................................................................................... 16
Control by Ascent........................................................................................... 16
Restrictions on Debt Financings............................................................................. 16
Dependence on Additional Capital for Growth................................................................. 17
Integration of OCV and Spectradyne Businesses............................................................... 17
No Prior Public Market and Possible Volatility of Stock Price............................................... 17
Highly Competitive In-Room Entertainment Industry........................................................... 18
Dependence on Significant Customers......................................................................... 18
Dependence on Performance of Lodging Industry............................................................... 18
Risk of Technological Obsolescence.......................................................................... 18
Dependence on Key Personnel................................................................................. 19
Seasonality................................................................................................. 19
Anti-Takeover Protections................................................................................... 19
STOCKHOLDERS' CONSENT........................................................................................... 20
THE TRANSACTIONS................................................................................................ 21
General..................................................................................................... 21
Background of the Transactions.............................................................................. 21
The Merger.................................................................................................. 22
Merger Consideration................................................................................... 22
Effective Time......................................................................................... 23
Directors and Officers of the Surviving Corporation.................................................... 23
Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock Certificates;
Fractional Shares.................................................................................. 23
Treatment of OCV Employee Stock Options................................................................ 25
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Representations and Warranties......................................................................... 25
Pre- and Post-Closing Obligations...................................................................... 26
Conditions to the Consummation of the Merger........................................................... 26
Termination of the Merger Agreement.................................................................... 27
Regulatory Approvals................................................................................... 27
Fees and Expenses...................................................................................... 27
Amendment and Waiver................................................................................... 28
Interests of Certain Persons in the Merger............................................................. 28
Resale of OCC Common Stock and Warrants................................................................ 29
Appraisal Rights....................................................................................... 30
The Acquisition............................................................................................. 32
The Acquisition Agreement.............................................................................. 32
Assets Acquired........................................................................................ 32
Liabilities Assumed.................................................................................... 33
Acquisition Consideration.............................................................................. 35
Certain Definitions.................................................................................... 35
Closing Conditions and Other Pre-Closing Matters....................................................... 38
Representations and Warranties......................................................................... 40
The Warrants................................................................................................ 40
Exercisability; Expiration............................................................................. 40
Adjustments............................................................................................ 41
Registration; Exemption..................................................................................... 42
Registration Rights......................................................................................... 42
Anticipated Accounting Treatment............................................................................ 43
Reasons for the Transactions; Determination of the Board of Directors of OCV................................ 43
Opinion of Allen & Company.................................................................................. 44
SELECTED PRO FORMA FINANCIAL INFORMATION........................................................................ 47
HISTORICAL SELECTED FINANCIAL INFORMATION....................................................................... 48
OCV ....................................................................................................... 48
SpectraVision............................................................................................... 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................................... 50
Overview.................................................................................................... 50
Results of Operations....................................................................................... 50
OCV -- Historical...................................................................................... 50
SpectraVision -- Historical............................................................................ 54
Liquidity and Capital Resources............................................................................. 59
On Command Video Corporation........................................................................... 59
On Command Corporation................................................................................. 59
Seasonality................................................................................................. 60
Anticipated Accounting Treatment............................................................................ 61
BUSINESS........................................................................................................ 61
General..................................................................................................... 62
Industry Overview........................................................................................... 63
Operating and Growth Strategies............................................................................. 63
On Command Video Corporation................................................................................ 64
Services and Products.................................................................................. 64
Sales and Marketing.................................................................................... 66
Installation and Service Operations.................................................................... 67
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Technology............................................................................................. 67
Manufacturing and Suppliers............................................................................ 67
Spectradyne, Inc............................................................................................ 68
Pay-Per-View Services.................................................................................. 68
Free-To-Guest Services................................................................................. 69
Interactive and Other Services.............................................................................. 69
Programming............................................................................................ 70
The EDS Servicing and Technology Agreement.................................................................. 70
Hotel Contracts........................................................................................ 71
Manufacturing.......................................................................................... 71
Competition............................................................................................ 71
Regulation.................................................................................................. 72
Patents, Trademarks and Copyrights.......................................................................... 73
Employees................................................................................................... 73
Properties.................................................................................................. 73
Legal Proceedings........................................................................................... 73
MANAGEMENT...................................................................................................... 74
Directors and the Executive Officers........................................................................ 74
Committees of the Board of Directors........................................................................ 74
Directors' Compensation..................................................................................... 74
Executive Compensation...................................................................................... 75
BENEFICIAL OWNERSHIP OF OCV AND OCC COMMON STOCK................................................................ 79
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES.................................................................... 81
DESCRIPTION OF ON COMMAND CORPORATION CAPITAL STOCK............................................................. 85
General..................................................................................................... 85
OCC Common Stock............................................................................................ 85
On Command Corporation Preferred Stock...................................................................... 86
COMPARISON OF STOCKHOLDER RIGHTS................................................................................ 86
General..................................................................................................... 86
Voting Rights............................................................................................... 87
Dividends................................................................................................... 87
Board of Directors.......................................................................................... 88
Reports to Stockholders; Other Public Information........................................................... 89
Rights of Inspection........................................................................................ 89
Stockholder Meeting Procedures.............................................................................. 89
Stockholder Vote Required for Certain Actions............................................................... 90
Indemnification for Securities Act Liabilities.............................................................. 92
Stockholder Suits........................................................................................... 92
Appraisal Rights............................................................................................ 92
EXPERTS......................................................................................................... 94
LEGAL MATTERS................................................................................................... 94
INDEX TO PRO FORMA FINANCIAL STATEMENTS OF ON COMMAND CORPORATION............................................... P-1
INDEX TO FINANCIAL STATEMENTS OF ON COMMAND VIDEO CORPORATION................................................... F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF SPECTRAVISION, INC. ..............................................F-22
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ANNEXES
Annex I Agreement and Plan of Merger
Annex II Acquisition Agreement
Annex III Warrant Agreement
Annex IV Registration Rights Agreement
Annex V Opinion of Allen & Company
Annex VI Delaware General Corporation Law Section 262
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
INFORMATION STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ON COMMAND CORPORATION OR OCV. THIS
INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION IN WHICH IT
IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION OR TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS INFORMATION STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF ON COMMAND CORPORATION OR OCV SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
AVAILABLE INFORMATION
OCV currently is not subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
On Command Corporation currently is not subject to the periodic
reporting and other informational requirements of the Exchange Act. In
connection with the Merger and the issuance of the OCC Common Stock and the
Series A Warrants, On Command Corporation will become subject to the
informational requirements of the Exchange Act and in accordance therewith will
file reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Following the Merger, On Command
Corporation will furnish to holders of OCC Common Stock annual reports
containing audited consolidated financial statements prepared in accordance with
generally accepted accounting principles ("GAAP"), with an opinion thereon by On
Command Corporation's independent auditors, and will make available upon request
all quarterly reports containing unaudited consolidated financial information
prepared in accordance with GAAP.
On Command Corporation has filed with the Commission a Registration
Statement on Form S-4 (together with all amendments, exhibits and schedules
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the shares of OCC Common Stock
and the Series A Warrants to purchase OCC Common Stock to be issued to holders
of OCV Common Stock pursuant to the Merger Agreement. This Information
Statement/Prospectus does not contain all the information set forth in the
Registration Statement, a portion of which has been omitted in accordance with
the rules and regulations of the Commission. Such additional information may be
obtained from the Commission's principal office at Room 1024, 450 Fifth Street,
N.W., Washington, D.C.
20549.
SpectraVision is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Commission. The reports, proxy statements and other
information filed by SpectraVision with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's
Regional Offices at Suite 1300, Seven World Trade Center, New York, New York
10048, and The Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
Information contained in this Information Statement/Prospectus relating
to SpectraVision and its subsidiaries has been obtained from publicly available
documents.
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Information Statement/Prospectus. Reference is made to, and this summary
is qualified in its entirety by, the more detailed information contained
elsewhere in this Information Statement/Prospectus and the annexes hereto. OCV
stockholders are urged to read this Information Statement/Prospectus and the
annexes hereto carefully and in their entirety.
THE COMPANIES
On Command Corporation. On Command Corporation is a newly formed
Delaware corporation and is currently a wholly owned subsidiary of Ascent.
COMSAT Corporation ("COMSAT") owns 80.7% of the outstanding common stock of
Ascent. From and after the closing date of the transactions contemplated by the
Merger Agreement and the Acquisition Agreement (the "Closing Date"), and after
giving effect to the Merger and the Acquisition (collectively, the
"Transactions"), On Command Corporation will be a holding company the principal
assets of which will be OCV, Spectradyne and On Command Development Corporation
("On Command Development"), each of which will operate as a separate, wholly
owned subsidiary of On Command Corporation. The address of On Command
Corporation's principal executive offices is 3301 Olcott Street, Santa Clara,
California 95054 (telephone (408) 496-1800).
OCV. OCV is the leading provider (by number of hotel rooms served) of
on-demand in-room entertainment for the United States lodging industry. The OCV
system is a patented video selection and distribution system that allows guests
to select on a pay-per-view ("PPV") basis from up to 50 motion pictures on
computer controlled television sets located in their rooms at any time. OCV
also provides in-room viewing of free-to-guest programming of select cable
channels (such as HBO, the Disney Channel, Showtime, ESPN and CNN) and other
interactive services. OCV provides its services under long-term contracts
primarily to business and luxury hotel chains such as Marriott, Hilton,
Wyndham, Doubletree, Fairmont, Embassy Suites and Holiday Inn, and to other
select hotels. OCV has experienced rapid growth in the past three years,
increasing its base of installed on- demand rooms from approximately 37,000
rooms at the end of 1992 to approximately 419,000 rooms at June 30, 1996. The
address of OCV's principal executive offices is 3301 Olcott Street, Santa Clara,
California 95054 (telephone: (408) 496-1800).
Spectradyne. Spectradyne, a subsidiary of SpectraVision, is a leading
provider of interactive in- room video entertainment services to the lodging
industry. Founded in 1971, SpectraVision originally developed and patented a
system which provides in-room television viewing of recently released major and
other motion pictures on a PPV basis. SpectraVision, through Spectradyne,
subsequently expanded its services to include providing PPV movies in an
on-demand format, delivering free-to-guest programming and providing
interactive services that capitalize on Spectradyne's proprietary two-way
communications equipment. Spectradyne has been a major provider of these
services to the lodging industry since 1971 and, at June 30, 1996, provided PPV
services to approximately 495,000 rooms in approximately 1,600 hotels.
Spectradyne provides its services under contracts to hotel chains, hotel
management companies and individually owned and franchised hotel properties.
In June 1993, SpectraVision entered into a ten-year exclusive contract
with Electronic Data Systems Corporation ("EDS") to install and maintain a
digital satellite delivered hotel PPV system. By late 1994, the costs associated
with the EDS contract combined with SpectraVision's high debt levels created
financial difficulties for SpectraVision. In early 1995, SpectraVision
determined that a financial restructuring would be required to ensure
SpectraVision's long-term survival. SpectraVision conducted
7
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restructuring negotiations with representatives of its secured and unsecured
creditors during April and May 1995, working toward the development of an
overall restructuring plan. In June 1995, SpectraVision concluded that a filing
for reorganization under Chapter 11 of the Bankruptcy Code should be made in
order to preserve the value of its assets and to ensure that the business had
sufficient cash resources to continue operations while it completed the
financial restructuring process. On June 8, 1995, SpectraVision and its domestic
subsidiaries, including Spectradyne (collectively with SpectraVision, the
"Debtors"), filed a petition for relief under the Bankruptcy Code in the
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), which
cases were procedurally consolidated for joint administration as Case No. 95-
659 (collectively, the "Bankruptcy Case").
On Command Development. On Command Development, a newly formed
subsidiary of On Command Corporation, has been formed to develop new
technologies to be used by OCV and Spectradyne in order to support and improve
OCV's and Spectradyne's operations and to develop new applications to be
marketed by On Command Corporation, OCV and Spectradyne.
THE TRANSACTIONS
On April 19, 1996, SpectraVision, Ascent, OCV and an unsecured
creditors' committee (the "Creditors' Committee"), which was appointed by the
United States Trustee for the District of Delaware pursuant to Section 1102 of
the Bankruptcy Code, entered into an agreement (the "Plan Sponsor Agreement")
pursuant to which it was agreed that Ascent would be plan sponsor for the
SpectraVision plan of reorganization (the "Plan") and that On Command
Corporation, directly or indirectly, would acquire the assets or the capital
stock and certain liabilities of OCV and Spectradyne, subject to the terms and
conditions of the Plan Sponsor Agreement. The Merger Agreement, the Acquisition
Agreement, the Warrant Agreement (as defined below) and the Registration Rights
Agreement (as defined below) were or will be entered into to implement the Plan
Sponsor Agreement.
The Plan Sponsor Agreement. The Plan Sponsor Agreement provides that
Ascent and the other stockholders of OCV will contribute all of the assets,
leases, operations and businesses of OCV (and certain liabilities) in
consideration for 72.5% of the OCC Common Stock. The Debtors will contribute
substantially all of their assets and certain liabilities to On Command
Corporation in consideration for 27.5% of the OCC Common Stock, subject to
adjustment downward to the extent that the Debtors' net working capital has a
negative balance at the closing of the Acquisition. The Plan Sponsor Agreement
also provides that On Command Corporation will issue Warrants to purchase 20% of
the OCC Common Stock on a fully diluted basis, of which warrants to purchase 13%
of the OCC Common Stock will be distributed at the direction of Ascent and OCV
and warrants to purchase 7% of the OCV Common Stock will be distributed to the
Debtors. Of the Warrants distributable at the direction of Ascent and OCV,
Warrants to purchase 9.2% of the OCC Common Stock will be issued to Gary
Wilson Partners, financial advisors to Ascent and OCV, as partial
consideration for services rendered pursuant to a letter agreement dated April
19, 1996.
The Merger Agreement. At the Effective Time (as defined below),
pursuant to the terms of the Merger Agreement, Merger Sub will merge with and
into OCV, with OCV as the surviving corporation (the "Surviving
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Corporation"). After giving effect to the Merger, the separate corporate
existence of Merger Sub will cease. The Merger Agreement provides that the
Certificate of Incorporation and Bylaws of OCV, as in effect immediately prior
to the Effective Time, will be the Certificate of Incorporation and Bylaws of
the Surviving Corporation.
Upon consummation of the Merger, each share of OCV Common Stock that
is issued and outstanding immediately prior to the Effective Time (other than
shares of OCV Common Stock held by OCV or by its direct or indirect subsidiaries
and Dissenting Shares (as defined below)), will be converted into the right to
receive the following (the "Merger Consideration"): (i) approximately 2.84
shares of OCC Common Stock (the "Initial Shares"), (ii) such additional number
of shares of Reserved Stock, if any, to which holders of OCV Common Stock may be
entitled and (iii) Series A Warrants to purchase, on a cashless basis,
approximately 18.61% of a share of OCC Common Stock. See "The Transactions--The
Merger--Merger Consideration." The Initial Shares to be issued to holders of OCV
Common Stock will represent, in the aggregate, 72.5% of the total number of
shares of OCC Common Stock to be issued pursuant to the Merger Agreement and the
Acquisition Agreement (of which shares representing approximately 57.2% will be
issued to Ascent), assuming no holder of OCV Common Stock exercises its
appraisal rights and before giving effect to any Reserved Stock and the exercise
of any warrants.
If the working capital of Spectradyne as of the Closing Date is less
than $1,000,000, the number of shares of Reserved Stock to be issued to OCV
stockholders will equal the product of 30,000,000 multiplied by a fraction, the
numerator of which will be equal to the Reserved Amount (as defined herein)
and the denominator of which will be equal to the numerator used in the
calculation of the Warrant Exercise Price (as defined herein). The Warrant
Exercise Price will be determined by dividing (i) the amount by which
$550,000,000 exceeds the aggregate amount of debt of On Command Corporation and
its subsidiaries that is outstanding as of the Closing Date after giving effect
to the Transactions (including, but not limited to, the aggregate amount of
debt incurred by On Command Corporation to perform all of its obligations under
the Acquisition Agreement and the OCV Debt (as defined herein)) by (ii)
30,000,000. Based on a maximum Reserved Amount of $10,000,000 and on
assumptions regarding the aggregate amount of debt of On Command Corporation as
of the Closing Date that On Command Corporation believes to be reasonable as of
the date of this Information Statement/Prospectus, (i) the maximum aggregate
number of shares of Reserved Stock to be issued to OCV stockholders is not
expected to exceed approximately 650,000 shares of OCC Common Stock in the
aggregate and (ii) the Warrant Exercise Price is expected to be approximately
$15.33 per share. See "The Transactions--The Acquisition--Certain
Definitions." The assumptions on which these calculations are based could change
prior to the Closing Date. As a result, the number of shares of Reserved Stock
to which OCV will be entitled could be lower, and the Warrant Exercise Price
could be higher or lower, than as set forth above. Cash will be paid in lieu
of the issuance of fractional OCC Common Stock as described below under "The
Transactions--The Merger--Conversion of OCV Common Stock; Procedures for
Exchange of OCV Stock Certificates; Fractional Shares."
The Acquisition Agreement. The Acquisition Agreement provides that On
Command Corporation will purchase all of the capital stock of Spectradyne. It
also provides that certain assets held by affiliates of Spectradyne and the
other Debtors will be transferred to Spectradyne prior to the acquisition of the
Spectradyne capital stock by On Command Corporation. As consideration for the
capital stock of Spectradyne, in accordance with the provisions of the
Acquisition Agreement, On Command Corporation will issue to the creditors of the
Debtors (collectively, the "Creditors"), or an agent on their behalf: (i) an
aggregate of 8,250,000 shares of OCC Common Stock, less the aggregate amount of
Reserved Stock and (ii) warrants to purchase for cash an aggregate of 2,625,000
shares of OCC Common Stock for cash, at the same exercise price applicable to
the Series A Warrants. The shares of OCC Common Stock to be issued to the
Creditors will represent, in the aggregate, 27.5% of the total number of shares
of OCC Common Stock to be issued pursuant to the Merger Agreement and the
Acquisition Agreement, assuming no holder of OCV Common Stock exercises its
appraisal rights and before giving effect to any Reserved Stock and the exercise
of any warrants. See "The Transactions--The Acquisition."
The manner in which the number of shares of OCC Common Stock that
constitutes Reserved Stock, if any, will be determined, and its allocation among
the OCV stockholders and the Creditors, are described below under "The
Transactions--The Acquisition."
The Warrants. On the Closing Date, On Command Corporation and The Bank
of New York, as warrant agent (the "Warrant Agent"), will enter into a warrant
agreement (the "Warrant Agreement") pursuant to which On Command Corporation
will issue (i) the Series A Warrants to purchase an aggregate of 1,425,000
shares of OCC Common Stock on a cashless basis to the stockholders of OCV, (ii)
warrants to purchase for cash an aggregate of 2,625,000 shares of OCC Common
Stock (the "Series B Warrants") to the Creditors and (iii) a warrant to purchase
for cash an aggregate of 3,450,000 shares of OCC Common Stock (the "Series C
Warrant") to Gary Wilson Partners in consideration for certain investment
banking and advisory services provided in connection with the Transactions and
for future advisory and other services to be rendered to On Command Corporation.
9
<PAGE> 12
The exercise price for the shares of OCC Common Stock (the "Warrant
Shares") purchasable upon exercise of the Series A Warrants, the Series B
Warrants and the Series C Warrant (collectively, the "Warrants") will be
determined as of the Closing Date, as described under the caption "The
Transactions--The Warrants--Exercisability; Expiration." The exercise price for
each Warrant and the number of Warrant Shares issuable per Warrant are subject
to adjustment as described under the caption "The Transactions--The
Warrants--Adjustments." The Warrants will be exercisable from and after the
Closing Date (other than the Series C Warrant, which will not be exercisable
until two years after the Closing Date) and, unless exercised prior to 5:00
p.m., New York City time, on the seventh anniversary of their issuance, will
expire at that time.
Registration Rights. Following the Transactions, any stockholder of
OCV, including Ascent, that is deemed to be an "affiliate" of On Command
Corporation as defined in Rule 144 under the Securities Act may resell its stock
only pursuant to an effective registration statement under the Securities Act or
in accordance with Rule 144 or another exemption under the Securities Act. See
"The Transactions--The Merger--Resale of OCC Common Stock and Warrants."
Following the Transactions, holders of approximately 17,500,000 shares of OCC
Common Stock will be subject to such restrictions (before giving effect to the
issuance of any Reserve Stock). Any OCV stockholder that owns 10% or more of the
OCV Common Stock prior to the Effective Time (including, but not limited to,
Ascent) and any Creditor who receives 10% or more of the OCC Common Stock upon
initial issuance thereof in connection with the Transactions will be entitled to
certain registration rights set forth in the Registration Rights Agreement (the
"Registration Rights Agreement") described under the caption "The
Transactions--Registration Rights." The holder of the Series C Warrant will also
be entitled to certain registration rights under the Registration Rights
Agreement. See "The Transactions--Registration Rights."
STOCKHOLDERS' CONSENT
Certain stockholders of OCV, including Ascent, Robert Snyder,
President, Chief Executive Officer and a director of OCV, and Richard Fenwick,
Sr., a director of OCV, who own, in the aggregate, approximately 86.5% of the
outstanding shares of OCV Common Stock, acting pursuant to Section 228 of the
Delaware General Corporation Law (the "DGCL"), have consented in writing to the
adoption of the Merger Agreement and to the consummation of the Merger. As a
result, pursuant to Section 228 of the DGCL, no special meeting of the
stockholders of OCV is required to approve the Merger Agreement.
EXCHANGE OF CERTIFICATES
As soon as practicable after the Merger, holders of certificates that
formerly represented shares of OCV Common Stock will receive a letter of
transmittal containing instructions for the surrender of such certificates in
exchange for certificates representing shares of OCC Common Stock and
certificates representing Series A Warrants and, if the holder is entitled to a
fractional share of OCC Common Stock, a check representing such cash payable in
lieu of any fractional share of OCC Common Stock. See "The Transactions--The
Merger--Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock
Certificates; Fractional Shares."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain stockholders, members of the Board of Directors and management
of OCV may be deemed to have certain interests in the Merger, in addition to
their interests generally as stockholders of OCV. Immediately prior to
consummation of the Transactions, Ascent will own approximately 78.9% of the
outstanding OCV Common Stock. Following the consummation of the Transactions,
Ascent will own approximately 57.2% of the OCC Common Stock, assuming no holder
of OCV Common Stock exercises its appraisal rights and before giving effect to
any Reserved Stock and the exercise of any Warrants. See "Beneficial Ownership
of OCV and OCC Common Stock." In addition, in connection with the Transactions,
On Command Corporation will enter into (i) the Corporate Agreement (as defined
herein), pursuant to which, among other things, On Command Corporation will
agree not to incur any indebtedness without Ascent's prior consent, other than
indebtedness under the OCC Credit Facility (as defined herein) and refinancings
thereof and indebtedness incurred in the ordinary course of business, which
together shall not exceed $100 million in the aggregate, and (ii) the Services
Agreement (as defined herein), pursuant to which Ascent will provide certain
strategic planning, administrative, financial, legal and other services to On
Command Corporation for an annual fee of $1.2 million and reimbursement of
certain of Ascent's actual out-of-pocket expenses in connection with rendering
such services (not including overhead and the cost of its personnel). After
consummation of the Transactions, Ascent will no longer be obligated to provide
funding to OCV and will have no obligation to fund the operatins of On Command
Corporation. The OCV Board of Directors was aware of these interests of its
directors and officers and considered them, among other matters, in approving
the Merger Agreement and the transactions contemplated thereby. See "The
Transactions--The Merger--Interests of Certain Persons in the Merger."
APPRAISAL RIGHTS
Holders of OCV Common Stock who have not consented to the adoption of
the Merger Agreement and who (a) deliver to OCV a written demand for appraisal
of their shares of OCV Common
10
<PAGE> 13
Stock and (b) meet certain other statutory requirements, will be entitled to
have the value of their shares appraised in accordance with Section 262 of the
DGCL, a copy of which is included as Annex V to this Information
Statement/Prospectus. See "The Transactions--The Merger--Appraisal Rights."
ANTICIPATED ACCOUNTING TREATMENT
The Transactions will be accounted for using the historical book value
of the assets, liabilities and stockholders equity acquired from OCV by On
Command Corporation and On Command Corporation's management's estimate of the
fair value of Spectradyne's assets to be acquired and liabilities to be assumed
by On Command Corporation. The final purchase price allocation for the Debtors'
net assets will be determined at a future date (no later than one year from the
Closing Date), which may result in adjustments to the preliminary allocation.
However, in the opinion of On Command Corporation's management, the preliminary
allocation of the purchase price reflects On Command Corporation's best estimate
and all adjustments necessary to fairly state the pro forma financial
information presented in this Information Statement/Prospectus.
OPINION OF ALLEN & COMPANY
Allen & Company, financial advisor to Ascent and OCV, has rendered
written opinions, dated April 18, 1996, that, subject to certain assumptions, as
of such date, the consideration to be received by the holders of Ascent common
stock (indirectly as a result of Ascent's ownership of OCV Common Stock) and
OCV Common Stock (directly as a result of the Transactions) pursuant to the
transactions contemplated by the Plan Sponsor Agreement was fair, from a
financial point of view, to the holders of Ascent common stock and OCV Common
Stock. See "The Transactions--Opinion of Allen & Company."
LISTING OF OCC COMMON STOCK AND WARRANTS
The OCV Common Stock currently is not listed on any national securities
exchange or quoted on any automated quotation system. Upon consummation of the
Merger, the OCC Common Stock and the Warrants are expected to be listed on the
Nasdaq National Market under the symbols "ONCO" and "ONCOW," respectively.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
On Command Corporation has received an opinion of Latham & Watkins,
counsel to OCV, to the effect that, based upon certain representations of On
Command Corporation, Merger Sub, Ascent and OCV, among others, the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and as a result, holders of OCV
Common Stock will recognize no gain or loss upon the conversion of shares of OCV
Common Stock into shares of OCC Common Stock and Series A Warrants, except for
gain or loss for federal income tax purposes recognized on receipt of cash in
lieu of any fractional share interest in OCC Common Stock. All holders of OCV
Common Stock should read carefully the detailed discussion under the caption
"Certain Federal Income Tax Consequences."
RISK FACTORS
Holders of OCV Common Stock should take into account the specific
considerations set forth under "Risk Factors" as well as the other information
set forth in this Information Statement/Prospectus. In particular, OCV
stockholders should take into account the following risk factors: (i) following
the Transactions, Ascent will have the ability to control On Command
Corporation; (ii) due to restrictions on
11
<PAGE> 14
Ascent and its principal stockholder, COMSAT, On Command Corporation will be
subject to certain restrictions on its ability to raise capital through debt
financing; (iii) On Command Corporation may be dependent on additional capital
to implement its strategy; (iv) there can be no assurance that On Command
Corporation can successfully integrate the businesses of OCV and Spectradyne;
(v) there is no prior public market for the OCC Common Stock and the price of
the OCC Common Stock is subject to possible volatility; (vi) the in-room
entertainment industry is highly competitive; (vii) the loss of certain
significant customers would have a material adverse effect on On Command
Corporation's business; (viii) On Command Corporation's business will be
dependent on the performance of the lodging industry; (ix) On Command
Corporation's assets are subject to the risk of technological obsolescence; (x)
On Command Corporation may be dependent on certain key personnel of OCV and
Ascent with respect to the operations at On Command Corporation after the
closing of the Transactions; (xi) On Command Corporation's business may be
subject to seasonality; and (xii) certain anti-takeover provisions in On Command
Corporation's Certificate of Incorporation and Bylaws, as well as certain
provisions of the DGCL, could increase the difficulty of effecting a change of
control of On Command Corporation, thereby potentially depriving stockholders
from realizing a premium over the prevailing market price of the Common Stock.
FOR A MORE DETAILED DISCUSSION OF THESE AND OTHER RISK FACTORS IN
CONNECTION WITH THE MERGER AND ACQUISITION, SEE "RISK FACTORS."
COMPARATIVE MARKET PRICES AND DIVIDEND POLICY
Prior to the Transactions, neither the OCC Common Stock nor the OCV
Common Stock were listed on a national securities exchange or the Nasdaq
National Market. Prior to the Merger, Ascent will be the sole stockholder of On
Command Corporation. As a result, no meaningful comparison between the market
prices of the OCC Common Stock and the OCV Common Stock can be made. Since 1992,
neither On Command Corporation nor OCV have declared or paid dividends on their
common stock, except that OCV has declared a contingent dividend to holders of
its common stock on September 18, 1996 payable out of some or all of the
proceeds of the exercise of the Hilton Option (as defined herein). See
"Beneficial Ownership of OCV and OCC Common Stock." For each of On Command
Corporation and OCV, the declaration and payment of dividends are subject to the
discretion of the Board of Directors. It is the current policy of each of On
Command Corporation and OCV to retain earnings, if any, to finance the
operations and expansion of each of On Command Corporation's and OCV's
businesses. Any determination as to the payment of dividends in the future will
depend upon, among other things, general business conditions, On Command
Corporation's or OCV's respective earnings, financial conditions, capital needs
and other factors deemed pertinent by their respective boards of directors,
including limitations, if any, on the payment of dividends under state law and
under any existing indebtedness of On Command Corporation or OCV, as the case
may be. For a discussion of limitations on the ability to pay dividends
contained in existing indebtedness of On Command Corporation, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
12
<PAGE> 15
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following summary pro forma financial information of On Command
Corporation is derived from the financial statements of OCV and the consolidated
financial statements of SpectraVision included elsewhere herein and give pro
forma effect to the Transactions as if they had occurred on January 1, 1995 with
respect to the statement of operations data, and on June 30, 1996 with respect
to the balance sheet data. See "Available Information." The summary pro forma
financial information is not necessarily indicative of what the results of
operations or the financial position of On Command Corporation would have been
had the Transactions occurred on such dates, nor is such data necessarily
indicative of the results of operations or financial position of On Command
Corporation that can be expected for any future periods or at any future date.
The following summary pro forma financial information should be read together
with the Financial Statements of OCV, the Consolidated Financial Statements of
SpectraVision and the Pro Forma Financial Statements of On Command Corporation
included elsewhere in this Information Statement/Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED Six Months Ended
DECEMBER 31, 1995 June 30, 1996
----------------- ----------------
(Dollars in thousands, except per share data)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................... $226,045 $120,502
Total costs and expenses........................................... 243,011 126,706
Loss from operations............................................... (16,966) (6,204)
Net loss........................................................... (23,638) (8,839)
Net loss per common and equivalent share........................... (0.79) (0.29)
Shares used in per share calculations (in thousands)............... 30,000 30,000
OTHER DATA:
EBITDA(1).......................................................... $ 44,599 $ 31,503
Rooms served at end of period...................................... 911,406 915,218
Hotels served at end of period..................................... 3,109 3,141
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------------
(Dollars in thousands,
except per share data)
<S> <C>
BALANCE SHEET DATA:
Total assets................................................................................ $391,339
Total debt.................................................................................. 70,568
Total stockholders' equity.................................................................. 271,877
Book value per share........................................................................ 9.06
</TABLE>
- -----------------
(1) Earnings before interest expense, income taxes, depreciation and
amortization and excluding certain extraordinary or nonrecurring events
("EBITDA") is presented because it is a widely accepted financial
indicator used by certain investors and analysts to analyze and compare
companies on the basis of operating performance. EBITDA is not intended to
represent cash flows for the period, nor has it been presented as an
alternative to operating income as an indicator of operating performance
and should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted accounting
principles.
13
<PAGE> 16
HISTORICAL SUMMARY SELECTED FINANCIAL INFORMATION
The historical summary selected financial information of OCV and the
historical summary selected consolidated financial information of SpectraVision
have been derived from their respective historical financial statements and
should be read in conjunction with such financial statements and notes thereto,
included elsewhere in this Information Statement/Prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Interim financial information as of and for the six months ended June 30, 1996
and June 30, 1995 reflect, in the opinion of the managements of OCV and
SpectraVision, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information. Results for interim
periods are not necessarily indicative of results which may be expected for any
other interim period or for the fiscal year as a whole.
OCV
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ------------------
1995 1994 1993 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total net revenues ....................... $102,059 $ 81,609 $ 30,204 $ 62,490 $ 51,331
Total direct costs of revenues ........... 48,817 47,786 12,912 27,940 27,531
Total operating expenses ................. 45,091 27,976 14,955 30,674 19,524
Income from operations ................... 8,551 5,847 2,337 3,876 4,276
Net income ............................... 4,902 3,456 1,358 1,624 2,508
Net income applicable to common stock .... 4,261 2,856 1,179 1,301 2,174
Net income per common and equivalent
share .................................. 0.62 0.51 0.30 0.16 0.36
Shares used in per share calculations (in
thousands) ............................. 6,833 5,571 3,896 7,903 6,015
OTHER DATA:
EBITDA(1) ................................ $ 37,288 $ 23,381 $ 10,157 $ 25,169 $ 15,772
Cash dividends per share ................. -- -- -- -- --
Rooms served at end of period ............ 361,000 248,000 124,000 419,000 307,000
Hotels served at end of period ........... 1,221 751 272 1,500 996
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets ............................. $211,005 $138,884 $ 92,363 $232,915 $ --
Total debt ............................... 15,942 1,025 1,842 29,270 --
Redeemable common stock .................. 11,684 11,043 10,443 12,007 --
Total stockholders' equity ............... 169,804 108,949 67,817 173,214 --
Book value per share ..................... 23.33 -- -- 23.80 --
</TABLE>
- --------------------
(1) EBITDA is presented because it is a widely accepted financial indicator used
by certain investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
14
<PAGE> 17
SPECTRAVISION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ -------------------------
1995 1994 1993 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ......................... $ 123,986 $ 142,384 $ 162,993 $ 58,012 $ 65,208
Total direct costs ..................... 52,813 58,015 58,834 27,088 25,884
Write-down of hotel contracts .......... -- 196,256 -- -- --
Loss before extraordinary items ........ (73,645) (254,284) (43,057) (22,786) (38,729)
Extraordinary loss ..................... (915) -- (2,699) -- (915)
Net loss ............................... (74,560) (254,284) (45,756) (22,786) (39,644)
Net loss per common and equivalent
share before extraordinary items and
cumulative effect of change in
accounting principle ................... (3.07) (10.60) (2.37) (0.95) (1.65)
Shares used in per share
calculation (in thousands) ............. 23,984 23,984 18,178 23,984 23,984
OTHER DATA:
EBITDA(1) .............................. $ 866 $ 19,148 $ 55,790 $ 2,734 $ 8,756
Cash dividends per share ............... -- -- -- -- --
Rooms served at end of period .......... 550,406 635,378 684,599 496,218 608,146
Hotels served at end of period ......... 1,888 2,308 2,442 1,641 2,148
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets ........................... $ 205,622 $ 242,822 $ 409,478 $ 194,637 --
Total debt ............................. 28,667 510,563 436,557 41,298 --
Liabilities subject to settlement under
reorganization ....................... 579,587 -- -- 576,040 --
Stockholders' deficit .................. (447,608) (373,025) (118,614) (472,165) --
Book value per share ................... (18.66) -- -- (19.69) --
</TABLE>
- -------------------
(1) EBITDA is presented because it is a widely accepted financial indicator used
by certain investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
15
<PAGE> 18
RISK FACTORS
OCV stockholders should be aware that the distribution and ownership of
OCC Common Stock in exchange for OCV Common Stock involves certain risk factors,
including those which could adversely affect the value of their holdings
described below and elsewhere in this Information Statement/Prospectus. Because
in the Merger the OCV Common Stock will be converted into the right to receive
OCC Common Stock and Series A Warrants, OCV stockholders should consider
carefully the information set forth under the captions "Description of On
Command Corporation Capital Stock" and "Comparison of Stockholder Rights" in
addition to the following factors.
CONTROL BY ASCENT
Following the consummation of the Transactions, Ascent will own
approximately 57.2% of the OCC Common Stock, assuming no holder of OCV Common
Stock exercises its appraisal rights and before giving effect to any Reserved
Stock and the exercise of any Warrants. See "Beneficial Ownership of OCV and OCC
Common Stock." Accordingly, Ascent will have the ability to control the
management and policies of On Command Corporation and the outcome of matters
submitted to the stockholders for approval, including the election of directors.
See "The Transactions--The Merger--Interests of Certain Parties in the Merger."
In turn, COMSAT owns 80.7% of Ascent outstanding common stock.
RESTRICTIONS ON DEBT FINANCINGS
Pursuant to an agreement to be entered into between Ascent and On
Command Corporation (the "Corporate Agreement"), On Command Corporation will
agree, among other things, not to incur any indebtedness without Ascent's prior
written consent, other than indebtedness under the credit facility to be entered
into by On Command Corporation in connection with the Transactions (the "OCC
Credit Facility") and indebtedness incurred in the ordinary course of
operations, which together shall not exceed $100 million in the aggregate;
provided that not more than $50 million of such indebtedness may constitute
long-term debt. See "The Transactions-The Merger--Interests of Certain Persons
in the Merger." Restrictions on On Command Corporation's ability to incur
additional debt could adversely affect On Command Corporation's plans for
growth, its ability to develop new products and technologies and its ability to
meet its liquidity needs. See "--Dependence on Additional Capital for Growth"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In addition, pursuant to a
corporate agreement between Ascent and COMSAT (the "COMSAT Agreement"), Ascent
has agreed not to incur any indebtedness, other than under Ascent's existing
credit facility (and refinancings thereof) and indebtedness incurred in the
ordinary course of business, which together shall not exceed $175 million in the
aggregate, without COMSAT's consent. In contemplation of the closing of the
Transactions, COMSAT has consented to permit Ascent to incur consolidated
indebtedness (including indebtedness of On Command Corporation) of up to $216
million in the aggregate; provided that: (i) not more than $50 million of such
indebtedness may constitute long-term debt; and (ii) indebtedness in excess of
$175 million may only be incurred to satisfy funding requirements for 1996. A
primary purpose of the COMSAT Agreement is, and a primary purpose of the
Corporate Agreement will be, to require Ascent and On Command Corporation to
coordinate their capital requirements with COMSAT so that COMSAT can monitor its
compliance with the regulations of the Federal Communications Commission (the
"FCC") applicable to the capital structure and debt financing activities of
COMSAT and its consolidated subsidiaries. COMSAT is required to submit a
financial plan to the FCC for review annually. Under existing FCC guidelines,
COMSAT is subject to a maximum long-term debt to total capital ratio of 45%, a
limit of $200 million in short-term debt and interest coverage ratio of 2.3 to
1. COMSAT has requested a temporary decrease in the interest coverage ratio,
which is measured at year end, to a minimum of 1.9 to 1 for the 1996 plan year
and an increase in the short-term debt limit to $325 million as long as the
financial statements of Ascent are consolidated with those of COMSAT. COMSAT has
informed Ascent that COMSAT was in compliance with both the long-term debt to
total capital ratio and the short-term debt limit at June 30, 1996 and expects
to be in compliance with those guidelines and the interest coverage ratio
guidelines at December 31, 1996 if the short-term debt limit and the interest
coverage ratio are modified as requested. If the FCC approves COMSAT's request,
COMSAT has further informed Ascent that it expects that the cash flows from
operations and COMSAT's consolidated short-term borrowing capacity, including
indebtedness authorized under Ascent's credit facility and the
16
<PAGE> 19
refinancing thereof and the OCC Credit Facility, will be sufficient to fund
COMSAT's aggregate cash requirements for the balance of 1996. A number of
factors could cause the funding requirements of COMSAT, Ascent and On Command
Corporation to differ materially from those projected, including, but not
limited to, the performance of their respective operating subsidiaries,
unanticipated costs associated with the consummation of the Transactions or
integration of SpectraVision's and OCV's businesses, the level of ticket sales
and other revenues by Ascent's professional sports franchises, and market
conditions. Management of On Command Corporation and Ascent believe that the
$100 million limit on On Command Corporation's indebtedness and the $216 million
aggregate limit on Ascent's indebtedness will be adequate to fund their
respective operations through the end of 1996. For 1997, management of On
Command Corporation and Ascent believe that it will be necessary for On Command
Corporation to seek approval from Ascent to increase its debt limit, and for
Ascent to seek approval from COMSAT to increase its debt limit. As part of
Ascent's 1997 operating and capital planning process, Ascent's management will
request that COMSAT increase Ascent's debt limit beginning in January 1997.
There can be no assurance, however, that COMSAT will approve any increase in
Ascent's debt limit. If Ascent were not to obtain approval to increase its debt
limit, it is highly unlikely that Ascent would approve an increase in On Command
Corporation's debt limit. If On Command Corporation's debt limit were not
increased, On Command Corporation may be required to reduce or reschedule
planned capital investments, reduce cash outlays, reduce debt, sell assets or
sell equity. Finally, COMSAT has informed Ascent that if COMSAT were to fail to
satisfy one or more of the FCC guidelines as of an applicable measurement date,
COMSAT would be required to seek advance FCC approval of future financing
activities on a case by case basis. If such approval were not granted, On
Command Corporation could be required to reduce or reschedule planned capital
investments, reduce cash outlays, reduce debt or sell assets.
DEPENDENCE ON ADDITIONAL CAPITAL FOR GROWTH
The growth of On Command Corporation's business requires substantial
investment on a continuing basis to finance capital expenditures and related
expenses. Historically, OCV has relied on capital provided by Ascent and cash
flow from operations to finance its growth. However, Ascent is not obligated to
provide any additional capital or debt financing to OCV or On Command
Corporation after the closing of the Transactions. On Command Corporation
intends to use cash flow from operations and additional borrowings (subject to
the limitations discussed under "--Restrictions on Debt Financings") to support
its growth. Whether or when On Command Corporation can achieve cash flow levels
sufficient to support its anticipated growth cannot be accurately predicted.
Unless such cash flow levels are achieved, On Command Corporation may require
additional borrowings or the sale of debt or equity securities (subject to the
limitations described under "--Restrictions on Debt Financings"), or some
combination thereof, to provide funding for growth or, alternatively, may have
to reduce growth to a level that can be supported by internally generated cash
flow. On Command Corporation can give no assurances with respect to the impact
on the results of operations and financial condition if On Command Corporation
is required to reduce growth to a level that can be supported by internally
generated cash flow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
INTEGRATION OF OCV AND SPECTRADYNE BUSINESSES
Although OCV and Spectradyne will remain distinct entities, the full
benefits of On Command Corporation serving as a holding company for each of OCV
and Spectradyne will require the coordination of operating systems, financial
reporting, sales, marketing and management. This will require substantial
attention from the management of On Command Corporation. In addition,
successfully integrating the businesses of OCV and Spectradyne may require
additional capital. See "--Dependence on Additional Capital for Growth." There
can be no assurance that the businesses of OCV and Spectradyne can be
successfully integrated. The inability to successfully integrate the businesses
of OCV and Spectradyne could have a material adverse effect on the financial
condition or results of operations of On Command Corporation.
NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Closing Date, there has been no public market for OCC
Common Stock or the Warrants. Although application will be made to list the OCC
Common Stock and Warrants on the Nasdaq National Market, there can be no
assurance that an active public market will develop or be sustained or as to the
prices at which the OCC Common Stock and Warrants will trade following the
Closing Date. Further, the stock markets may experience volatility that affects
the market prices of
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companies in ways unrelated to the operating performance of such companies.
These market fluctuations may adversely affect the market price of the OCC
Common Stock or Warrants.
HIGHLY COMPETITIVE IN-ROOM ENTERTAINMENT INDUSTRY
The hotel in-room entertainment industry is highly competitive. Due to
the high level of penetration in the United States lodging industry already
achieved by participants in the in-room entertainment industry and the low rate
of construction and expansion of hotel properties in the United States, most of
the growth opportunities in the in-room entertainment industry currently involve
securing contracts to serve hotels that are already being served by a competing
vendor, expanding internationally and broadening the range of services provided.
These circumstances have led to increasing competition for contract renewals,
particularly at hotels operated by major hotel chains. There can be no assurance
that On Command Corporation will obtain new contracts with hotels currently
served by other vendors or that On Command Corporation will be able to retain
contracts with the hotels served by OCV and Spectradyne when those contracts
expire. The loss by On Command Corporation of one or more of the major hotel
chain customers, such as Marriott, Hyatt or Hilton, could have a material
adverse impact on On Command Corporation's results of operations. See
"--Dependence on Significant Customers." In addition, there are a number of
potential competitors that could utilize their existing infrastructure to
provide in-room entertainment to the lodging industry, including cable companies
(including wireless cable), telecommunications companies and direct-to-home and
direct broadcast satellite companies. Some of these potential competitors
already are providing free-to-guest services to hotels and testing video-on-
demand. Some of these potential competitors have substantially greater resources
than On Command Corporation will have after consummation of the Transactions.
See "Business--Competition."
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Marriott, Hilton and Hyatt accounted for approximately 16.0%, 6.7% and
5.4%, respectively, of On Command Corporation's pro forma revenues for the year
ended December 31, 1995. The loss of any of these customers, or the loss of a
significant number of other hotel chain customers, could have a material adverse
effect on On Command Corporation's results of operations or financial condition.
See "Business--OCV" and "--Spectradyne."
DEPENDENCE ON PERFORMANCE OF LODGING INDUSTRY
The business of each of OCV and Spectradyne is, and the business of On
Command Corporation will be, closely linked to the performance of the hotel
industry. Declines in hotel occupancy as a result of general business, economic,
seasonal and other factors can have a significant adverse impact on On Command
Corporation's results of operations. See "Business--On Command Video
Corporation" and "--Spectradyne, Inc."
RISK OF TECHNOLOGICAL OBSOLESCENCE
Technology in the entertainment and communications industry is
continuously changing as new technologies and developments continue to be
introduced. There can be no assurance that future technological advances will
not result in improved equipment or software systems that could adversely affect
On Command Corporation's competitive position. In order to remain competitive,
On Command Corporation must maintain the programming enhancements, engineering
and technical capability and flexibility to respond to customer demands for new
or improved versions of its systems and new
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technological developments, and there can be no assurance that On Command
Corporation will have the financial or technological resources to be successful
in doing so.
DEPENDENCE ON KEY PERSONNEL
On Command Corporation's success will be dependent upon the
contributions of its executive officers, especially Robert M. Kavner, its
President and Chief Executive Officer, Brian A.C. Steel, its Executive Vice
President, Chief Financial Officer and Chief Operating Officer, and Robert
Snyder, its Vice Chairman. The loss of the services of such executive officers
could have a material adverse effect on On Command Corporation. On Command
Corporation's success also depends on its continued ability to attract and
retain highly skilled and qualified personnel. There can be no assurance that On
Command Corporation or its subsidiaries will be successful in attracting and
retaining such personnel. Messrs. Kavner and Steel have entered into employment
agreements with On Command Corporation, and Mr. Snyder has entered into an
employment agreement with OCV. See "Management."
SEASONALITY
The business of each of OCV and Spectradyne is, and the business of On
Command Corporation will be, seasonal, with higher revenues per room realized
during the summer months and lower revenues per room realized during the
winter months due to business and vacation travel patterns. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Seasonality."
ANTI-TAKEOVER PROTECTIONS
Following the consummation of the Transactions, Ascent will own
approximately 57.2% of the OCC Common Stock, assuming no holder of OCV Common
Stock exercises its appraisal rights and before giving effect to any Reserved
Stock and the exercise of any Warrants. See "Beneficial Ownership of OCV and OCC
Common Stock." Accordingly, On Command Corporation will not be able to engage in
any strategic transactions without the approval of Ascent. Even if Ascent's
interest in On Command Corporation were reduced below such level, On Command
Corporation's Certificate of Incorporation contains certain provisions that
could make it more difficult for a third party to acquire, or discourage a third
party from attempting to acquire, control of On Command Corporation. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of OCC Common Stock. Certain of such provisions allow
On Command Corporation to issue preferred stock with rights senior to those of
the OCC Common Stock and impose various procedural and other requirements which
could make it more difficult for stockholders to effect certain corporate
actions. See "Description of On Command Corporation Capital Stock" and
"Comparison of Stockholder Rights."
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STOCKHOLDERS' CONSENT
Pursuant to the Certificate of Incorporation of OCV, the approval and
adoption of the Merger Agreement requires the affirmative vote of the holders of
record of two-thirds of the shares of OCV Common Stock. Section 228 of the DGCL
provides that any action which may be taken at any annual or special meeting of
stockholders of a Delaware corporation may be taken without a meeting, without
prior notice and without a vote if a consent or consents in writing, setting
forth the action to be taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action. Certain stockholders of OCV, including
Ascent, Robert Snyder, President, Chief Executive Officer and a director of OCV
and Richard Fenwick, Sr., a director OCV, who own, in the aggregate,
approximately 86.5% of the outstanding shares of OCV Common Stock, acting
pursuant to Section 228 of the DGCL, have consented in writing to the adoption
of the Merger Agreement and to the consummation of the Merger. As a result,
pursuant to Section 228 of the DGCL, no special meeting of the stockholders of
OCV is required to approve the Merger Agreement.
Holders of OCV Common Stock who have not consented to the adoption of
the Merger Agreement and who (a) deliver to OCV a written demand for appraisal
of their shares of OCV Common Stock and (b) meet certain other statutory
requirements, will be entitled to have the value of their shares appraised in
accordance with Section 262 of the DGCL, a copy of which is included as Annex
VI to this Information Statement/Prospectus. See "The Transactions--The
Merger--Appraisal Rights."
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THE TRANSACTIONS
GENERAL
This section of the Information Statement/Prospectus describes certain
aspects of the proposed Transactions, including the principal terms of the
Merger Agreement, the Acquisition Agreement, the Warrant Agreement and the
Registration Rights Agreement. A copy of the Merger Agreement is attached to
this Information Statement/Prospectus as Annex I and is incorporated herein by
reference; a copy of the Acquisition Agreement is attached to this Information
Statement/Prospectus as Annex II and is incorporated herein by reference; a copy
of the Warrant Agreement is attached to this Information Statement/Prospectus as
Annex III and is incorporated herein by reference; and a copy of the
Registration Rights Agreement is attached to this Information
Statement/Prospectus as Annex IV and is incorporated herein by reference. The
descriptions set forth below of the terms of the Merger Agreement, the
Acquisition Agreement, the Warrant Agreement and the Registration Rights
Agreement are qualified in their entirety by reference to such Annexes. All
stockholders of OCV are urged to read each of the Merger Agreement, the
Acquisition Agreement, the Warrant Agreement and the Registration Rights
Agreement in its entirety.
BACKGROUND OF THE TRANSACTIONS
In June 1993, SpectraVision entered into a ten-year exclusive contract
with EDS to install and maintain a digital satellite delivered hotel PPV system.
By late 1994, the costs associated with the EDS contract combined with
SpectraVision's high debt levels created financial difficulties for
SpectraVision. In early 1995, SpectraVision determined that a financial
restructuring would be required to ensure SpectraVision's long-term survival.
SpectraVision conducted restructuring negotiations with representatives of its
secured and unsecured creditors during April and May 1995, working toward the
development of an overall restructuring plan. In June 1995, SpectraVision
concluded that a filing for reorganization under Chapter 11 of the Bankruptcy
Code should be made in order to preserve the value of its assets and to ensure
that the business had sufficient cash resources to continue operations while it
completed the financial restructuring process. On June 8, 1995, the Debtors
filed the Bankruptcy Case in the Bankruptcy Court.
In April 1995, Gary Wilson Partners approached Ascent to discuss
methods for Ascent to capitalize on SpectraVision's financial difficulties.
Ascent retained Gary Wilson Partners to assist and advise Ascent and OCV as to a
potential transaction involving SpectraVision.
On June 23, 1995, the Creditors' Committee was appointed by the United
States Trustee for the District of Delaware pursuant to Section 1102 of the
Bankruptcy Code. The Creditors' Committee has the right to review and object to
certain business transactions and to participate in the negotiation of
SpectraVision's plan of reorganization. In November 1995, the Bankruptcy Court
authorized SpectraVision to retain Salomon Brothers Inc to assist SpectraVision
in maximizing the value of the SpectraVision estate by conducting a bidding
process. The objective of the bidding process was to select a plan sponsor to
reorganize SpectraVision. The plan sponsor's incentives were: (i) to include
protection for the plan sponsor by requiring any new bid to be at least $4.0
million higher than the plan sponsor's bid; (ii) a breakup fee of $2.0 million;
and (iii) expense reimbursement of up to $400,000. The proposed schedule for the
bidding process was for bids to be submitted by January 5, 1996. Based on
Ascent's earlier communications with SpectraVision and the apparent inability of
SpectraVision to obtain a settlement with EDS, in November 1995 Ascent
determined that it would not participate in the bidding process.
On December 20, 1995, the Bankruptcy Court approved the proposed
bidding process (the "Procedures Order"), but moved the date for submitting bids
to January 29, 1996. In January 1996, pursuant to the Procedures Order, the
Debtors solicited bids from third parties for financial restructuring
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proposals that would allow the Debtors to emerge from bankruptcy pursuant to a
business combination with a third party.
During December 1995 and January 1996, SpectraVision and EDS filed
motions in the Bankruptcy Court relating to whether the EDS contract would be
accepted or rejected on an ongoing basis.
On January 18, 1996, SpectraVision and EDS entered into an interim
agreement that was filed with the Bankruptcy Court for approval. The agreement
resolved certain issues regarding field service amounts owed to EDS in a way
that Ascent management believed signalled EDS's willingness to accept a plan of
reorganization that could drastically reduce SpectraVision's obligations to EDS.
In subsequent conversations with EDS personnel, Ascent management determined
that EDS would be open to negotiating an agreement with Ascent and OCV for the
provision of service to On Command Corporation on an interim basis, on terms
that could make the transaction attractive. In consideration of the EDS
position, on January 29, 1996, representatives of Ascent submitted a proposal to
acquire substantially all of SpectraVision's assets. On February 1, 1996, the
Bankruptcy Court approved the interim agreement between SpectraVision and EDS.
On April 19, 1996, SpectraVision, Ascent, OCV and the Creditors'
Committee entered into the Plan Sponsor Agreement pursuant to which it was
agreed that Ascent would be plan sponsor for the SpectraVision plan of
reorganization and that On Command Corporation, directly or indirectly, would
acquire the assets or the capital stock and certain liabilities of OCV and
Spectradyne, subject to the terms and conditions of the Plan Sponsor Agreement.
The Merger Agreement, the Acquisition Agreement, the Warrant Agreement and the
Registration Rights Agreement were or will be entered into to implement the Plan
Sponsor Agreement.
On September 13, 1996, the Bankruptcy Court entered an order and
judgment (the "Confirmation Order") confirming SpectraVision's First Amended
Joint Plan of Reorganization, dated August 2, 1996, as supplemented on August
27, 1996 and modified on September 11, 1996 (as supplemented and modified, the
"Plan"). The Plan incorporates the terms of the Transactions contained in this
Information Statement/Prospectus. As of the date of this Information
Statement/Prospectus there have not been any objections to or appeals of the
Confirmation Order.
THE MERGER
Upon the terms and subject to the conditions of the Merger Agreement
and in accordance with the DGCL, at the Effective Time, Merger Sub will merge
with and into OCV. OCV will be the Surviving Corporation in the Merger, and will
continue its corporate existence under Delaware law under the name On Command
Video Corporation. At the Effective Time, the separate corporate existence of
Merger Sub will cease. The Certificate of Incorporation and Bylaws of OCV, as in
effect immediately prior to the Effective Time, will be the Certificate of
Incorporation and Bylaws of the Surviving Corporation, until thereafter amended
or repealed in accordance with their terms and as provided by law.
Merger Consideration
Upon consummation of the Merger, each share of OCV Common Stock that is
issued and outstanding immediately prior to the Effective Time (other than
shares of OCV Common Stock held by OCV or by its direct or indirect subsidiaries
and Dissenting Shares), will be converted into the right to receive the Merger
Consideration, which shall include the following: (i) approximately 2.84 shares
of OCC Common Stock, (ii) such additional number of shares of Reserved Stock, if
any, to which holders of OCV Common Stock may be entitled as described below
under "--The Acquisition," and (iii) Series A Warrants to purchase, on a
cashless basis, approximately 18.61% of a share of OCC Common Stock. The Initial
Shares to be issued to holders of OCV Common Stock will represent, in the
aggregate, 72.5% of the total number of shares of OCC Common Stock to be issued
pursuant to the Merger Agreement and the Acquisition Agreement (of which shares
representing approximately 57.2% will be issued to Ascent), assuming no holder
of OCV Common Stock exercises its appraisal rights and before giving effect to
any Reserved Stock and the exercise of any Warrants. Cash will be paid in lieu
of the issuance of fractional shares of OCC Common Stock as described below
under "--Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock
Certificates; Fractional Shares."
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Holders of OCV Common Stock who (i) have not consented to the adoption
of the Merger Agreement, (ii) have demanded appraisal rights with respect to
their OCV Common Stock in accordance with Section 262 of the DGCL and (iii) have
perfected (or who have not effectively withdrawn or lost) their rights to
appraisal and payment under Section 262 of the DGCL, will be required to
exchange their shares of OCV Common Stock (the "Dissenting Shares") for a cash
payment in the amount of the appraised value of such shares. Such holders will
not be entitled to receive any of the Merger Consideration. See "--Appraisal
Rights." All holders of OCV Common Stock who do not satisfy all of the
requirements to perfect appraisal rights described in this paragraph will be
required to exchange their shares of OCV Common Stock for the Merger
Consideration.
None of the shares of OCC Common Stock or Series A Warrants that would
have been issued pursuant to the Merger Agreement in exchange for Dissenting
Shares if such Dissenting Shares had been converted into the Merger
Consideration will be issued to any holder of OCV Common Stock or any other
person or entity in connection with the Transactions.
The Merger Consideration (including the number of shares of OCC Common
Stock and Series A Warrants issuable to an OCV stockholder upon exchange of
such stockholder's shares of OCV Common Stock pursuant to the Merger) and the
Series C Warrant was determined through arms'-length negotiations between Ascent
and OCV on the one hand and the Debtors and the Creditors' Committee on the
other hand.
In consideration for certain investment banking and advisory services
provided to Ascent and OCV in connection with the Transactions and for future
advisory and other services to be rendered to On Command Corporation, Ascent
agreed with Gary Wilson Partners to direct On Command Corporation to issue the
Series C Warrant, which represents the ability to purchase approximately 9.2% of
the OCC Common Stock that would be issued and outstanding (after exercise of all
of the Warrants) at the Warrant Exercise Price (as defined below) to Gary Wilson
Partners. As described further below, Ascent and Gary Wilson Partners have
agreed to certain limitations and rights related to the Series C Warrant.
Effective Time
The effective time of the Merger (the "Effective Time") will be the
time of the filing of the Certificate of Merger with the Secretary of State of
the State of Delaware or such later time as is specified in such Certificate of
Merger. The Closing of the Merger (the "Closing") will take place as promptly as
practicable following satisfaction or waiver of the conditions set forth in the
Merger Agreement (other than those conditions which, by their terms, are to be
satisfied at the Closing) unless another date is agreed to in writing by On
Command Corporation, Merger Sub and OCV. Subject to certain limitations, the
Merger Agreement may be terminated by either On Command Corporation or OCV if,
among other reasons, the Transactions have not been consummated on or prior to
October 30, 1996. See "--Conditions to the Consummation of the Merger" and
"--Termination."
Directors and Officers of the Surviving Corporation
Following the Merger, Charles Lyons, Robert M. Kavner and James A.
Cronin, III, will be the directors of the Surviving Corporation until their
respective successors are duly elected or appointed and qualified, and the
officers of OCV immediately prior to the Effective Time will be the officers of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation.
Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock
Certificates; Fractional Shares
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The conversion of shares of OCV Common Stock (other than shares of OCV
Common Stock held by OCV or by any direct or indirect subsidiary of OCV, which
shares of OCV Common Stock will be cancelled in the Merger, and other than
Dissenting Shares) into the right to receive the Merger Consideration will occur
at the Effective Time.
As soon as practicable after the Effective Time, OCV will send a letter
of transmittal form to each holder of OCV Common Stock. The letter of
transmittal form will contain instructions with respect to the surrender of
certificates representing shares of OCV Common Stock in exchange for
certificates representing shares of OCC Common Stock and certificates
representing the Series A Warrants for which the shares represented by the
certificates so surrendered are exchangeable pursuant to the Merger Agreement.
OCV STOCKHOLDERS SHOULD NOT FORWARD OCV STOCK CERTIFICATES FOR
EXCHANGE UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS INSTRUCTING THEM
WHERE TO SEND SUCH CERTIFICATES.
As soon as practicable after the Effective Time, each holder of an
outstanding certificate or certificates that prior thereto represented shares of
OCV Common Stock shall, upon surrender to OCV of such certificate or
certificates and acceptance thereof by OCV, be entitled to a certificate or
certificates representing the whole number of shares of OCC Common Stock and the
number of Series A Warrants into which the aggregate number of shares of OCV
Common Stock previously represented by such certificate or certificates
surrendered shall have been converted pursuant to the Merger Agreement, plus any
cash payable in lieu of any fractional share of OCC Common Stock. OCV shall
accept such certificates upon compliance with such reasonable terms and
conditions as it may impose in order to effect an orderly exchange thereof in
accordance with normal exchange practices. After the Effective Time, there shall
be no further transfer on the records of OCV of certificates representing shares
of OCV Common Stock, and if such certificates are presented to OCV for transfer,
they shall be cancelled against delivery of certificates for shares of OCC
Common Stock and certificates for Series A Warrants pursuant to the Merger
Agreement. Until surrendered in accordance with the Merger Agreement, each
certificate for shares of OCV Common Stock will be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Merger Consideration as contemplated by the Merger Agreement. No interest will
be paid or will accrue on any cash payable in lieu of any fractional share of
OCC Common Stock.
On the Final Distribution Date (as defined below), each holder of an
outstanding certificate representing OCV Common Stock that has been surrendered
to, and accepted by, On Command Corporation shall be entitled to receive one or
more certificates representing the whole number of shares of Reserved Stock, if
any, into which such certificate representing OCV Common Stock has been
converted pursuant to the Merger Agreement, plus any cash payable in lieu of any
fractional share of Reserved Stock.
No certificates representing fractional shares of OCC Common Stock
shall be issued upon the surrender of certificates representing OCV Common
Stock. With respect to each holder of OCV Common Stock that would have been
entitled to receive a fractional share of OCC Common Stock, such holder shall be
entitled to receive in lieu of such fractional share an amount of cash equal to
the product of the average of the high and low trading price for the OCC Common
Stock for the five trading days immediately following the Effective Time and the
fractional share of OCC Common Stock that such holder would have been entitled
to receive.
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No dividends or other distributions with respect to OCC Common Stock
with a record date after the Effective Time will be paid to the holder of any
unsurrendered certificate for shares of OCV Common Stock with respect to the OCC
Common Stock issuable in respect thereof, and no cash payment in lieu of
fractional shares will be paid to any such holder, until the surrender of such
certificate in accordance with the Merger Agreement. Subject to the effect of
applicable laws, following surrender of any such certificate, On Command
Corporation will pay to the holder of the certificate representing whole shares
of OCC Common Stock issued in exchange therefor, without interest, to the holder
of such certificate all of the dividends and distributions that would have been
paid to such holder if its certificate representing OCV Common Stock had been
exchanged for OCC Common Stock immediately after the Effective Time.
No Warrant shall provide any holder with the right to purchase a
fractional share of OCC Common Stock. In the event that any holder of OCV Common
Stock would be entitled to receive a Warrant to purchase a fractional share of
OCC Common Stock, the number of shares of OCC Common Stock that such holder will
have the right to purchase pursuant to such Warrant shall be rounded to the
nearest whole number.
Treatment of OCV Employee Stock Options
The Merger Agreement provides that, prior to the Effective Time, the
Board of Directors of OCV will adopt appropriate resolutions and take all other
actions necessary to provide for the cancellation, as of the Effective Time, of
all the outstanding stock options (the "Employee Stock Options") previously
granted under the On Command Video Corporation 1987 Stock Option Plan (the "OCV
Stock Option Plan"), whether or not then vested or exercisable. As of the
Effective Time, or as soon as practicable thereafter, there will be substituted
for each outstanding Employee Stock Option an equivalent option (each, a "New
Employee Stock Option") to purchase shares of OCC Common Stock pursuant to the
On Command Corporation Stock Option Plan. The number of shares of OCC Common
Stock that a holder of any New Employee Stock Option will be entitled to
purchase, the price at which shares of OCC Common Stock will be purchasable upon
the exercise of any New Employee Stock Option, and the dates on which any New
Employee Stock Option will vest and become exercisable will be determined by On
Command Corporation's Board of Directors based upon the conversion ratio for OCV
Common Stock. As of the Effective Time, (i) the On Command Corporation Stock
Option Plan will become effective, and (ii) the OCV Stock Option Plan will
terminate and OCV will ensure that following the Effective Time, subject to
receipt of New Employee Stock Options, no holder of an Employee Stock Option or
any participant in the OCV Stock Option Plan will have any right thereunder to
acquire capital stock of OCV or the Surviving Corporation. See
"Management--Stock Incentive Plans."
Representations and Warranties
The Merger Agreement contains representations and warranties of OCV
that the financial statements of OCV that were supplied to the Debtors and the
Creditors' Committee present fairly in accordance with GAAP (except as otherwise
set forth in the notes thereto) the financial condition and results of
operations at and for the period reported on therein; that there has been no
material adverse change in such financial condition or results of operations of
OCV prior to the Effective Time, and that no grounds exist that would allow any
of OCV's five largest (by number of rooms served by OCV) hotel customers, or any
of OCV's major studio suppliers or free-to-guest programming suppliers, to
terminate their existing service contracts with OCV.
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Pre- and Post-Closing Obligations
In the Merger Agreement, OCV, On Command Corporation and Merger Sub
agree that (i) prior to the Closing Date OCV shall operate its business in the
ordinary course as conducted on April 19, 1996 and will use its best efforts to
maintain favorable relationships with its major hotel customers; (ii) except as
otherwise provided for in the Merger Agreement, OCV shall not incur any
indebtedness other than OCV Debt (as defined below) prior to the Effective Time;
(iii) if the Debtors desire to lease OCV equipment pursuant to one or more
equipment leases and (a) such equipment is compatible with the Debtors' existing
technology or OCV provides support services to the Debtors on terms similar to
those it previously provided to COMSAT Video Enterprises, Inc. and (b)
installation of such equipment will not breach any of the Debtors' contracts
with the hotels it serves, then OCV shall have the right but not the obligation
to lease such OCV equipment to the Debtors pursuant to one or more equipment
leases; (iv) none of OCV, On Command Corporation and Merger Sub shall enter into
any agreement that would adversely affect (a) its ability to perform its
obligations under the Merger Agreement or (b) the rights of any other person or
entity under the Merger Agreement, the Acquisition Agreement or the Procedures
Order (as defined below); (v) On Command Corporation and OCV shall (a) cause any
necessary filings with any governmental agency to be made expeditiously and (b)
use their reasonable best efforts to obtain any necessary government or
third-party approvals (including, without limitation, any filings or
registrations with the Commission or state securities regulatory authorities);
(vi) OCV shall use its reasonable best efforts to estimate the aggregate amount
of OCV Debt that will be outstanding as of the Effective Time, which amount
shall be used to calculate the Warrant Exercise Price; (vii) promptly after the
date of the Merger Agreement, (a) On Command Corporation and OCV shall prepare
and file with the Commission this Information Statement/Prospectus and On
Command Corporation shall prepare and file with the Commission a Registration
Statement on Form S-4, in which this Information Statement/Prospectus will be
included as a prospectus, (b) each of On Command Corporation and OCV shall use
its reasonable best efforts to have the Registration Statement declared
effective under the Securities Act as soon as practicable after such filing and
(c) OCV will use its reasonable best efforts to cause this Information
Statement/Prospectus to be mailed to OCV's stockholders as soon as practicable
after the Registration Statement has been declared effective under the
Securities Act; (viii) On Command Corporation shall use its reasonable best
efforts to cause the OCC Common Stock and Warrants to be issued to the holders
of OCV Common Stock and the Creditors pursuant to the Merger Agreement and the
Acquisition Agreement to be approved for listing on a securities exchange,
subject to official notice of issuance, prior to the Closing Date, or at On
Command Corporation's election, to be listed on the Nasdaq National Market; and
(ix) OCV shall cooperate with On Command Corporation in connection with On
Command Corporation obtaining the financing required to pay up to $40,000,000 of
the DIP Loan (as defined below).
The parties to the Merger Agreement further agree that after the
Closing, OCV and On Command Corporation shall take such additional actions, and
execute and deliver such additional documents and instruments, as may be
reasonably necessary or appropriate to effect the transactions contemplated by,
and to carry out the intent of, the Merger Agreement.
The Merger Agreement also provides that, prior to the Effective Time,
Ascent and its affiliates may enter into agreements with On Command Corporation
with respect to the provision of management services, matters of corporate
governance, technology licensing, tax sharing and other operating matters,
subject to the approval of On Command Corporation's Board of Directors and on
terms at least as favorable as may be available to On Command Corporation in
comparable third-party transactions. See "--Interests of Certain Persons in the
Merger."
Conditions to the Consummation of the Merger
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The obligation of OCV to consummate the Merger is subject to the
satisfaction of each of the following conditions: (a) all consents and approvals
required to consummate the Merger shall have been obtained; (b) as of the
Closing Date, no court has entered an order that enjoins, restrains or prohibits
the consummation of the Merger; (c) a registration statement covering both the
OCC Common Stock and the Series A Warrants to be issued to OCV's stockholders as
part of the Merger Consideration pursuant to the Merger Agreement shall have
been filed with, and declared effective by (and no stop order or other action
has been taken, and no proceeding has been commenced, to enjoin distribution of
such shares) the Commission, and such OCC Common Stock and Series A Warrants
shall have been qualified under all applicable state securities laws; and (d)
prior to or contemporaneously with the consummation of the Merger, On Command
Corporation (or, at the election of On Command Corporation, a wholly owned
subsidiary of On Command Corporation) shall have acquired all of the capital
stock of Spectradyne pursuant to and in accordance with the terms of the
Acquisition Agreement.
Termination of the Merger Agreement
The Merger Agreement may be terminated by OCV prior to the Effective
Time upon the occurrence of either of the following events (each, a "Termination
Event"): (i) On Command Corporation has not acquired all of the capital stock of
Spectradyne on or before October 30, 1996 or (ii) the Acquisition Agreement has
been terminated for any reason. OCV may elect to exercise its right to terminate
the Merger Agreement by sending a written notice (a "Termination Notice") to the
other parties in the manner provided in the Merger Agreement. In the event of
the termination of the Merger Agreement, the Merger Agreement will become void
and there will be no liability on the part of any party thereto to any other
party thereto.
Regulatory Approvals
The consummation of the Acquisition is conditioned upon, and the Merger
Agreement is accordingly also conditioned upon (unless such condition is waived
in writing by On Command Corporation), among other things, the issuance of an
order by the Bankruptcy Court that confirms the Plan and as to which (i) both
(a) the time to seek reconsideration, rehearing, or new trial by the rendering
court (a "Post-Trial Motion"), and (b) the time (including time resulting from a
timely filed motion under Rule 8002(c) under the Federal Rules of Bankruptcy
Procedure) to appeal or to seek a petition for review or certiorari
(hereinafter, an "Appellate Court Review"), has expired (without regard to
whether time to seek relief of a judgment under Rule 60(b) of the Federal Rules
of Civil Procedure or Rule 9024 of the Federal Rules of Bankruptcy Procedure has
expired); and (ii) either (a) no Post-Trial Motion or request for Appellate
Court Review is pending, or (b) a Post-Trial Motion or a request for Appellate
Court Review is pending but the subject order of judgment has not been stayed,
amended, modified or reversed by a court of competent jurisdiction or, if
stayed, such stay has been vacated or is no longer in effect. Without limiting
the foregoing, the pendency of, or request for, a Post-Trial Motion or an
Appellate Court Review will not prevent an order from becoming final and being
implemented, absent the entry of a stay by a court of competent jurisdiction and
the continuation thereof. On September 13, 1996, the Bankruptcy Court entered
the Confirmation Order and, as of the date of this Information
Statement/Prospectus, there has been no Post-Trial Motion or request for
Appellate Court Review.
The waiting period under the Hart-Scott-Rodino Antitrust Improvement
Act of 1976 with respect to the Acquisition has expired.
Fees and Expenses
Except as described below, each party to the Merger Agreement shall
bear its own expenses in connection with the Merger Agreement and the
transactions contemplated thereby, regardless of whether the transactions
contemplated by the Merger Agreement and the Acquisition Agreement are
consummated.
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The costs of registering the OCC Common Stock and the Series A Warrants
and the costs of preparing and filing the Form S-4 Registration Statement
containing this Information Statement/Prospectus will be paid by On Command
Corporation. In the event that any OCC Common Stock and/or Warrants being issued
to the Creditors are required to be registered under the Securities Act, all of
the fees and expenses incurred in connection with such registration shall be
paid by On Command Corporation.
Amendment and Waiver
The Merger Agreement may be altered or amended only by an instrument in
writing by all the parties thereto. Except as otherwise contemplated by the
Merger Agreement, neither On Command Corporation nor OCV may assign its rights
or delegate its obligations under the Merger Agreement without the prior written
consent of the other. The representations and warranties of OCV in the Merger
Agreement shall expire on the Closing Date and neither OCV nor On Command
Corporation shall have any liability after the Closing Date for any breach of
any of its representations, warranties, covenants or agreements under the Merger
Agreement; provided, however, that notwithstanding anything to the contrary in
the Merger Agreement, following consummation of the Merger, the respective
obligations of On Command Corporation and OCV (i) relating to the payment of the
Merger Consideration and (ii) to take such additional actions, and execute and
deliver such additional documents and instruments, as may be reasonably
necessary or appropriate to effect the transactions contemplated by, and to
carry out the intent of, the Merger Agreement, shall, in each case, survive the
consummation of the Merger.
Interests of Certain Persons in the Merger
Certain stockholders, members of the Board of Directors and management
of OCV may be deemed to have certain interests in the Merger, in addition to
their interests generally as stockholders of OCV. All of such additional
interests are described below, to the extent material, and except as described
below such persons have, to the best knowledge of On Command Corporation and
OCV, no material interests in the Merger apart from those of stockholders
generally. The OCV Board of Directors was aware of these interests of its
directors and officers and considered them, among other matters, in approving
the Merger Agreement and the transactions contemplated thereby.
As of September 15, 1996, Ascent beneficially owned and was entitled to
vote 6,038,650 shares of OCV Common Stock, representing approximately 78.9% of
the shares of OCV Common Stock, as adjusted to give effect to the exercise by
Hilton of its option to purchase OCV Common Stock, which is expected to be
exercised immediately prior to the Effective Time. See "Beneficial Ownership of
OCV and OCC Common Stock." Upon consummation of the Transactions, Ascent will
beneficially own at least 17,154,572 shares of OCC Common Stock, or
approximately 57.2% of the total number of shares of OCC Common Stock (assuming
no holder of OCV Common Stock exercises its appraisal rights and before giving
effect to any Reserved Stock and the exercise of any Warrants), and will be
able, among other things, to approve any corporate action requiring majority
stockholder approval, including the election of a majority of the board of
directors, certain amendments to On Command Corporation's Certificate of
Incorporation and Bylaws and any other matter submitted to a vote of On Command
Corporation stockholders, without the consent of the other stockholders of On
Command Corporation. In addition, through its control of the Board of Directors
of On Command Corporation, Ascent will be able to influence certain decisions,
including decisions with respect to On Command Corporation's dividend policy, On
Command Corporation's access to capital (including the decision to incur
additional indebtedness or issue additional shares of OCC Common Stock), mergers
or other business combinations involving On Command Corporation, the acquisition
or disposition of assets by On Command Corporation and any change in control of
On Command Corporation.
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On Command Corporation and Ascent will enter into a management services
agreement (the "Services Agreement") pursuant to which Ascent will provide
certain strategic planning, administrative, financial, legal and other services
to On Command Corporation. Pursuant to the Services Agreement, On Command
Corporation will pay to Ascent (i) an annual fee of $1.2 million payable monthly
and (ii) certain of Ascent's actual out-of-pocket expenses in connection with
the Services Agreement (not including overhead and the cost of its personnel).
Further, On Command Corporation will indemnify Ascent from (i) all damages from
Ascent's performance of services under the Services Agreement unless such
damages are caused by willful breach by Ascent or willful misconduct or gross
negligence by Ascent's employees and (ii) On Command Corporation's failure to
fulfill its obligations under the Services Agreement. Ascent will indemnify On
Command Corporation from damages arising from willful breach by Ascent or gross
negligence or willful misconduct by Ascent's employees in the performance of the
Services Agreement. The initial term of the Services Agreement will expire
December 31, 1997, subject to renewal by On Command Corporation for one
additional one-year term.
On Command Corporation and Ascent will also enter into the Corporate
Agreement that will govern certain other relationships and arrangements between
On Command Corporation and Ascent. Pursuant to the Corporate Agreement, for so
long as Ascent owns the largest percentage (and at least 40%) of the outstanding
OCC Common Stock, On Command Corporation will propose nominees to the board of
directors such that the board would consist of at least a majority of members
designated by Ascent and two independent directors who are neither employees nor
directors of Ascent nor employees of On Command Corporation. In addition, for so
long as Ascent owns the largest percentage (and at least 40%) of the outstanding
OCC Common Stock, On Command Corporation will agree not to incur any
indebtedness, other than under the OCC Credit Facility (and refinancings
thereof) and indebtedness incurred in the ordinary course of business, which
together shall not exceed $100 million (not more than $50 million of which may
be long term debt), or issue any equity securities or any securities convertible
into equity securities without Ascent's prior consent. On Command Corporation
will agree in the Corporate Agreement, for so long as Ascent owns the largest
percentage (and at least 40%) of the outstanding OCC Common Stock, to utilize
reasonable cash management procedures and to use its reasonable best efforts to
minimize On Command Corporation's excess cash holdings. As a consequence, the
ability of On Command Corporation to utilize the OCC Credit Facility will be
subject to the limitations described above.
Certain members of the Board of Directors and management of OCV may be
deemed to have certain interests in the Merger in addition to their interests
generally as OCV stockholders. In particular, Messrs. Cronin, Kavner and Lyons,
each a director of OCV, will become directors of On Command Corporation upon
completion of the Merger, and Mr. Kavner will become President and Chief
Executive Officer of On Command Corporation upon completion of the Merger.
Messrs. Cronin, Kavner and Lyons, however, will not be receiving any
compensation in connection with their services as directors of On Command
Corporation.
Resale of OCC Common Stock and Warrants
The shares of OCC Common Stock and Series A Warrants issued to OCV
stockholders as Merger Consideration pursuant to the Merger will not be subject
to any restrictions on transfer arising under the Securities Act, except for
shares or Warrants issued to any OCV stockholder, including Ascent, who may be
deemed to be an "affiliate" of On Command Corporation or OCV for purposes of
Rule 144 under the Securities Act. It is expected that each such affiliate will
enter into an agreement with On Command Corporation providing that such
affiliate will not transfer any OCC Common Stock received in the Merger except
in compliance with the Securities Act. This Information Statement/Prospectus
does not cover resales of OCC Common Stock received by any person who may be
deemed to be such an affiliate of On Command Corporation or OCV, including
Ascent. The shares of OCC Common Stock issuable upon exercise of the Series A
Warrants will be exempt from registration requirements pursuant to Section
3(a)(9) of the Securities Act.
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Pursuant to the Confirmation Order (as defined below), the shares of
OCC Common Stock and Series B Warrants issued as consideration pursuant to the
Acquisition Agreement are exempt from the registration requirements of the
Securities Act pursuant to Section 1145 of the Bankruptcy Code.
Appraisal Rights
Holders of OCV Common Stock are entitled to appraisal rights under
Section 262 of the DGCL, the text of which is attached as Annex VI hereto. The
description of appraisal rights contained in this Information
Statement/Prospectus is qualified in its entirety by reference to Section 262 of
the DGCL.
If the Merger is completed, holders of OCV Common Stock who did not
consent to the Merger and who have fully complied with the provisions of Section
262 of the DGCL may have the right to require OCV to pay them the appraised
value of their OCV Common Stock in cash. Shares of OCV Common Stock that are
outstanding immediately prior to the Effective Time and that are held by OCV
stockholders who (a) have not consented to the Merger, (b) have delivered to OCV
a written demand for appraisal of such OCV Common Stock prior to October 27,
1996 (20 days from the date of notice hereunder) in the manner provided in
Section 262 of the DGCL and (c) have held continuously such OCV Common Stock
from the date of the written demand for appraisal through the Effective Time
("Dissenting Shares"), shall not be converted into or represent the right to
receive the Merger Consideration, but instead the holders thereof shall be
entitled to payment of the appraised value of such Dissenting Shares in
accordance with Section 262 of the DGCL. If, however, any holder of Dissenting
Shares (i) subsequently delivers a written withdrawal of such holder's demand
for appraisal of such Dissenting Shares within 60 days after the Effective Time
(or thereafter with the written approval of OCV), (ii) any holder fails to
perfect such holder's entitlement to appraisal rights as provided in such
Section 262, or (iii) if neither any holder of Dissenting Shares nor OCV has
filed a petition with the Delaware Court of Chancery demanding a determination
of the value of all Dissenting Shares within 120 days after the Effective Time,
such holder or holders shall forfeit the right to appraisal of such Dissenting
Shares and such Dissenting Shares may thereupon be deemed to have been converted
into the right to receive, and to have become exchangeable for, as of the
Effective Time, the Merger Consideration.
FAILURE TO TAKE ANY NECESSARY STEPS WILL RESULT IN A TERMINATION OR
WAIVER OF THE RIGHTS OF THE HOLDER UNDER SECTION 262 OF THE DGCL. A PERSON
HAVING A BENEFICIAL INTEREST IN OCV COMMON STOCK THAT IS HELD OF RECORD IN THE
NAME OF ANOTHER PERSON, SUCH AS A TRUSTEE OR NOMINEE, MUST ACT PROMPTLY TO CAUSE
THE RECORD HOLDER TO FOLLOW THE REQUIREMENTS OF SECTION 262 IN A TIMELY MANNER
IF SUCH PERSON ELECTS TO DEMAND APPRAISAL OF SUCH SHARES.
Any holder of record of OCV Common Stock electing to demand the
appraisal of such shares of OCV Common Stock under Section 262 of the DGCL must
(a) deliver to OCV, prior to October 27, 1996 (20 days from the date of notice
hereunder), a written demand for appraisal of such shares and (b) not consent to
the adoption of the Merger Agreement. Failure to consent to the Merger Agreement
does not constitute such a demand. A holder of record of OCV Common Stock
electing to take such action must do so by a separate written demand that
reasonably informs OCV of such holder's identity and of such holder's intention
thereby to demand the appraisal of such holder's shares of OCV Common Stock.
Only the holder of record of OCV Common Stock is entitled to assert
appraisal rights for the OCV Common Stock registered in that holder's name. The
demand should be executed by or for the holder of record, fully and correctly,
as the holder's name appears on the holder's stock certificates. If
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the OCV Common Stock is owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of the demand should be made in that
capacity, and if the OCV Common Stock is owned of record by more than one
person, as in a joint tenancy or tenancy in common, the demand should be
executed by or for all owners. An authorized agent, including one of two or more
joint owners, may execute the demand for appraisal for a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is acting as agent
for the record owner or owners. A record holder, such as a broker, who holds OCV
Common Stock as nominee for the beneficial owners may exercise the holder's
right of appraisal with respect to the OCV Common Stock held for all or less
than all of such beneficial owners. In such case, the written demand should set
forth the number of shares of OCV Common Stock covered by the written demand.
Where no number of shares of OCV Common Stock is expressly mentioned, the demand
will be presumed to cover all shares of OCV Common Stock standing in the name of
the record owner.
Within 120 days after the Effective Time, OCV or any holder of OCV
Common Stock who has satisfied the foregoing conditions and is otherwise
entitled to appraisal rights under Section 262 of the DGCL, may file a petition
in the Delaware Court of Chancery demanding a determination of the value of the
stock of all such holders. Holders of OCV Common Stock seeking to exercise
appraisal rights should not assume that OCV will file a petition with respect to
the appraisal of the value of their Dissenting Shares or that OCV or On Command
Corporation will initiate any negotiations with respect to the "fair value" of
such Dissenting Shares. Accordingly, holders of OCV Common Stock seeking to
assert appraisal rights should regard it as their obligation to initiate all
necessary action with respect to the perfection of their appraisal rights within
the time periods prescribed in Section 262. At any time within 60 days after the
Effective Time, any OCV stockholder who has demanded appraisal of his OCV Common
Stock shall have the right to withdraw his demand for appraisal and to accept
the Merger Consideration.
Within 120 days after the Effective Time, any holder of OCV Common
Stock who has complied with the requirements for the exercise of appraisal
rights, as discussed above, is entitled, upon written request, to receive from
OCV a statement setting forth the aggregate number of shares of OCV Common Stock
the holders of which did not consent to the approval of the Merger and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such OCV Common Stock. OCV is required to mail such
statement within 10 days after it receives a written request therefor.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine which holders of OCV
Common Stock are entitled to appraisal rights and will appraise the Dissenting
Shares owned by such holders, determining their "fair value" exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the "fair value." Any such judicial determination of the "fair
value" of the Dissenting Shares could be based upon considerations other than or
in addition to the price paid in the Merger and the market value of the
Dissenting Shares, including asset values, earnings value and any other
valuation considerations generally accepted in the investment community
including, if appropriate, factors such as dividends, earnings prospects, the
nature of the enterprise and any other facts which could be ascertained as of
the date of the Merger which throw any light on future prospects of On Command
Corporation. The value so determined for Dissenting Shares could be more or less
than the Merger Consideration to be paid pursuant to the Merger. The costs of
the appraisal proceeding may be determined by the Delaware Court of Chancery and
taxed upon the parties as the Delaware Court of Chancery deems equitable in the
circumstances. Upon application of a holder of OCV Common Stock, the Delaware
Court of Chancery may order all or a portion of the expenses incurred by any
such holder in connection with the appraisal proceeding, including, without
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limitation, reasonable attorney's fees and the fees and expenses of experts, to
be charged pro rata against the value of the shares entitled to an appraisal.
Any holder of OCV Common Stock who has duly demanded an appraisal in
compliance with Section 262 will not be entitled to vote the Dissenting Shares
subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions on those Dissenting Shares (other than those
payable or deemed to be payable to OCV stockholders of record as of a date prior
to the Effective Time).
A holder of OCV Common Stock will fail to perfect, or effectively lose,
such holder's right to appraisal if no petition for appraisal is filed with the
Delaware Court of Chancery within 120 days after the Effective Time, or if after
the Effective Time such holder delivers to OCV a written withdrawal of such
holder's demand for an appraisal and an acceptance of the Merger, except that
any such attempt to withdraw made more than 60 days after the Effective Time
will require the written approval of OCV.
In the event an appraisal proceeding is instituted in a timely manner,
such proceeding may not be dismissed as to any holder of OCV Common Stock who
has perfected such stockholder's right of appraisal without the approval of the
Delaware Court of Chancery.
Any demands, notices, certificates or other documents to be delivered
to OCV prior to the Merger or to the Surviving Corporation after the Merger may
be sent to: On Command Video Corporation, 3301 Olcott Street, Santa Clara,
California 95054, Attention: Secretary.
THE ACQUISITION
The Acquisition Agreement
The Acquisition Agreement provides that On Command Corporation will
purchase all of the capital stock of Spectradyne. It also provides that certain
assets held by affiliates of Spectradyne will be transferred to Spectradyne
prior to the acquisition of the Spectradyne capital stock by On Command
Corporation.
Assets Acquired
The assets to be owned by Spectradyne on the Closing Date will include
all of the Debtors' assets and properties (including, without limitation, all
tangible, intangible, real and personal assets and properties of the Debtors,
wherever located, other than the Excluded Assets (as defined below) (the
"Assets"). The Assets include all rights of the Debtors under the following: (i)
all contracts, leases and licenses assumed by the Debtors at the written
direction of On Command Corporation or Ascent under the Acquisition Agreement
and (ii) all other contracts, leases and licenses that both (a) have been
entered into by the Debtors since the commencement of the Bankruptcy Case in the
ordinary course of business or that have been assumed by the Debtors pursuant to
an order of the Bankruptcy Court and (b) with respect to the Non-Spectradyne
Debtors are identified on a schedule to the Acquisition Agreement.
The Assets also include: (i) all copyrights, patents, trademarks,
tradenames, slogans, logos, service marks, computer software, data processing
files, systems and programs, business lists, trade secrets, sales and operating
plans and other similar intangible property owned by the Debtors; (ii) all
permits, permissions, consents and other authorizations issued for the operation
of the Debtors' businesses by any governmental agency; (iii) all personal
property and equipment owned by the Debtors; (iv) all real property owned by the
Debtors identified on a schedule to the Acquisition Agreement; (v) all of the
capital stock and other equity interests owned by any of the Debtors in each
corporation, limited liability
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company, foreign company, limited partnership, general partnership and
other entity (other than another Debtor), each of which is identified on a
schedule to the Acquisition Agreement; (vi) all current assets, including cash
and cash equivalents, as well as all claims of the Debtors against all persons
and entities (other than another Debtor) other than (a) certain claims retained
by the Debtors and (b) the cash retained by the Debtors in accordance with the
Acquisition Agreement to make administrative and priority payments under the
Plan, which amount shall have been approved by the Bankruptcy Court; and (vii)
all records relating to the Debtors' businesses and the Assets (including but
not limited to all books of account, customer lists, supplier lists, employee
personnel files, tax records and information, local public records file
materials, engineering data, logs, programming records, consultants' reports,
budgets, financial reports and projections, and sales, operating and business
plans, that relate to or are used in the operation of any Debtor's business or
necessary or desirable to show compliance with any law or regulation applicable
to any Debtor's business).
Notwithstanding the foregoing, the Assets shall not include any of the
following (collectively, the "Excluded Assets"): (i) the contracts, leases,
licenses, assets and properties of Spectradyne identified as Excluded Assets on
a schedule to the Acquisition Agreement; (ii) the assets and properties, if any,
of the Non-Spectradyne Debtors not being contributed to Spectradyne as
identified on a schedule to the Acquisition Agreement; (iii) all contracts,
leases and licenses of the Non-Spectradyne Debtors other than those identified
on a schedule to the Acquisition Agreement; (iv) the claims of each
Non-Spectradyne Debtor against any other Non-Spectradyne Debtor; (v) all causes
of action and avoidance powers of the Debtors other than the causes of action
and avoidance powers related to, or derived from, the leases and executory
contracts assumed by and/or assigned to Spectradyne; (vi) any real estate owned
by the Non-Spectradyne Debtors that is not identified on a schedule to the
Acquisition Agreement; and (vii) to the extent necessary, a reasonable amount of
funds to be retained by the Debtors to make administrative and priority payments
under the Plan, which amount shall have been approved by the Bankruptcy Court.
"Non-Spectradyne Debtors" means the Debtors other than Spectradyne.
Liabilities Assumed
On Command Corporation shall not assume any responsibility for any of
the Debtors' liabilities or obligations other than as expressly set forth in the
Acquisition Agreement. Specifically, On Command Corporation shall assume and pay
all of the Debtors' liabilities under the DIP Loan (as defined below) on the
Closing Date up to a maximum amount of $40,000,000 with proceeds under a
financing facility to be entered into by On Command Corporation and/or its
subsidiaries on such terms and conditions as shall be satisfactory to On Command
Corporation in its sole discretion after consultation with the Debtors and the
Creditors' Committee; provided, however, that so long as On Command Corporation
is a consolidated subsidiary of COMSAT under GAAP, On Command Corporation shall
be subject to Ascent's intercompany agreements with COMSAT.
In addition, subject to certain limitations, On Command Corporation
shall be responsible for paying the allowed administrative expenses (the
"Allowed Administrative Expenses") and all amounts payable by the Debtors (the
"Cure Payments") to cure any defaults under the contracts and leases that were
(i) assumed by the Debtors pursuant to an order of the Bankruptcy Court
(exclusive of certain contracts and leases assumed at the direction of Ascent or
On Command Corporation pursuant to the Acquisition Agreement), or (ii) entered
into by the Debtors in the ordinary course of their businesses since the
commencement of the Bankruptcy Case; provided, that the amounts payable by On
Command Corporation with respect to such Allowed Administrative Payments and
Cure Payments shall only be for certain liabilities previously identified and
shall not exceed the amounts specified in the addendum to the Plan Sponsor
Agreement.
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On Command Corporation also shall be responsible for paying all of the
Cure Payments payable by the Debtors with respect to, and On Command Corporation
shall assume all of the Debtors' other obligations under, the contracts and
leases assumed by the Debtors at the written direction of Ascent or On Command
Corporation pursuant to the Acquisition Agreement. On Command Corporation also
shall assume all of the Debtors' obligations under any equipment leases with
OCV.
On the Closing Date, subject to certain conditions discussed below,
Spectradyne will assume the Current Liabilities identified on the Pre-Closing
Balance Sheet (exclusive of the current liabilities of the foreign subsidiaries
of Debtors, which shall remain the obligations of such foreign subsidiaries) up
to a maximum amount not to exceed the Current Liabilities specified in the
Pre-Closing Balance Sheet; provided, however, that if the Adjusted Current
Liabilities set forth on the Pre-Closing Balance Sheet exceed the Maximum
Assumable Amount, the Current Liabilities to be assumed by Spectradyne will be
reduced until the Adjusted Current Liabilities equals the Maximum Assumable
Amount, in which case On Command Corporation will designate the Current
Liabilities that will not be assumed by Spectradyne and the Debtors' Estates
(as defined below) shall remain liable for all Current Liabilities not assumed
by Spectradyne. The Current Liabilities assumed by Spectradyne described in
this paragraph (collectively, the "Assumed Liabilities") shall be paid by
Spectradyne in accordance with the terms of such liabilities.
Subject to certain limitations set forth below, from and after the
Closing Date until the Adjustment Date (as defined below), to the extent that
the Debtors after the Closing Date (the "Debtors' Estates") have inadequate
funds to pay the Allowed Administrative Expenses and the Current Liabilities (as
defined below), if any, that are not set forth on the Pre-Closing Balance Sheet
(as defined below), On Command Corporation and/or its subsidiaries shall provide
the Debtors' Estates with sufficient funds to pay such expenses, and Spectradyne
shall assume such liabilities, up to an aggregate amount not to exceed the sum
of the Estimated Net Working Capital (as defined below) and the Reserved Stock
Value, if any. After the Adjustment Date, to the extent that the Debtors'
Estates have inadequate funds to pay the Allowed Administrative Expenses and the
Current Liabilities, if any, that are not set forth on the Pre- Closing Balance
Sheet, On Command Corporation and/or its subsidiaries shall provide the Debtors'
Estates with sufficient funds to pay such expenses, and Spectradyne shall assume
such liabilities, up to an aggregate amount not to exceed the Maximum Remaining
Payment Amount (as defined below).
Notwithstanding the foregoing, the Plan will discharge all liabilities
of, and claims against, the Debtors as of the Closing Date other than (i)
Assumed Liabilities, and (ii) any indebtedness of Spectradyne that is owed by
Spectradyne or any of its subsidiaries to SPI Newco, Inc. (a wholly-owned
subsidiary of SpectraVision that, prior to the Transactions, will own all of the
capital stock of Spectradyne) or SpectraVision, which indebtedness will be
contributed to the capital of Spectradyne pursuant to the Acquisition Agreement;
provided, however, that unless otherwise agreed to by Ascent in writing, none of
such indebtedness will be discharged pursuant to the Plan or otherwise; provided
further, however, that neither Ascent nor On Command Corporation shall be
entitled to receive any distribution under the Plan on account of such
indebtedness. Except for the Assumed Liabilities and the other liabilities for
which On Command Corporation and/or its subsidiaries are expressly responsible
for paying pursuant to the Acquisition Agreement, none of On Command
Corporation, Spectradyne or any of their post-closing affiliates shall have any
responsibility or liability for any expenses or liabilities of, or any claims
(whether matured, contingent or otherwise) against, the Debtors, all of which
shall be the responsibility and liability of the Debtors' Estates. In the event
that there is any Excess Payment (as defined below) as of the Adjustment Date,
the Debtors' Estates shall promptly pay On Command Corporation an amount equal
to such Excess Payment, which at the option of the Creditors' Committee may be
paid with either cash or a number of shares of OCC Common Stock equal to the
Excess Stock Payment. Notwithstanding the foregoing, none of On Command
Corporation, Spectradyne or any of their post-closing affiliates shall
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have any liability or responsibility for any amounts due under or with respect
to the DIP Loan Agreement in excess of $40,000,0000.
Acquisition Consideration
As consideration for the capital stock of Spectradyne, on the Closing
Date, On Command Corporation shall: (i) issue to the Creditors, or to an agent
on their behalf, an aggregate number of shares of OCC Common Stock that
represents the Initial Percentage (as defined below) of the Total On Command
Corporation Initial Shares (as defined below) and (ii) shall reserve the
Reserved Stock for issuance to the Creditors and/or OCV's stockholders at the
time and in the manner prescribed below.
The number of shares of Reserved Stock to be issued to the stockholders
of OCV shall equal the product of (i) the amount, if any, by which the aggregate
amount of Current Liabilities that were assumed, and the aggregate amount of the
Allowed Administrative Expenses that were paid, by On Command Corporation
pursuant to the Acquisition Agreement exceeds the Adjusted Current Assets (as
defined below) and (ii) a fraction, the numerator of which shall be equal to the
Total On Command Corporation Initial Shares (as defined below) and the
denominator of which shall be equal to the Warrant Exercise Price (as defined
below); provided, however, that notwithstanding the foregoing, the stockholders
of OCV shall not be entitled to receive any shares of the Reserved Stock unless
the Adjusted Current Liabilities exceed the Adjusted Current Assets by more than
$250,000. Any Reserved Stock that is not issuable to the OCV stockholders
pursuant to the Merger Consideration will be issued to the Debtors. The
Reserved Stock will be distributed as promptly as practical after the Final
Distribution Date.
Certain Definitions
For the definitions of capitalized terms used herein and not otherwise
defined herein, reference is made to the Acquisition Agreement, a copy of which
is attached hereto as Annex II. The following terms used in the Acquisition
Agreement have the following meanings:
"Additional OCV Debt" means the following: (i) $22,000,000 of
intercompany debt owed by OCV to Ascent as of March 1, 1996, plus any additional
debt incurred by OCV in connection with its buildout of hotel rooms and
transition costs associated with the Transactions from March 1, 1996 to the
Closing Date; provided, however, that (a) prior to May 18, 1996, the rate of
additional debt incurred by OCV in connection with buildouts and transition
costs shall not exceed $3,000,000 per month and shall be consistent with, and on
the same terms as, the intercompany debt outstanding on March 1, 1996, and (b)
on and after May 18, 1996, the amount of additional debt incurred by OCV may
exceed $3,000,000 per month (but shall be consistent with, and on the same
terms, as the intercompany debt outstanding on March 1, 1996) in order to
accelerate the buildout of room backlog after consultation with SpectraVision
and the Creditors' Committee; (ii) all of the debt incurred by OCV in connection
with leasing OCV equipment to Spectradyne and all of the rental charges to be
assumed or paid by On Command Corporation; and (iii) all of the debt incurred by
OCV, directly or on behalf of On Command Corporation, in arranging for
alternative service to replace the network, transponder and similar services
currently provided to the Debtors by EDS.
"Adjusted Current Assets" means the aggregate dollar amount of the
Current Assets less the sum of the following assets if, and only to the extent
that, such assets constitute Current Assets: (i) the aggregate outstanding
balance of the Accounts Receivable that are more than 90 days past due, and (ii)
the aggregate amount of cash and other assets, if any, transferred by
Spectradyne to the Debtors' Estates pursuant to the Acquisition Agreement.
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"Adjusted Current Liabilities" means the aggregate dollar amount of the
Current Liabilities less the sum of the following liabilities if, and only to
the extent that, such liabilities constitute Current Liabilities: (i) the Rental
Charges, (ii) the aggregate amount of liabilities to be paid by On Command
Corporation pursuant to the Acquisition Agreement, and (iii) the deferred
obligations set forth on Schedule A to the Plan Sponsor Agreement; provided,
however, that the amount of each such deferred obligation that is excluded from
Current Liabilities shall not exceed the amount of such obligation as set forth
on such Schedule A.
"Adjustment Date" means (i) the date on which the disagreements, if
any, that On Command Corporation has with the Closing Balance Sheet as set forth
in On Command Corporation's Statement have been resolved in accordance with the
Acquisition Agreement, or (ii) if On Command Corporation does not have any
disagreements with the Closing Balance Sheet or if all such disagreements have
been resolved by On Command Corporation, SpectraVision and the Creditors'
Committee prior to the expiration of the Resolution Period, the last day of the
Resolution Period or such earlier date as is agreed to by On Command
Corporation, SpectraVision and the Creditors' Committee.
"Aggregate Warrant Exercise Price" means the product of the Warrant
Exercise Price times 7,500,000 shares issuable under the Warrants.
"Confirmation Order" means a Bankruptcy Court Order that confirms the
Plan and satisfies the conditions set forth in the Acquisition Agreement.
"Current Assets" means the aggregate dollar amount of the consolidated
assets of Spectradyne and its foreign subsidiaries as of the Closing Date that
are properly classified as "current assets" under GAAP, after giving effect to
all of the transactions contemplated by the Acquisition Agreement (in
calculating such dollar amount, if the current assets of any foreign subsidiary
are not denominated in U.S. dollars, such current assets shall be converted
into their U.S. dollar equivalent as of the Closing Date in accordance with
GAAP).
"Current Liabilities" means the aggregate dollar amount of the
consolidated liabilities of Spectradyne and the Foreign Subsidiaries as of the
Closing Date that are properly classified as "current liabilities" under GAAP
(in calculating such dollar amount, if the current liabilities of any Foreign
Subsidiary are not denominated in U.S. Dollars, such current liabilities shall
be converted into their U.S.
dollar equivalent as of the Closing Date in accordance with GAAP).
"DIP Loan" means all amounts (including, without limitation, principal,
interest and fees) due and owing to the Foothill Capital Corporation as of the
Closing Date under the loan and security agreement, dated as of June 9, 1995, by
and between Spectradyne and the Foothill Capital Corporation.
"Estimated Net Working Capital" means the positive or negative amount
obtained by subtracting (i) the Adjusted Current Liabilities as reflected in the
Spectradyne's Pre-Closing Balance Sheet, from (ii) 95% of the Adjusted Current
Assets as reflected in the Pre-Closing Balance Sheet.
"Excess Payment" means the dollar amount, if any, by which the
Non-Specified Payment Obligations as of the Adjustment Date exceeds the sum of
the Adjusted Current Assets as reflected in the Adjusted Balance Sheet and the
Reserved Stock Value, if any; provided, however, that the Excess Payment shall
be equal to zero unless the Non-Specified Payment Obligations as of the
Adjustment Date exceed the Adjusted Current Assets as reflected in the Adjusted
Balance Sheet by at least $250,000.
"Final Distribution Date" means the first business day practicable
after the Adjustment Date; provided, however, that if the Estimated Net Working
Capital exceeds $1,000,000, then such date shall be the Closing Date,
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"Final Order" means an order or judgment rendered by the Bankruptcy
Court or other court of competent jurisdiction that has been entered on the
docket and (unless otherwise ordered by such court) as to which (i) both (a) the
time to seek reconsideration, rehearing, or new trial by the rendering court
(hereinafter, a "Post-Trial Motion"), and (b) the time (including time
resulting from a timely filed motion under Rule 8002(c) under the Federal Rules
of Bankruptcy Procedure) to appeal or to seek a petition for review or
certiorari (hereinafter, an "Appellate Court Review"), has expired (without
regard to whether time to seek relief of a judgment under Rule 60(b) of the
Federal Rules of Civil Procedure or Rule 9024 of the Federal Rules of Bankruptcy
Procedure has expired); and (ii) either (a) no Post-Trial Motion or request for
Appellate Court Review is pending, or (b) a Post-Trial Motion or a request for
Appellate Court Review is pending but the subject order of judgment has not been
stayed, amended, modified or reversed by a court of competent jurisdiction or,
if stayed, such stay has been vacated or is no longer in effect. Without
limiting the foregoing, the pendency of, or request for, a Post-Trial Motion or
an Appellate Court Review shall not prevent an order from becoming final and
being implemented, absent the entry of a stay by a court of competent
jurisdiction and the continuation thereof.
"Initial Percentage" means the percentage equal to the difference
between 27.5% and the Potential Additional Percentage.
"Maximum Assumable Amount" means the sum of 95% of the Adjusted Current
Assets as reflected in the Pre-Closing Balance Sheet and the Reserved Stock
Value, if any.
"Maximum Remaining Payment Amount" means the difference between (i) the
Adjusted Current Assets as reflected in the Adjusted Balance Sheet, and (ii) the
Non-Specified Payment Obligations as of the Adjustment Date; provided, however,
that if Non-Specified Payment Obligations as of the Adjustment Date equal or
exceed the Adjusted Current Assets as reflected in the Adjusted Balance Sheet,
the Maximum Remaining Payment Amount shall be equal to zero.
"Non-Specified Payment Obligations" means (A) as of the Final
Distribution Date, an amount equal to the sum of (i) the aggregate amount of the
Adjusted Current Liabilities that have been assumed by Spectradyne pursuant to
the Acquisition Agreement, (ii) the aggregate amount of the Allowed
Administrative Expenses that have been paid by On Command Corporation and/or it
subsidiaries pursuant to the Acquisition Agreement as of the Final Distribution
Date, and (iii) the aggregate amount of the Current Liabilities, if any, that
have been assumed by Spectradyne pursuant to the Acquisition Agreement as of the
Final Distribution Date, and (B) as of the Adjustment Date, an amount equal to
the sum of (i) the aggregate amount of the Adjusted Current Liabilities that
have been assumed by Spectradyne pursuant to the Acquisition Agreement, (ii) the
aggregate amount of the Allowed Administrative Expenses that have been paid by
On Command Corporation and/or its subsidiaries pursuant to the Acquisition
Agreement as of the Adjustment Date, and (iii) the aggregate amount of the
Current Liabilities, if any, that have been assumed by Spectradyne pursuant to
the Acquisition Agreement as of the Adjustment Date.
"OCV Debt" means the current liabilities of OCV and the Additional OCV
Debt.
"Pre-Closing Balance Sheet" means the pro forma balance sheet of
Spectradyne that SpectraVision will deliver to Ascent at least five
business days prior to the Closing Date, which shall set forth SpectraVision's
best estimate of the Current Assets, Current Liabilities, Adjusted Current
Assets and Adjusted Current Liabilities as of the Closing Date after giving
effect to the Acquisition Agreement.
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"Potential Additional Percentage" means the percentage (rounded to the
nearest one-thousandth) calculated by dividing the number of shares of Reserved
Stock by the number of Total On Command Corporation Initial Shares.
"Reserved Amount" means (i) if the Estimated Net Working Capital is
positive but less than $1,000,000, the difference between $1,000,000 and the
Estimated Net Working Capital, (ii) if the Estimated Net Working Capital is
negative, the sum of $1,000,000 and the absolute value of the Estimated Net
Working Capital; provided, however, that Reserved Amount shall not exceed
$10,000,000 under any circumstances, and (iii) if the Estimated Net Working
Capital is equal to or greater than $1,000,000, then the Reserved Amount shall
be zero.
"Reserved Stock" means a number of authorized but unissued shares of
OCC Common Stock (rounded to the nearest whole number) that is determined as
follows: (i) if the Estimated Net Working Capital is less than $1,000,000, a
number of shares of OCC Common Stock equal to the product of the Total On
Command Corporation Initial Shares and a fraction, the numerator of which shall
be equal to the Reserved Amount and the denominator of which shall be equal to
the numerator used in the calculation of the Warrant Exercise Price, and (ii)
if the Estimated Net Working Capital is greater than or equal to $1,000,000,
there shall be no shares of Reserved Stock.
"Reserved Stock Value" means an amount equal to the product of the
number of shares of Reserved Stock and the Warrant Exercise Price.
"Resolution Period" means the 20-day period following delivery
of the Closing Balance Sheet to On Command Corporation pursuant to the
Acquisition Agreement.
"Termination Event" means (i) with respect to On Command Corporation
(a) a trustee is appointed in the Bankruptcy Case; (b) the Bankruptcy Case is
converted to a case under Chapter 7 of the Bankruptcy Code; or (c) the Closing
Date has not occurred on or before October 30, 1996 or such later date as is
acceptable to On Command Corporation and Ascent, and (ii) with respect to
Debtors (a) the Closing Date has not occurred on or before October 30, 1996 or
such later date as is acceptable to SpectraVision and the Creditors' Committee;
or (b) the Debtors receive a higher and better offer for their assets that
complies with the terms and conditions of the Procedures Order and the
Disclosure Statement and Ascent or On Command Corporation has not matched such
offer in accordance with the terms and conditions of the Procedures Order and
the Disclosure Statement.
"Total On Command Corporation Initial Shares" means 30,000,000 shares
of OCC Common Stock.
"Warrant Exercise Price" means the amount by which $550,000,000 exceeds
the aggregate amount of debt of On Command Corporation and its subsidiaries that
is outstanding as of the Closing Date after giving effect to the Transactions
(including, but not limited to, the aggregate amount of debt incurred by On
Command Corporation to perform all of its obligations under the Acquisition
Agreement and the OCV Debt) divided by the Total On Command Corporation Initial
Shares.
Closing Conditions and Other Pre-Closing Matters
The obligation of each party to the Acquisition Agreement to consummate
the Acquisition is subject to the satisfaction of certain conditions, including
the following conditions: (i) all authorizations required to consummate the
Transactions shall have been obtained; (ii) as of the Closing Date, no court
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shall have entered an order that enjoins, restrains, or prohibits the
consummation of the Transactions; (iii) the Plan shall (a) incorporate the terms
of the Acquisition Agreement, (b) have been confirmed pursuant to an order of
the Bankruptcy Court, and (c) have become effective in accordance with the
provisions of Chapter 11 of the Bankruptcy Code; and (iv) if the Common Stock is
listed on a national securities exchange or the Nasdaq National Market, On
Command Corporation's board of directors shall satisfy the applicable
requirements, if any, for independent directors.
The obligations of On Command Corporation under the Acquisition
Agreement are conditioned upon: (i) the representations and warranties of the
Debtors being true and correct as of the Closing Date; (ii) compliance by the
Debtors and the Creditors Committee with all conditions under the Acquisition
Agreement; (iii) the Bankruptcy Court's confirmation order shall have become a
Final Order; (iv) On Command Corporation shall have received the Confirmation
Letter from counsel to the Debtors; (v) no material adverse change shall have
occurred since December 31, 1995; (vi) the Disclosure Statement, the Plan and
the Confirmation Order shall (a) incorporate, and otherwise be consistent with,
the terms of the Acquisition Agreement and the Merger Agreement, and (b) be in
form and substance reasonably satisfactory to On Command Corporation; (vii) the
Debtors shall deliver to On Command Corporation all the required closing
documents; (viii) no Termination Event shall have occurred (other than any that
have been waived by On Command Corporation in writing); (ix) On Command
Corporation has not sent (a) any uncured default notice to SpectraVision (other
than any that have been rescinded or waived by On Command Corporation in
writing), or (b) a termination notice to SpectraVision; (x) the Bankruptcy Court
shall have approved Ascent's director nominees; (xi) Ascent shall have approved
the Creditors Committee's director nominees; (xii) a registration statement
covering both the OCC Common Stock and the Series A Warrants to be issued to
OCV's stockholders shall have been filed with, and declared effective by the
Commission; and (xiii) On Command Corporation shall have received the
Pre-Closing Balance Sheet at least five (5) business days prior to the Closing
Date, which shall be in form and substance reasonably satisfactory to On Command
Corporation.
The obligations of Debtors are conditioned upon: (i) the
representations and warranties of OCV in the Merger Agreement being true and
correct as of the Closing Date; (ii) compliance by On Command Corporation or
Ascent with all applicable conditions under the Acquisition Agreement; (iii)
the Merger shall have been consummated; (iv) On Command Corporation shall
deliver to SpectraVision all the required closing documents; (v) On Command
Corporation has not sent (a) any default notice to SpectraVision (other than
any that have been rescinded or waived by On Command Corporation in writing),
or (b) a termination notice to SpectraVision; (vi) the Bankruptcy Court and
Ascent shall have approved the Creditors' Committee director nominees; (vii)
the Warrant Agreement and Registration Rights Agreement shall be in full force
and effect; (viii) On Command Corporation shall have made arrangements to
repay the DIP Loan up to a maximum amount of $40 million; (ix) OCV shall not
have incurred indebtedness not permitted under the Acquisition Agreement; (x)
the Transactions shall be in compliance with any applicable United States
securities laws; (xi) the Disclosure Statement, the Plan and the Confirmation
Order shall (a) incorporate, and otherwise be consistent with, the terms of the
Acquisition Agreement and the Merger Agreement, and (b) be in form and
substance reasonably satisfactory to Debtors and the Creditors' Committee;
(xii) no Termination Event shall have occurred (other than any that have been
waived by SpectraVision and the Creditors' Committee in writing); and (xiii)
the capital structure of On Command Corporation shall be as contemplated by the
Acquisition Agreement and the Merger Agreement.
Pursuant to the Acquisition Agreement, immediately preceding the
Closing Date, Spectradyne will terminate the employment of all of its officers
and other employees. Neither On Command Corporation nor any of its affiliates
shall have any liability on account of the Debtors' employees (including without
limitation any liability arising in connection with or with respect to any of
the following: unemployment
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insurance contributions, termination payments, severance payments, retirement,
pension, profit-sharing, bonus, severance pay, disability, health, accrued
vacation, accrued sick leave or other employee benefit plans, agreements or
understandings). If On Command Corporation or any of its subsidiaries elect to
hire any employee of Debtors, the terms and conditions (including the scope and
amount of all benefits) under which any such employment will be offered will be
determined by On Command Corporation in its sole discretion. The Acquisition
Agreement does not provide that any employees of any Debtor must be employed
after the Closing Date by On Command Corporation, Spectradyne or any of their
subsidiaries or post-closing affiliates, and any offers of employment may be
made by On Command Corporation in its sole discretion. However, the Acquisition
Agreement does not prevent the Debtors from taking actions that seek to minimize
the expenses incurred by the Debtors' Estates in connection with the termination
of the Debtors' employees.
Representations and Warranties
The Acquisition Agreement contains representations and warranties of
the Debtors relating to: (i) their title to certain real property, free and
clear of liens or encumbrances; (ii) the absence of certain changes or events
since the date of the most recent audited financial statements filed with the
Commission, including material adverse changes with respect to the Debtors;
(iii) the absence of grounds for termination of the Debtors' five largest hotel
customers or any of the Debtors' major studio movie suppliers or free-to-guest
programming suppliers; (iv) the absence of any material environmental liability
(other than as disclosed in the Environmental Assessment Report, dated July
1995, which was prepared by ENTRIX, Inc., as to which the Debtors do not concede
any material liability); and (v) the absence of any material federal, state or
foreign tax liability that may be assessed against or collected from On Command
Corporation as a successor of the Debtors or otherwise.
THE WARRANTS
On Command Corporation will enter into the Warrant Agreement with The
Bank of New York, as warrant agent. The Warrants will be governed by the Warrant
Agreement, which is included as Annex III to this Information
Statement/Prospectus and is incorporated by reference herein, and the following
description of the Warrants and the Warrant Agreement and their respective terms
is qualified in its entirety by reference thereto.
Exercisability; Expiration
Each holder of Series A Warrants will have the right, which may be
exercised at any time prior to and until 5:00 P.M., New York City Time, on the
seventh anniversary of the Effective Time, to receive from On Command
Corporation, on a net basis and without the exchange of any funds, that number
of fully paid and nonassessable Warrant Shares which is equal to the number of
Warrant Shares specified in such holder's Series A Warrants less a number of
Warrant Shares having an aggregate fair market value at the time of exercise
(determined in accordance with the provisions of the Warrant Agreement) equal to
the then Warrant Price multiplied by the number of Warrant Shares specified in
such holder's Series A Warrants. Each holder of Series B Warrants will have the
right, which may be exercised at any time prior to 5:00 P.M., New York City
Time, on the seventh anniversary of the Effective Time, to purchase from On
Command Corporation for cash the number of fully paid and nonassessable Warrant
Shares which such holder may at the time be entitled to purchase on exercise of
such Warrants. The holder of the Series C Warrant will have the right, which may
be exercised at any time prior to and until 5:00 P.M., New York City Time, on
the seventh anniversary of the Effective Time, to purchase from On Command
Corporation for cash the number of fully paid and nonassessable
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Warrant Shares which each such holder may at the time be entitled to purchase on
exercise of such Warrants.
Each Warrant not exercised prior to 5:00 P.M., New York City Time, on
the seventh anniversary of the Effective Time will become void and all rights
thereunder and all rights in respect thereof under the Warrant Agreement will
cease as of such time.
Warrants may be exercised upon (i) surrender to On Command Corporation
at the principal office of the Warrant Agent in New York, New York of the
certificate or certificates evidencing the Warrants to be exercised, together
with the form of election to purchase, duly completed and signed, with the
signature thereon guaranteed by a bank or trust company having an office or
correspondent in the United States or a broker or dealer which is a member of a
registered securities exchange or the National Association of Securities
Dealers, Inc. (the "NASD"), and (ii) payment to the Warrant Agent for the
account of On Command Corporation of the Warrant Price for the number of Warrant
Shares in respect of which such Warrant is then exercised, such payment to be
made by surrendering additional Warrants, in the case of the Series A Warrants,
and in cash, in the case of the Series B Warrants and the Series C Warrant.
No adjustment will be made in respect of any accrued and unpaid
dividends on any Warrant Shares issued upon exercise of Warrants.
Adjustments
The number of Warrant Shares purchasable upon the exercise of each
Warrant and the Warrant Price will be subject to adjustment in the event On
Command Corporation (a) pays a dividend on the OCC Common Stock in shares of OCC
Common Stock, (b) subdivides its outstanding shares of OCC Common Stock into a
greater number of shares, (c) combines its outstanding shares of OCC Common
Stock into a smaller number of shares, (d) distributes to all holders of OCC
Common Stock shares of its capital stock other than OCC Common Stock, (e) issues
by reclassification of its OCC Common Stock any shares of its capital stock, (f)
distributes any rights, options or warrants to all holders of its Common Stock
or to any affiliate (as such term is defined in the Securities Act of 1933) of
On Command Corporation entitling such holders or such affiliate to purchase
shares of Common Stock at a price per share less than the current market price
per share on that record date, (g) sells to any affiliate (as defined above) of
On Command Corporation any shares of OCC Common Stock at a price per share less
than the current market price per share on the date of distribution, or (h)
distributes, by dividend or otherwise, to all holders of its Common Stock cash
or assets in an aggregate amount that, together with any other distributions to
all holders of its Common Stock within the 12 months preceding the date of
payment of such distribution and in respect of which no adjustment pursuant to
this clause (h) has been made, exceeds 5% of the product of the current
market price per share of the Common Stock on the record date for stockholders
to receive such distribution times the number of shares of Common Stock
outstanding on such date.
No adjustment in the Warrant Price will be made unless the adjustment
would require an increase or decrease of at least 1% in the Warrant Price. Any
adjustments which are not made will be carried forward and taken into account in
any subsequent adjustment. Except as described above, no adjustment in the
Warrant Price will be made because On Command Corporation issues, in exchange
for cash, property or services, shares of OCC Common Stock, or any securities
convertible into or exchangeable for shares of OCC Common Stock, or securities
carrying the right to purchase shares of OCC Common Stock or such convertible or
exchangeable securities. Furthermore, no adjustment in the Warrant Price
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need be made under the Warrant Agreement for sales of shares of OCC Common Stock
pursuant to a plan providing for reinvestment of dividends or interest or in the
event the par value of the OCC Common Stock is changed or in the event the par
value of the OCC Common Stock is eliminated.
On Command Corporation has reserved, or will have reserved as of the
Effective Time, and will keep reserved at all times, a sufficient number of
shares out of the authorized OCC Common Stock to provide for the exercise of the
rights to purchase Warrant Shares represented by all outstanding Warrants. On
Command Corporation will pay cash in lieu of fractional shares of OCC Common
Stock that would otherwise be issuable upon exercise of a Warrant.
Registration; Exemption
The Series A Warrants are being registered under the Securities Act
pursuant to the registration statement of which this Information
Statement/Prospectus is a part. The Warrant Shares issuable upon exercise of the
Series A Warrants will be exempt from registration under the Securities Act
pursuant to Section 3(a)(9) thereof and not subject to any transfer restrictions
under the Securities Act, except for Warrant Shares issued to any holder of
Series A Warrants who may be deemed to be an "affiliate" of On Command
Corporation or OCV for purposes of Rule 145 under the Securities Act. See
"--Resale of OCC Common Stock and Warrants."
REGISTRATION RIGHTS
Following the Transactions, any stockholder of OCV, including Ascent,
that is deemed to be an "affiliate" of On Command Corporation, as defined
pursuant to Rule 144 under the Securities Act, may resell its stock only
pursuant to an effective registration statement under the Securities Act or in
accordance with Rule 144 or another exemption under the Securities Act. See
"The Transactions -- The Merger -- Resale of OCC Common Stock and Warrants."
Following the Transactions, holders of approximately 17,500,000 shares of OCC
Common Stock will be subject to such restrictions (before giving effect to the
issuance of any Reserve Stock). Any person owning 10% or more of the OCV Common
Stock prior to the Effective Time, Gary Wilson Partners and any other person
that receives 10% or more of the OCC Common Stock issuable upon consummation of
the Transactions, including Warrant Shares issuable upon exercise of the
Warrants (each a "Holder" and, collectively, the "Holders"), will be entitled to
certain registration rights with respect to the shares of OCC Common Stock
and/or Warrants received by such Holders pursuant to the Merger Agreement or the
Acquisition Agreement and the Warrant Shares issuable to such Holders upon the
exercise of the applicable Warrants, all as set forth in the Registration Rights
Agreement, a copy of which is included as Annex IV to this Information
Statement/Prospectus.
The Registration Rights Agreement provides that any Holder (a
"Demanding Party") shall have the right once during any twelve-month period to
make a written request of On Command Corporation for a registration with the
Commission under the Act of all or part of its Registrable Securities (a "Demand
Registration"); provided, that (a) On Command Corporation need not effect a
Demand Registration if (1) such Demand Registration fails to include at least
$10,000,000 in aggregate fair market value of the Registrable Securities (as
defined in the Registration Rights Agreement) or (2) such Demand Registration
would require an audit of On Command Corporation's financial statements for a
period as of a date other than its fiscal year end and the Demanding Party fails
to agree to bear responsibility for the expenses of such an audit, (b) On
Command Corporation may, if a majority of the On Command Corporation Board of
Directors determines in the exercise of their good faith judgment that
compliance with the disclosure obligations necessary to effect such Demand
Registration at such time would have an adverse effect on On Command
Corporation, defer such Demand Registration for a single period not to exceed
180 days, and (c) if On Command Corporation has undertaken a Registration within
the six months preceding the receipt by On Command Corporation of the request
for the Demand Registration, commencement of such Demand Registration shall be
delayed until at least six months have elapsed from the date of effectiveness of
such Registration. The Registration Rights Agreement also provides piggyback
registration rights, which may be exercised in connection with a Demand
Registration or any other registration by On Command Corporation.
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Pursuant to a letter agreement, dated April 19, 1996, between Gary
Wilson Partners and Ascent, and as consideration for the registration rights
granted to Gary Wilson pursuant to the Registration Rights Agreement, Gary
Wilson Partners has agreed that, so long as it owns any Warrant Shares, it will
vote such shares in accordance with the instructions of Ascent for so long as
Ascent continues to own 20% of the outstanding shares of OCC Common Stock.
Additionally, Gary Wilson Partners has agreed that without prior written consent
of Ascent, Gary Wilson Partners will not sell, assign, or otherwise transfer any
interest in the Warrants, or any Warrant Shares, prior to the second anniversary
of the Effective Date for so long as Ascent holds at least 20% of the
outstanding shares of OCC Common Stock.
ANTICIPATED ACCOUNTING TREATMENT
The Transactions will be accounted for using the historical book value
of the assets, liabilities and stockholders equity acquired from OCV by On
Command Corporation and On Command Corporation's management's estimate of the
fair value of Spectradyne's assets to be acquired and liabilities to be assumed
by On Command Corporation. The final purchase price allocation for the Debtors'
assets will be determined at a future date (no later than one year after the
Closing Date), which may result in adjustments to the preliminary allocation.
However, in the opinion of management, the preliminary allocation of the
purchase price reflects On Command Corporation's best estimate and all
adjustments necessary to fairly state the pro forma financial information
presented in this Information Statement/Prospectus.
REASONS FOR THE TRANSACTIONS; DETERMINATION OF THE BOARD OF DIRECTORS OF OCV
The OCV Board of Directors has determined that the Transactions are in
the best interests of OCV and its stockholders. In reaching its determination to
approve the Merger Agreement, the OCV Board of Directors considered a number of
factors, including, without limitation, those listed below. In view of the wide
variety of factors considered in connection with its evaluation of the Merger,
the OCV Board of Directors did not consider it practicable to, nor did it
attempt to, quantify or otherwise assign relative weights to the specific
factors it considered in reaching its determination, nor did it specifically
characterize any factor as positive or negative except as noted below. In
addition, individual members of the OCV Board of Directors may have given
different weights to different factors.
1. The potential appreciation in value of the OCC Common Stock to be
held by the OCV stockholders as compared to the value of OCV Common Stock
expected to result from the synergies between OCV's and Spectradyne's
distribution systems of in-room entertainment in the lodging industry and OCV's
and Spectradyne's contracts with hotel chains and hotel management companies.
Upon consummation of the Transactions, On Command Corporation will be the
leading multimedia distribution in-room entertainment provider in the U.S.
lodging industry.
2. The fact that, upon the consummation of the Transactions, the OCC
Common Stock will be registered under the Securities Act and eligible for
listing on the Nasdaq National Market. The OCV Board of Directors viewed these
factors as favorable to the OCV stockholders for the long term, as well as in
the short term in the case of those OCV stockholders seeking to liquidate their
OCC Common Stock received in the Merger.
3. The opportunity for OCV stockholders to participate in the growth of
the business to be conducted by On Command Corporation after the Transactions.
OCV's Board of Directors believes that SpectraVision's bankruptcy proceedings
present a unique strategic opportunity for expansion.
4. The OCV Board of Directors considered the dilutive effect of the
Acquisition on the holders of OCV Common Stock. In this regard, the OCV Board of
Directors reviewed the opinion of Allen &
43
<PAGE> 46
Company dated April 18, 1996 delivered to the OCV Board of Directors to
the effect that, as of such date, the consideration to be received by the
holders of OCV Common Stock pursuant to the Plan Sponsor Agreement was fair from
a financial point of view to the holders of OCV common stock. A copy of Allen &
Company's written opinion to the OCV Board of Directors is attached hereto as
Annex V and is incorporated herein by reference. The Allen & Company opinion
was delivered to the OCV Board of Directors on April 18, 1996 and neither
Ascent nor OCV has requested an update of such opinion. The information
underlying the analysis performed by Allen & Company in connection with its
opinion to the OCV Board of Directors has changed since April 1996.
Notwithstanding the changes to the information underlying the analysis
performed by Allen & Company, the OCV Board of Directors determined on August
13, 1996 that the Transactions are in the best interests of OCV stockholders.
See "--Opinion of Allen & Company."
The OCV Board of Directors also considered a number of potential
disadvantages of the Transactions. In particular, the OCV Board of Directors
took into account the following potential risks: (i) due to restrictions on
Ascent and its principal stockholder, COMSAT, On Command Corporation will be
subject to certain restrictions on its ability to raise capital through debt
financing; (ii) On Command Corporation may be dependent on additional capital
to implement its strategy; (iii) there can be no assurance that On Command
Corporation can successfully integrate the businesses of OCV and Spectradyne;
(iv) there is no prior public market for the OCC Common Stock and the price of
the OCC Common Stock is subject to possible volatility; (v) On Command
Corporation may be dependent on certain key personnel of OCV and Ascent with
respect to the operations at On Command Corporation after the closing of the
Transactions; and (vi) certain anti-takeover provisions in On Command
Corporation's Certificate of Incorporation and Bylaws, as well as certain
provisions of the DGCL, could increase the difficulty of effecting a change of
control of On Command Corporation, thereby potentially depriving stockholders
from realizing a premium over the prevailing market price of the Common Stock.
For the reasons stated above, management of OCV and of On Command
Corporation believe that the Transactions provide On Command Corporation with an
opportunity to significantly expand the business of OCV and Spectradyne by
capitalizing on the synergies between OCV and Spectradyne. On Command
Corporation believes that the increased number of rooms under contract and
serviced by its subsidiaries' distribution systems will enhance On Command
Corporation's ability to compete and expand in the highly competitive market for
in-room entertainment viewing distribution systems servicing the worldwide
lodging industry.
OPINION OF ALLEN & COMPANY
By engagement letter, dated April 18, 1996, Ascent, on behalf of itself
and OCV, retained Allen & Company to act as financial advisor in connection with
any acquisition by On Command Corporation of the assets of SpectraVision and its
subsidiaries and of OCV (the "Combination Transaction"), and to render its
opinion as to the fairness of such a transaction, from a financial point of
view, to the stockholders of each of OCV and Ascent. Allen & Company was
selected by Ascent because of Allen & Company's experience and expertise in
mergers and acquisitions and its knowledge of the entertainment and multimedia
distribution industries, and because of Allen & Company's familiarity with OCV's
business arising out of its prior role as investment banker to OCV, Ascent and
COMSAT.
No limitations were imposed by either the Ascent Board of Directors,
the OCV Board of Directors, Ascent or OCV upon Allen & Company with respect to
the investigations made or the procedures followed by it in rendering its
opinion. Ascent, OCV and their respective management cooperated fully with Allen
& Company in connection with its investigation.
Allen & Company delivered its written opinions, dated April 18, 1996,
to the Ascent Board of Directors and the OCV Board of Directors (the "Opinion"),
to the effect that, as of such date, the consideration to be received by the
holders of Ascent common stock (indirectly as a result of Ascent's ownership of
OCV Common Stock) and OCV Common Stock (directly as a result of the
Transactions) pursuant to the terms of the Combination Transaction set forth in
the Plan Sponsor Agreement was fair from a financial point of view to the
holders of Ascent common stock and OCV Common Stock. A copy of the Opinion of
Allen & Company to the OCV Board of Directors is attached hereto as Annex V. THE
OCV STOCKHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY FOR ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN BY ALLEN & COMPANY.
The Allen & Company Opinion addresses only the fairness of the
consideration to be received by the holders of Ascent common stock and OCV
Common Stock from a financial point of view and does not constitute a
recommendation that the stockholders of OCV should approve the Merger Agreement.
The summary of Allen & Company's Opinion set forth herein is qualified in its
entirety by reference to the full text of the Opinion.
Although Allen & Company evaluated the financial terms of the
Combination Transaction, Allen & Company did not recommend the specific
consideration to be paid to the OCV stockholders. The consideration to be
received by the OCV stockholders was determined by negotiations between Ascent,
OCV, the Debtors, the Creditors' Committee and their respective representatives.
In connection with its rendering of the Opinion, Allen & Company, among
other things, performed the following procedures: (i) reviewed the terms and
conditions of the Plan Sponsor Agreement and related documentation (excluding
exhibits and schedules, which were not provided to it as of the date of its
Opinion); (ii) reviewed certain reports prepared by management and Gary Wilson
Partners ("GWP"), financial advisor to Ascent and OCV, regarding the projected
financial performance and budgetary information for OCV and the
44
<PAGE> 47
combined entity; (iii) analyzed certain historical business and financial
information relating to Ascent and OCV including non-public financial and
operating results of OCV and Ascent made available by management; (iv)
considered trends in the in-room entertainment, pay-per-view, programming and
satellite communications industries, and the business prospects of OCV and
SpectraVision; (v) conducted discussions with members of the senior management
of Ascent and OCV with respect to the financial condition, business, operations,
strategic objectives and prospects of Ascent and OCV, as well as discussions
with Gary Wilson Partners with respect to the newly created entity to result
from the Combination Transaction; (vi) conducted discussions with, and reviewed
information obtained from, management of Ascent, OCV and Gary Wilson Partners;
(vii) reviewed information regarding SpectraVision's relationship with EDS,
including certain financial and operating assumptions supplied to it by
management and Gary Wilson Partners, and as to which it was informed by
management and Gary Wilson Partners that they believed such arrangements were
achievable; (viii) reviewed financial information relating to SpectraVision,
including forecasts prepared by Salomon Brothers Inc on behalf of SpectraVision;
(ix) reviewed and analyzed publicly available financial and transaction
information of selected comparable companies in the in-room entertainment,
pay-per-view, programming, and satellite communications industries; (x) reviewed
the pro forma impact of the Combination Transaction from financial and equity
ownership perspectives; (xi) analyzed discounted cash flows of OCV and
SpectraVision based on management's forecasts; and (xii) conducted such other
financial analyses and investigations as it deemed necessary or appropriate for
the purposes of the Opinion.
In connection with its review, Allen & Company assumed and relied upon,
without independent verification, (i) the accuracy and completeness of all the
financial and other information provided to it by Ascent, OCV, Gary Wilson
Partners and SpectraVision for purposes of its Opinion and the representations
contained in the Plan Sponsor Agreement, as well as certain information
relating to the strategic objectives of Ascent, OCV and SpectraVision, as well
as their existing business relationships, prospects and opportunities,
including without limitation SpectraVision's relationship with EDS and (ii) the
reasonableness of the assumptions made by the management of Ascent, OCV, Gary
Wilson Partners, and SpectraVision with respect to their financial forecasts
and budgetary information. In addition, Allen & Company did not make or seek to
obtain appraisals of OCV's or SpectraVision's assets and liabilities, nor of
creditors' claims in the reorganization of SpectraVision, in rendering its
Opinion. Allen & Company further relied upon the assurances of the managements
of OCV, Ascent and SpectraVision that they were unaware of any facts that would
make the information or any projections provided by them, respectively, to
Allen & Company incomplete or misleading. The Opinion is also necessarily based
upon the economic, market and other conditions as in effect on, and the
information made available to Allen & Company as of, the date of its Opinion.
The following is a summary of the presentation to the Ascent Board of
Directors and the OCV Board of Directors by Allen & Company in connection with
the rendering of Allen & Company's fairness opinion.
Transaction Summary. Prior to delivering its Opinion to the Ascent
Board of Directors and the OCV Board of Directors, Allen & Company reviewed
certain information relating to OCV and SpectraVision, including the financial
terms of the Transaction, the consideration to be received by holders of OCV
Common Stock and the financial analyses summarized below.
Overview of OCV. Allen & Company presented an overview of OCV,
focusing particularly on OCV's established PPV on-demand in-room entertainment
business as well as industry trends.
Allen & Company reviewed OCV's historical financial performance for
the four fiscal years ended December 31, 1995, and its estimated operating
results for the five fiscal years ending December 31, 2000. Allen & Company
also reviewed OCV's preliminary balance sheet at December 31, 1995.
Allen & Company valued OCV based on (i) market multiples of comparable
public companies, in particular LodgeNet Entertainment Corporation
("LodgeNet"), derived from the market capitalization of such companies in April
1996; (ii) a discounted cash flow analysis of OCV's estimate, as of April 1996,
of its operating results for the five-year period ending December 31, 2000,
which estimate, OCV has informed Allen & Company, has changed materially based
on trends in the industry and changes in the strategic and operating plans for
OCV; and (iii) an enterprise value per room valuation based primarily on the
public market valuation of LodgeNet as of April 1996. Because of the changes
in the information underlying the above analysis since April 1996, the range of
values is not presented herein and Allen & Company has not been requested to
update such analysis.
Overview of SpectraVision. Allen & Company presented an overview of
SpectraVision, noting particularly SpectraVision's market position and business
history, including its reorganization in bankruptcy.
Allen & Company reviewed SpectraVision's historical financial results
for the four fiscal years ended December 31, 1995, and its preliminary balance
sheet at December 31, 1995.
Allen & Company valued SpectraVision based on (i) market multiples of
comparable public companies, in particular LodgeNet, derived from the market
capitalization of such companies in April 1996; (ii) a discounted cash flow
analysis of an estimate prepared by SpectraVision's financial advisor in
November 1995 of SpectraVision's operating results for the five year period
ending June 30, 2001, which estimate has not been reviewed by OCV,
SpectraVision or their respective financial advisors in light of recent trends
in the industry or potential changes in the strategic or operating plans for
SpectraVision; and (iii) an enterprise value per room valuation based primarily
on the public market valuation of LodgeNet as of April 1996. Because of the
changes in the information underlying the above analysis since April 1996, the
range of values is not presented herein and Allen & Company has not been
requested to update such analysis.
Description and Valuation of Combined Entity. Allen & Company reviewed
the description and valuation of the combined entity proposed to result from
the Transactions, including pro forma financial statements, anticipated
business opportunities and benefits of the Transactions. Allen & Company valued
the combined entity based on (i) market multiples of comparable public
companies, in particular LodgeNet, derived from the market capitalization of
such companies in April 1996; (ii) a discounted cash flow analysis of an
estimate prepared by Ascent and OCV, as of April 1996, of the combined entity's
operating results for the five-year period ending December 31, 2000, which
estimate, Ascent and OCV have informed Allen & Company, has changed materially
based on trends in the industry and changes in the strategic and operating
plans for On Command Corporation; and (iii) an enterprise value per room
valuation based primarily on the public market valuation of LodgeNet as of
April 1996. Because of the changes in the information underlying the above
analysis since April 1996, the range of values is not presented herein and
Allen & Company has not been requested to update such analysis. Allen & Company
also analyzed the proposed split of the equity of the combined entity between
stockholders of OCV (72.5%) and creditors of SpectraVision (27.5%) to result
from the Transactions.
Conclusion. Allen & Company concluded, among other things, that the
combined entity would be a market leader with approximately one million rooms
served, would possess the ability to develop and utilize proprietary
technology, and would have a greater debt capacity to finance capital
expenditures and potential acquisitions. Allen & Company's financial analyses
also indicated among other things, an accretion in value to the stockholders
of OCV, on discounted cash flow and Black Scholes option valuation methods, and
that the value of OCV stockholders' interest in the combined entity exceeds the
value of OCV on an enterprise value per room valuation method. Allen & Company
also concluded that, based on its valuation of OCV and the combined entity, the
Transaction is fair to OCV stockholders.
Allen & Company concluded that, as of the date of the Opinion, the
Transaction is fair to OCV stockholders from a financial point of view.
No company used in the comparable company analyses summarized above is
identical to OCV or SpectraVision, and no transaction used in the comparable
transaction analysis summarized above is identical to the Transactions.
Accordingly, any such analysis of the consideration to be received by the
holders of OCV Common Stock pursuant to the Transactions involves complex
considerations and judgments concerning differences in the potential financial
and operating characteristics of the comparable companies and transactions and
other factors in relation to the trading and acquisition values of the
comparable companies.
Allen & Company's Opinion was based solely upon the information
available to it and economic, monetary, market and other conditions as they
existed as of the date of such Opinion; events occurring thereafter could
materially affect the assumptions used in preparing the Opinion. As of the date
of this Information Statement/Prospectus, Allen & Company has not been asked to
update its Opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
evaluation of the fairness of a transaction, from a financial point of view, is
a subjective one based on the experience and judgment of Allen & Company, and
not merely the result of mathematical analysis of financial data. In its
analyses, Allen & Company made numerous assumptions with respect to business,
market, monetary and economic conditions, industry performance, business and
economic conditions and other matters, many of which are beyond Allen &
Company's, Ascent's, OCV's, On Command Corporation's and SpectraVision's
control.
45
<PAGE> 48
Pursuant to the engagement letter, Allen & Company will be paid for its
services as financial advisor to Ascent and OCV in connection with the
Combination Transaction, and in connection with Allen & Company's rendering of
its Opinion, a cash fee of $600,000. Pursuant to the engagement letter, Allen &
Company was entitled to an initial fee of $50,000 and the balance of $550,000 is
payable immediately upon consummation of the Combination Transaction. Ascent
also agreed to reimburse Allen & Company for its reasonable out-of-pocket
expenses incurred in connection with the services rendered to Ascent pursuant to
the engagement letter (including the reasonable fees and disbursements of its
legal counsel, and of other consultants and advisors retained with Ascent's
consent). Ascent also agreed, pursuant to the engagement letter, to indemnify
Allen & Company's officers, agents, employees, affiliates, and controlling
persons against certain expenses and liabilities, including liabilities under
the federal securities laws.
46
<PAGE> 49
SELECTED PRO FORMA FINANCIAL INFORMATION
The following selected pro forma financial information of On Command
Corporation is derived from the financial statements of OCV and the consolidated
financial statements of SpectraVision included elsewhere herein and give pro
forma effect to the Transactions as if they had occurred on January 1, 1995 with
respect to the statement of operations data, and on June 30, 1996 with respect
to the balance sheet data. The selected pro forma financial information is not
necessarily indicative of what the results of operations or the financial
position of On Command Corporation would have been had the Transactions occurred
on such dates, nor is such data necessarily indicative of the results of
operations or financial position of On Command Corporation that can be expected
for any future periods or at any future date. The following selected pro forma
financial information should be read together with the Financial Statements of
OCV, the Consolidated Financial Statements of SpectraVision and the Pro Forma
Financial Statements of On Command Corporation included elsewhere in this
Information Statement/Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(Dollars in thousands, except per share data)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................................ $226,045 $120,502
Total costs and expenses ........................ 243,011 126,706
Loss from operations ............................ (16,966) (6,204)
Net loss ........................................ (23,638) 8,839
Net loss per common and equivalent share......... (0.79) (0.29)
Shares used in per share calculations
(in thousands) .............................. 30,000 30,000
OTHER DATA:
EBITDA (1) ...................................... $ 44,599 $ 31,503
Cash dividends per share ........................ -- --
Rooms served at end of period ................... 911,406 915,218
Hotels served at end of period .................. 3,109 3,141
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------
(Dollars in thousands, except per share data)
BALANCE SHEET DATA:
<S> <C>
Total assets.................................................................... $391,339
Total debt...................................................................... 70,568
Total stockholders' equity...................................................... 271,877
Book value per share ........................................................... 9.06
</TABLE>
- ----------------
(1) EBITDA is presented because it is a widely accepted financial indicator used
by certain investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
47
<PAGE> 50
HISTORICAL SELECTED FINANCIAL INFORMATION
The historical selected financial information of OCV and the historical
selected consolidated financial information of SpectraVision have been derived
from their respective historical financial statements and should be read in
conjunction with such financial statements and notes thereto, included elsewhere
in this Information Statement/Prospectus, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Interim financial
information at and for the six months ended June 30, 1996 and June 30, 1995
reflect, in the opinion of the managements of OCV and SpectraVision, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such information. Results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the fiscal year as a whole.
OCV
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- -----------------------
1995 1994 1993 1992 1991 1996 1995
-------- -------- -------- ------- -------- -------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total net revenues ............. $102,059 $ 81,609 $ 30,204 $ 8,595 $ 2,431 $ 62,490 $ 51,331
Total direct costs of
revenues ..................... 48,817 47,786 12,912 5,461 1,304 27,940 27,531
Total operating expenses ....... 45,091 27,976 14,955 2,780 2,427 30,674 19,524
Income (loss) from operations .. 8,551 5,847 2,337 354 (1,300) 3,876 4,276
Net income (loss) .............. 4,902 3,456 1,358 168 (1,875) 1,624 2,508
Net income (loss) applicable to
common stock ................. 4,261 2,856 1,179 168 (1,875) 1,301 2,174
Net income (loss) per common
and equivalent share ......... 0.62 0.51 0.30 0.07 (1.65) 0.16 0.36
Shares used in per share
calculations (in thousands) .. 6,833 5,571 3,896 2,353 1,135 7,903 6,015
OTHER DATA:
EBITDA(1) ...................... $ 37,288 $ 23,381 $ 10,157 $ 2,257 $ (581) $ 25,169 $ 15,772
Cash dividends per share ....... -- -- -- -- -- -- --
Rooms served at end of period .. 361,000 248,000 124,000 37,000 11,000 419,000 307,000
Hotels served at end of
period ....................... 1,221 751 272 89 38 1,500 996
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets ................... $211,005 $138,884 $ 92,363 $48,646 $ 12,570 $232,915
Total debt ..................... 15,942 1,025 1,842 2,634 3,385 29,270
Redeemable common stock ........ 11,684 11,043 10,443 -- -- 12,007
Total stockholders' equity ..... 169,804 108,949 67,817 40,675 7,605 173,214
Book value per share ........... 23.33 23.80
</TABLE>
(1) EBITDA is presented because it is a widely accepted financial indicator used
by certain investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
48
<PAGE> 51
SPECTRAVISION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------- ---------------------
1995 1994 1993 1992 1991 1996 1995
--------- --------- --------- --------- --------- --------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues .................... $ 123,986 $ 142,384 $ 162,993 $ 168,621 $ 173,093 $ 58,012 $ 65,208
Total direct costs ................ 52,813 58,015 58,834 56,528 58,597 27,088 25,884
Write-off of goodwill ............. -- -- -- 218,453 -- -- --
Write-down of hotel contracts ..... -- 196,256 -- -- -- -- --
Loss before extraordinary items and
cumulative effect of change
in accounting principle ......... (73,645) (254,284) (43,057) (270,242) (60,003) (22,786) (38,729)
Extraordinary gain (loss) ......... (915) -- (2,699) 23,378 -- -- (915)
Cumulative effect of change in
accounting principle ............ -- -- -- (28,498) -- -- --
Net loss .......................... (74,560) (254,284) (45,756) (275,362) (60,003) (22,786) (39,644)
Preferred stock dividend........... -- -- -- (21,878) (38,157) -- --
Net loss applicable to common
stockholders..................... (74,560) (254,284) (45,756) (297,240) (98,160) (22,786) (39,644)
Net loss per common and equivalent
share before extraordinary items
and cumulative effect of change
in accounting principle.......... (3.07) (10.60) (2.37) (166.31) (655.88) (0.95) (1.65)
Shares used in per share
calculation (in thousands)....... 23,984 23,984 18,178 1,757 150 23,984 23,984
OTHER DATA:
EBITDA(1) ......................... $ 866 $ 19,148 $ 55,790 $ 65,303 $ 69,877 $ 2,734 $ 8,756
Cash dividends per share .......... -- -- -- 12.45 254.38 -- --
Rooms served at end of period ..... 550,406 635,378 684,599 722,571 758,710 496,218 608,146
Hotels served at end of period .... 1,888 2,308 2,442 2,543 2,554 1,641 2,184
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets ...................... $ 205,622 $ 242,822 $ 409,478 $ 401,493 $ 619,518 $ 194,637
Total debt ........................ 28,667 510,563 436,557 458,900 514,782 41,298
Liabilities subject to settlement
under reorganization ............ 579,587 -- -- -- -- 576,040
Stockholders' equity (deficit) .... (447,608) (373,025) (118,614) (150,923) 59,899 (472,165)
Book value per share .............. (18.66) (19.69)
</TABLE>
(1) EBITDA is presented because it is a widely accepted financial indicator used
by certain investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
49
<PAGE> 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements of OCV and of SpectraVision included elsewhere in
this Information Statement/Prospectus.
OVERVIEW
On Command Corporation was formed in July 1996 as a holding company for
the acquisition of OCV and Spectradyne. Prior to the consummation of the
Transactions, On Command Corporation has had no operations and has conducted no
business other than those activities related to the Transactions. Set forth
below is a discussion of the results of operations of OCV and of SpectraVision.
Following the Transactions, OCV and Spectradyne, which comprises substantially
all of the operations of SpectraVision, will comprise the principal operations
of On Command Corporation.
RESULTS OF OPERATIONS
ON COMMAND CORPORATION -- PRO FORMA
The pro forma results of operations for the year ended December 31,
1995 and the six months ended June 30, 1996 reflect the Transactions as if
they had taken place as of January 1, 1995. Such pro forma results reflect
the historical operations of OCV andSpectraVision, adjusted for the following:
(i) the anticipated cost savings relating to a new EDS contract: (ii) the
additional cost of a management services fee to be paid to Ascent; (iii)
adjustments to depreciation and amortization relating to the goodwill recorded
in the Acquisition and the change in depreciable basis in connection with the
allocation of the purchase price for fixed assets and revisions to the
estimated useful lives of the purchased assets; (iv) adjustments to interest
expense to reflect the terms of the OCC Credit Facility and pro forma
borrowings thereunder; (v) an adjustment to reduce restructuring costs for
non-recurring bankruptcy costs incurred by SpectraVision; and (vi) an
elimination of OCV's tax provision as it is anticipated that OCV would not
record tax expense on a combined basis.
While On Command Corporation expects that its subsidiaries will
achieve substantial operating cost savings through the consolidation of certain
operations and elimination of redundant costs, no adjustments have been made
for these possible operating cost savings, as there are no assurances that
these cost savings will be realized. The extent to which the operating cost
savings will be achieved depends on, among other things, the regulatory
environment and economic conditions and may be affected by unanticipated
changes in business activities, inflation and operating costs.
The impact of the adjustments noted above reduces the combined net
loss of On Command Corporation by $46.0 million and $12.3 million for the
year ended December 31, 1995 and the six months ended June 30, 1996,
respectively.
OCV -- HISTORICAL
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Total net revenues increased by $11.2 million or 21.7% to $62.5 million
for the six months ended June 30, 1996 as compared to total net revenues of
$51.3 million for the six months ended June 30, 1995, primarily as a result of
net movie revenues from 419,000 installed on-demand rooms as of June 30, 1996
compared to 307,000 such rooms as of June 30, 1995, and, to a lesser extent, as
a result of selected price increases. OCV's movie prices are now generally $8.95
for the first buy, and when applicable, $4.95 for the second and subsequent
buys. The decrease in video system sales and the absence of video management
services revenue for the six months ended June 30, 1996 is primarily
attributable to the contribution by Ascent of certain assets included in its
Satellite Cinema division to OCV in exchange for OCV Common Stock pursuant to a
contribution agreement effective August 1, 1995. During the six month period
ending June 30, 1995, video system sales and management services to Ascent
totaled approximately $16.2 million.
Total direct cost of revenues was $27.9 million or 44.7% of total net
revenues, for the six months ended June 30, 1996, compared to $27.5 million, or
53.6% of total net revenues, for the six months ended June 30, 1995. This
percentage decrease resulted from the elimination of low margin video system
sales and video management services to Ascent, offset by increased free-to-guest
direct costs due to price reductions granted in connection with certain hotel
contracts without a corresponding decrease in programming fees paid to
suppliers.
Field service costs, which consist primarily of labor and material
expense required to maintain the existing on-demand equipment, were $5.2 million
for the six months ended June 30, 1996, or 9.4% of net movie revenue compared to
$4.3 million or 13.8% of net movie revenue for the same period in 1995. This
percentage decrease is the result of operating efficiencies due to the increase
in installed on-demand rooms and increased management focus.
Depreciation and amortization was $21.3 million or 38% of net movie
revenues, for the six months ended June 30, 1996, compared to depreciation and
amortization of $11.5 million, or 36.6% of net movie revenues, for the
comparable period in 1995. This increase in depreciation and amortization
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is attributable to the capital investment associated with installing on-demand
service in hotel rooms, coupled with the depreciation and amortization resulting
from the acquisition of the assets from Ascent.
Marketing, general and administrative expense increased $1.2 million
for the six months ended June 30, 1996 compared to the same period in 1995 due
to higher levels of business activities, and costs associated with the
SpectraVision acquisition.
Research and development expense increased to $1.9 million for the six
months ended June 30, 1996, compared to $1.1 million for the six months ended
June 30, 1995. The increase of $.8 million is primarily attributable to
continued investment in the development of new products by OCV, including the
prototype work being done in 1996 on a new remote control.
In 1995, OCV recorded a charge of $1.5 million related to the
settlement of a lawsuit with a former employee of OCV.
Income from operations decreased to $3.9 million for the six months
ended June 30, 1996 from $4.3 million in 1995, a decrease of 9.4%. This decrease
is primarily attributable to the decreased level of video system sales, higher
free to guest programming costs and an increase in depreciation and amortization
expenses.
Net interest expense was $1.0 million for the six month period ended
June 30, 1996 as compared to $.1 million for the comparable 1995 period. This is
the result of OCV utilizing debt financing from Ascent during 1996 to finance
OCV's continuing expansion of its installed customer base, in contrast to the
comparable period in 1995 when equity financing was used in lieu of debt.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total net revenues increased by $20.5 million or 25.1% to $102.1
million for the year ended December 31, 1995 as compared to total net revenues
of $81.6 million for the year ended December 31, 1994 primarily as a result of
net movie revenues from 361,000 installed on-demand rooms as of December 31,
1995 compared to 248,000 such rooms as of December 31, 1994. This increase in
net movie revenues was partially offset by the elimination of video systems
sales and video management services to Ascent in the August through December,
1995 period. Video system sales and video management services to Ascent totaled
approximately $18.9 million and $28.1 million in 1995 and 1994, respectively.
Total direct cost of revenues was $48.4 million or 47.4% of total net
revenues, for the year ended December 31, 1995, compared to $47.8 million, or
58.6% of total net revenues, for the year ended December 31, 1994. This
percentage decrease resulted from a reduction in film share expense from 13.7%
of net movie revenues in 1994 to 11.7% in 1995 and from the elimination of low
margin video system sales and video management services to Ascent in the August
through December, 1995 period.
Field service costs, which consist primarily of labor and material
expense required to maintain the existing on-demand equipment, were $9.1 million
for the year ended December 31, 1995, or 12.1% of net movie revenue compared to
$5.3 million or 11.5% of net movie revenue for the same period in 1994. This
increase in field service expense was broad based and included increase in
personnel, travel, facility and spare equipment purchase and repair costs.
Depreciation and amortization was $28.7 million or 38.3% of net movie
revenues, for the year ended December 31, 1995, compared to depreciation and
amortization of $17.5 million, or 38.2% of net movie revenues, for the
comparable period in 1994. This increase in depreciation and amortization is
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attributable to the capital investment associated with installing on-demand
service in additional hotel rooms combined with the depreciation and
amortization resulting from the contribution by Ascent as described above.
Research and development expense for the year ended December 31, 1995
was $2.6 million as compared to $1.8 million for the 1994 period, as OCV
continued its efforts to be competitive through continued investment in the
development of new products, as well as new features for existing products. The
increase across the periods was attributable to an increase in the costs
associated with executing these efforts, primarily an increase in personnel
costs of $.7 million.
Marketing, general and administrative expense decreased to $3.1 million
in the year ended December 31, 1995 as compared to $3.4 million in 1994,
primarily due to reduced legal expenses in 1995.
In 1995 OCV recorded a charge of $1.5 million related to the settlement
of a lawsuit with a former employee of OCV.
Income from operations increased to $8.6 million for the year ended
December 31, 1995 from $5.9 million in 1994, an increase of 46.3%. This increase
is attributable to increased movie revenues and a lower film share cost, offset
by increased field service costs and settlement of litigation expenses.
Net interest expense increased to $.4 million during the year ended
December 31, 1995 as compared to $.1 million for the comparable 1994 period.
This is the result of OCV obtaining debt financing from Ascent in the latter
half of 1995 to finance OCV's continuing expansion of its installed customer
base, in contrast to the comparable period in 1994 when equity financing was
used in lieu of debt.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total net revenues increased by $51.4 million or 170.1% to $81.6
million for the year ended December 31, 1994 as compared to net revenues of
$30.2 million for the year ended December 31, 1993 primarily as the result of a
100% increase in installed on-demand rooms and from video system sales and video
management services to Ascent. Video system sales and video management services
to Ascent totaled approximately $28.1 million and $4.2 million in 1994 and 1993,
respectively.
Total direct cost of revenues was $47.8 million or 58.6% of total net
revenues, for the year ended December 31, 1994, compared to $12.9 million, or
42.7% of total net revenues, for the year ended December 31, 1993. This
percentage increase resulted from an increase in lower margin video system sales
and video management services to Ascent and an increase in free-to-guest direct
costs due to price reductions granted in connection with certain hotel contracts
without a corresponding decrease in programming fees paid to suppliers.
Field services costs, which consist primarily of labor and material
expense required to maintain the existing on-demand equipment, were $5.3 million
for the year ended December 31, 1994, or 11.5% of net movie revenue compared to
$3.3 million or 14.1% of net movie revenue for the same period in 1993. This
percentage decrease was primarily attributable to the increase in OCV's
installed base with a lower increase in fixed costs associated with providing
customer support.
Depreciation and amortization was $17.5 million or 38.2% of net movie
revenues, for the year ended December 31, 1994, compared to depreciation and
amortization of $7.8 million, or 33.4% of net movie revenues, for the comparable
period in 1993. This percentage increase is attributable to the increased
capital investment required to obtain and install new hotel contracts.
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Research and development expense for the year ended December 31, 1994
was $1.8 million as compared to $1.2 million for the 1993 period. Increased
costs in 1994 included personnel, occupancy and consultants.
Marketing, general and administrative expense increased to $3.4 million
in the year ended December 31, 1994 as compared to $2.6 million in 1993.
Income from operations increased to $5.8 million and 7.2% of total net
revenues for the year ended December 31, 1994 from $2.3 million and 7.7% of
total net revenues in 1993. This increase is attributable to increased revenues
with a lower fixed cost in operating expenses.
Net interest expense increased to $78,000 during the year ended
December 31, 1994 as compared to $17,000 for the comparable 1993 period.
This was a combination of having lower interest earning, and lower investor loan
balances in 1994 as compared to 1993.
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SpectraVision -- Historical
Information contained in this Information Statement/Prospectus relating
to SpectraVision and its subsidiaries has been obtained from publicly available
documents, including the most recent Form 10-Q and Form 10-K of SpectraVision
filed with the Commission. See "Available Information."
The following discussion of SpectraVision's results of operations has
been obtained from publicly available documents filed by SpectraVision with the
Commission. See "Available Information."
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total revenues decreased to $58.0 million in the six months ended June
30, 1996 from $65.2 million in the six months ended June 30, 1995, a decrease of
$7.2 million or 11.0%. Of the total revenues reported in the six months ended
June 30, 1996, 86.9% were revenues from pay-per-view, 9.5% were from
free-to-guest, and 3.6% were from other sources.
Pay-per-view revenues decreased to $50.4 million in the six months
ended June 30, 1996 from $55.1 million in the six months ended June 30, 1995, a
decrease of $4.7 million or 8.5%. This decrease in pay-per-view revenues
primarily reflects the decline in the number of rooms served, which resulted in
a decrease in revenues of approximately $8.7 million. The decline in the number
of revenue producing rooms during the quarter is due to the loss of rooms from
non-renewal of certain hotel PPV contracts as a result of the intense
competition in the hotel pay-per-view industry and SpectraVision's voluntary
termination of certain unprofitable hotel contracts. These decreases were
somewhat offset by an increase in average price per view from $7.75 during the
six months ended June 30, 1995 to $8.32 for the six months ended June 30, 1996
contributing approximately $4.0 million to pay-per-view revenue. This increase
in average price per view revenue is primarily due to the $1.00 price increase
SpectraVision implemented on March 1, 1996 for substantially all of the hotels
it services located in the United States.
Free-to-guest revenues decreased to $5.5 million in the six months
ended June 30, 1996 from $6.9 million in the six months ended June 30, 1995, a
decrease of $1.4 million or 20.3%. This decrease primarily reflects the decline
in the number of hotels served as well as negotiated price reductions in
connection with certain PPV contract renewals.
Pay-per-view direct costs increased to $20.2 million in the six months
ended June 30, 1996 from $19.2 million in the six months ended June 30, 1995, an
increase of $1.0 million or 5.2%. As a percentage of pay-per-view revenues,
pay-per-view direct costs increased to 40.0% in the six months ended June 30,
1996 from 34.8% in the six months ended June 30, 1995. This percentage increase
is primarily due to increased film licensing fees and in room collateral costs.
Film licensing costs were 16.0% of pay-per-view revenues in the six months ended
June 30, 1995 as compared to 19.0% in the six months ended June 30, 1996. The
film license costs increased due to higher costs from vendors. The in room
collateral costs, which increased $.6 million or 59.2% increased due to the
introduction of the Entertainment Guide.
Free-to-guest direct costs increased to $5.9 million in the six months
ended June 30, 1996 from $5.7 million in the six months ended June 30, 1995, an
increase of $.2 million or 3.5%. As a percentage of free-to-guest revenues,
free-to-guest direct costs increased to 107.2% in the six months ended June 30,
1996 from 82.5% in the six months ended June 30, 1995. The increase in
free-to-guest direct costs as a percentage of free-to-guest revenues reflects
the price reductions in free-to-guest revenues in connection with certain PPV
contract renewals and increases in certain free-to-guest programming costs.
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Operating expenses decreased to $20.0 million in the six months ended
June 30, 1996 from $21.0 million in the six months ended June 30, 1995, a
decrease of approximately $1.0 million or 4.8%. Operating expenses consist
primarily of maintenance of hotel systems including contractual services
performed by EDS, pay-per-view equipment rental expense (primarily integrated
receiver decoders and file servers for the digital guest choice system) and
pay-per-view equipment repairs performed by a third party. Operating expenses
declined due to the reduction in the number of hotel rooms served and due to the
term of the EDS contract.
Selling, general and administrative expenses decreased to $7.2 million
in the six months ended June 30, 1996 from $10.2 million in the six months ended
June 30, 1995, a decrease of $3.0 million or 29.4%. Decreases in salaries and
benefits as a result of the reduction in workforce, along with decreases in
marketing and public relations expenditures, account for the decrease.
Interest expense (net) decreased to $3.1 million in the six months
ended June 30, 1996 from $26.9 million in the six months ended June 30, 1995, a
decrease of $23.8 million or 88.5%. The decrease is primarily due to the
non-accrual of interest on debt instruments subject to settlement under
reorganization. SpectraVision also capitalized interest in the amount of $.2
million for the six months ended June 30, 1996 as compared to $1.8 million in
the six months ended June 30, 1995. SpectraVision's cash interest for the six
months ended June 30, 1996 was $3.2 million compared to $.6 million for the six
months ended June 30, 1995.
Reorganization items were $1.8 million in the six months ended June 30,
1996 and consisted of normal bankruptcy, professional and other miscellaneous
charges.
Net loss was $22.8 million for six months ended June 30, 1996 and $39.6
million for the six months ended June 30, 1995. The decrease in the net loss for
the six months ended June 30, 1996 compared to June 30, 1995 was primarily due
to the decreased interest and expenses offset by declining revenues and
increases in direct costs, depreciation and amortization and reorganization
costs.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues decreased to $124.0 million in 1995 from $142.4 million
in 1994, a decrease of $18.4 million or 12.9% primarily due to the decline in
pay-per-view revenues as a result of the reduction of installed hotel rooms. Of
the total revenues reported in 1995, 84.6% were revenues from pay-per-view,
11.0% were from free-to-guest, 4.4% were from interactive services and other
revenue sources.
Pay-per-view revenues decreased to $104.9 million in 1995 from $119.5
million in 1994, a decrease of $14.6 million or 12.2%. This decrease in
pay-per-view revenues reflects the decline in the number of rooms served, which
resulted in an approximate $11.1 million decrease in revenues. The remainder of
the decrease in pay-per-view revenues is attributed to a decline in revenues per
equipped room ("RER") reflecting lower viewing levels. SpectraVision believes
the lower RER in 1995 can also be attributed to an increased number of
non-operating hotel systems due to poor service and poorly performing movie
product.
Free-to-guest revenues decreased to $13.6 million in 1995 from $14.8
million in 1994, a decrease of $1.2 million or 8.1%. This decrease primarily
reflects negotiated price reductions in connection with certain PPV hotel
contract renewals and the decline in the number of hotels with free-to-guest
services.
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Other revenues decreased to $5.5 million in 1995 from $8.1 million in
1994, a decrease of $2.6 million or 32.1%. This decrease is primarily due to the
fact that equipment sales in 1994 did not recur in 1995.
Pay-per-view direct costs decreased to $39.9 million in 1995 from $41.8
million in 1994, a decrease of $1.9 million or 4.5%. As a percentage of PPV
revenues, pay-per-view direct costs increased to 38.1% in 1995 from 35.0% in
1994 for a number of reasons. Film share expense increased from 16.2% of PPV
revenues in 1994 to 17.1% of PPV revenues in 1995 because of higher film share
percentages being charged to SpectraVision from the various film studios for the
major studio film product shown by SpectraVision. Although transmission costs
remained the same, they increased to 3.1% of PPV revenues in 1995 from 2.3% in
1994 because PPV revenues declined. The video tape costs increased to 3.4% of
PPV revenues in 1995 compared to 2.6% in 1994 due to increased tape encoding and
duplicating costs established by SpectraVision's vendors during bankruptcy.
Movie card costs rose from 2.9% of PPV revenues in 1994 to 3.8% of PPV revenues
in 1995 due primarily to the introduction of an Entertainment Guide magazine.
Free-to-guest direct costs decreased to $11.4 million in 1995 from
$11.8 million in 1994, a decrease of $.4 million or 3.4%. As a percentage of
free-to-guest revenues, free-to-guest direct costs increased to 84.4% in 1995
from 79.6% in 1994 as a result of the lower revenues due to price reductions
granted in connection with certain PPV contract renewals without a corresponding
decrease in programming fees paid to suppliers.
Other direct costs decreased to $1.4 million in 1995 from $4.4 million
in 1994, a decrease of $3.0 million or 68.2%. As a percentage of other revenues,
other direct costs decreased to 26.0% in 1995 from 54.8% in 1994 principally due
to a one time $1.5 million charge for prior period licensing fees in 1994.
Depreciation and amortization expense decreased to $39.4 million in
1995 from $50.5 million in 1994, a decline of $11.1 million or 22.0%. The
decline is due to the write-down of hotel contracts at the end of 1994 and
assets becoming fully depreciated.
Operating expenses increased to $17.6 million in 1995 from $13.2
million in 1994, a net increase of $4.4 million or 33.3%. Operating expenses for
periods prior to April 1994 included costs of SpectraVision's U.S. field service
organization as well as field service operations in its foreign subsidiaries,
and labor costs of repairs and maintenance of hotel system components (including
TV's). Subsequent to March 1994, operating expenses are comprised of field
service operations of the foreign subsidiaries and repairs and maintenance
costs. In 1995, these costs also included technicians who were hired to improve
customer service in the field. Approximately $2.0 million represented duplicated
costs during 1995 when SpectraVision employed its own field service organization
and also paid contract fees under the EDS Service and Technology Agreement. In
addition, the cost of repairs to system components increased $1.6 million due to
both the cost of shipping and the increased quantity of room units and videotape
players repaired. The increased number of repairs, primarily to room unit
channel selectors, is partially due to the omission of on-site repairs
previously performed by SpectraVision field service personnel in prior years.
Contracted service costs increased to $29.3 million in 1995 from $21.0
million in 1994, an increase of $8.3 million or 39.5%. The remaining increases
include the costs from the EDS Service and Technology Agreement, which was in
effect for the last three quarters of 1994 and the entire year of 1995. The
increase is due primarily to the recording of $6.0 million of operating leases
for equipment previously owned by SpectraVision and sold in a sale leaseback
arrangement.
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Selling and marketing expenses decreased to $4.9 million in 1995 from
$8.7 million in 1994, a decrease of $3.8 million or 43.7% due to the elimination
of the marketing department during the year and reductions in activities
associated with public relations and promotion of new products.
General and administrative expenses decreased to $17.3 million in 1995
from $19.6 million in 1994, a net decrease of $2.3 million or 11.7%. Expenses in
1994 included severance costs of $2.1 million due to changes in executive
management. Additionally, 1994 included increases in legal fees, outside
management fees for warehouse management and shipping services provided by
Certech.
Research and development expenses decreased to $1.8 million in 1995
from $3.8 million in 1994, a decrease of $2.0 million due to various cost
reductions implemented.
Non-operating income for 1995 was $.5 million. This amount includes
adjustments to certain prior obligations which were settled for less than
anticipated. Non-operating income for 1994 was $1.2 million and is comprised of
business interruption insurance proceeds from hurricanes in 1993 and certain
non-operating payments received in-lieu of performance under purchase orders for
equipment by a customer.
Interest expense (net) decreased to $28.2 million in 1995 from $55.0
million in 1994, a decrease of $26.8 million or 48.7%. Cash interest expense
decreased from $4.0 million in 1994 to $3.2 million in 1995, a decrease of $.8
million. Non-cash interest expense decreased from $51.2 million in 1994 to $25.0
million in 1995, a decrease of $26.2 million. These decreases in interest
expense were the result of the non-accrual of interest on debt instruments
subject to settlement under reorganization for the period from June 8, 1995, the
date of the Chapter 11 filing, to December 31, 1995. This decrease was partially
offset by an increase in interest expense due to the increased outstanding
balance of the 11.65% Senior Subordinated Reset Notes during 1995 (prior to June
8, 1995) as compared to 1994.
Reorganization items of $7.6 million ($0 in 1994) for the twelve months
ended December 31, 1995 include normal bankruptcy, professional and
miscellaneous charges of $1.6 million and restructure charges of $6.0 million,
which includes discontinuing service to a number of unprofitable hotels and the
elimination of certain positions within SpectraVision. Of the total $6.0 million
restructuring charge, $.9 million relates to the cost of deinstalling certain
hotels and $1.7 million was recorded for estimated losses on the disposal of
deinstalled equipment. SpectraVision also recorded $.1 million in employee
severance costs which will be incurred in the restructure process. SpectraVision
recorded an additional charge of $2.3 million which represented the write-off or
abandonment of other fixed assets and $1.0 million for other costs associated
with the restructure process.
Deferred income tax benefits decreased to $1.0 million in 1995 from
$28.5 million in 1994, a decrease of $27.5 million or 96.5%. The 1994 deferred
tax benefit includes the tax effects related to the write-down of hotel
contracts. SpectraVision has recognized deferred tax assets only to the extent
such assets can be realized through future reversals of existing taxable timing
differences. As of December 31, 1995, the net operating loss carryforwards for
federal income tax purposes were $328 million.
Extraordinary item of $.9 million in 1995 represents the write-off of
unamortized debt issuance costs in connection with the extinguishment of
SpectraVision's Revolving and Canadian Bank Credit Facilities.
Net loss decreased to $74.6 million in 1995 from $254.3 million in
1994, a decrease of $179.7 million. The net loss for 1994 included a one-time
charge of $196.3 million for the revaluation of hotel
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contracts and patent costs. Ignoring this one time charge in 1994, 1995 net loss
increased by $16.6 over the 1994 net loss.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues decreased to $142.4 million in 1994 from $163.0 million
in 1993, a decrease of $20.6 million or 12.6% primarily due to the decline in
pay-per-view revenues as a result of the reduction of installed hotel rooms. Of
the total revenues reported in 1994, 83.9% were revenues from pay-per-view,
10.4% were from free-to-guest, 5.7% were from interactive services and other
revenue sources.
Pay-per-view revenues decreased to $119.5 million in 1994 from $134.8
million in 1993, a decrease of $15.3 million or 11.4%. This decrease in
pay-per-view revenues reflects the decrease in the number of rooms served, which
resulted in an approximate $11.3 million decrease in revenue. The remainder of
the decrease in pay-per-view revenues is attributed to a decline in RER
reflecting lower viewing levels. SpectraVision believes the lower RER in 1994
can also be attributed to an increased number of non-operating hotel systems
during the transition. The transition of SpectraVision's field service to EDS
involved numerous difficulties for field service personnel in maintaining the
normal level of repairs and maintenance of existing PPV rooms (particularly
those with tape-based PPV systems) concurrent with the installation of the
compressed digital video sites.
Free-to-guest revenues decreased to $14.8 million in 1994 from $17.9
million in 1993, a decrease of $3.1 million or 17.3%. This decrease primarily
reflects negotiated price reductions in connection with certain PPV hotel
contract renewals and the decline in the number of hotels with free-to-guest
services.
Other revenues decreased to $8.1 million in 1994 from $10.3 million in
1993, a decrease of $2.2 million or 21.4%. This decrease is primarily due to
reduced equipment sales and a $1.0 million decrease in interactive revenues due
to price reductions granted in connection with certain PPV contract renewals.
Pay-per-view direct costs decreased to $41.8 million in 1994 from $42.2
million in 1993, a decrease of $429,000 or 1.0%. As a percentage of pay-per-view
revenues, pay-per-view direct costs increased to 35.0% in 1994 from 31.3% in
1993. The increase resulted primarily from costs of the transponder lease
required for the implementation of the compressed digital video Satellite
Network beginning in the last quarter of 1993. The costs of videotapes and
in-room schedule cards increased to 5.4% of PPV revenues in 1994 from 4% in
1993. Due to the delay of deployment of the satellite-delivered compressed
digital video technology including SPEXIS and the electronic on-screen movie
card, reduction of videotapes and in-room cards were not realized as
anticipated.
Free-to-guest direct costs decreased to $11.8 million in 1994 from
$12.8 million in 1993, a decrease of $1.0 million or 7.8%. As a percentage of
free-to-guest revenues, free-to-guest direct costs increased to 79.0% in 1994
from 71.6% in 1993. The increase in free-to-guest direct costs as a percentage
of free-to-guest revenues is a result of the lower revenues due to price
reductions granted in connection with certain PPV contract renewals without a
corresponding decrease in programming fees paid to suppliers.
Other direct costs increased to $4.4 million in 1994 from $3.8 million
in 1993, an increase of $.6 million or 15.8%. As a percentage of other revenues,
other direct costs increased to 54.8% in 1994 from 50.2% in 1993 principally due
to a $1.5 million charge for prior period licensing fees.
Depreciation and amortization expense increased to $50.5 million in
1994 from $44.1 million in 1993, an increase of $6.4 million or 14.5%. The
increase in depreciation is due to the increase in video
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systems capitalized during 1994 due to the installation of the new
satellite-delivered compressed digital video technology.
Technology and field service charge for 1993 reflects the one-time
costs due to changes in technology and field service operations in connection
with the EDS Service and Technology Agreement. SpectraVision recorded costs in
the amount of $7.0 million for the write-off of obsolete equipment (primarily
videotape players and obsolete microprocessing equipment) and personnel related
costs associated with the reorganization of SpectraVision's field service
operations. Approximately $3.9 million was attributable to the write-off of
obsolete equipment and $3.1 million was due to costs of severance and incentives
to field operation personnel and costs related to the closing of field service
offices. The EDS Service and Technology Agreement was executed in July 1993 and
SpectraVision's management determined the impact on operations including
obsolete equipment and personnel reductions at that time and accordingly
recorded the estimation of these costs in the results of operations for 1993.
Loss on sale of manufacturing assets and inventory is a result of the
sale of SpectraVision's manufacturing operations to The Cerplex Group in
December 1993. Certech Technology, Inc., a wholly-owned subsidiary of The
Cerplex Group, manufactures and sells to SpectraVision a portion of the hotel
PPV system components. Certech has leased the manufacturing space at
SpectraVision's corporate headquarters. The cash proceeds to SpectraVision
resulting from the sale of assets and inventory were $5.2 million. The net loss
on the transaction of $0.7 million is comprised of a gain on the sale of assets
net of inventory write-downs and accrued severance costs.
Operating expenses combined with contracted service costs increased to
$34.2 million in 1994 from $26.3 million in 1993, a net increase of $7.9 million
or 30.0%. Operating expenses for periods prior to April 1994 include costs of
SpectraVision's U.S. field service organization as well as field service
operations in its foreign subsidiaries, and labor costs of repairs and
maintenance of hotel system components (including TV's). Subsequent to March
1994, operating expenses are comprised of field service operations of the
foreign subsidiaries and repairs and maintenance costs. The combined expenses
for 1994 includes a decrease of approximately $2.2 million due to personnel
transferred from operations to SpectraVision's sales organization which costs
are included in selling and marketing expenses for 1994. Approximately $5.3
million represents duplicated costs during the first quarter of 1994 when
SpectraVision employed its own field service organization and also paid contract
fees under the EDS Service and Technology Agreement. The cost of repairs to
system components also increased. This increase is attributable to both the cost
of shipping and the increased quantity of room units and videotape players
repaired. The increased number of repairs, primarily to room unit channel
selectors, is partially due to the omission of on-site repairs previously
performed by SpectraVision field service personnel.
Selling and marketing expenses increased to $8.7 million in 1994 from
$5.1 million in 1993, an increase of $3.6 million or 70.6%. Sales costs
increased approximately $2.2 million due to transfers of personnel previously
utilized in the field operations group as described above. Marketing costs
increased approximately $1.2 million due to activities associated with public
relations and promotion of new products.
General and administrative expenses increased to $19.6 million in 1994
from $15.4 million in 1993, a net increase of $4.2 million or 27.3%. Expenses in
1994 included severance costs of $2.1 million due to changes in executive
management. Additionally there were increases in legal fees and increases in
outside management fees for warehouse management and shipping services provided
by Certech. Directors' and officers' liability insurance costs and bad debt
expense decreased in 1994 as compared to 1993.
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Non-operating income for 1994 was $1.2 million and is comprised of
business interruption insurance proceeds from hurricanes in 1993 and certain
non-operating payments received in-lieu of performance under purchase orders for
equipment by a customer. Non-operating income was zero in 1993.
Research and development expenses increased to $3.8 million in 1994
from $1.6 million in 1993, an increase of $2.2 million due to increased
development and support of the satellite-delivered compressed digital video
technology.
Interest expense (net) increased to $55.0 million in 1994 from $49.0
million in 1993, an increase of $6.0 million or 12.2%. Cash interest expense
decreased from $43.2 million in 1993 to $4.0 million in 1994, a decrease of
$39.2 million. Non-cash interest expense increased from $6.1 million in 1993 to
$51.2 million in 1994, an increase of $45.1 million. The decrease in cash
interest expense and the increase in non-cash interest expense is due to
SpectraVision's issuance of additional Reset Notes in payment of the interest
obligation on June 1 and December 1, 1994 on the Reset Notes resulting in $34.0
million of non-cash interest expense. Additionally, 1994 includes a full year of
discount accretion on the Senior Notes (issued in October 1993) compared to only
3 months of discount accretion during 1993.
State and foreign income tax benefit was $448,888 in 1994 as compared
to $1.7 million of state and foreign income tax expense in 1993, a decrease of
$2.2 million. The benefit in 1994 is primarily attributed to operating losses on
the state level resulting in loss carrybacks.
Deferred tax benefits increased to $28.5 million in 1994 from $4.5
million in 1993, as a result of a reduction in SpectraVision's net deferred tax
liabilities. The increase in the tax benefit for 1994 as compared to 1993
primarily relates to the write-down of hotel contracts. SpectraVision has
recognized deferred tax assets only to the extent such assets can be realized
through future reversals of existing taxable temporary differences. As of
December 31, 1994 the net operating loss carryforwards for federal income tax
purposes were $285 million.
Loss before extraordinary items increased to $254.3 million in 1994
from $43.1 million in 1993, an increase of $211.2 million. The net loss for 1994
includes a one-time charge of $196.3 million for the revaluation of hotel
contracts and patent costs.
LIQUIDITY AND CAPITAL RESOURCES
On Command Video Corporation
Through 1994, the liquidity and capital needs of OCV were financed
primarily through cash flow from operations and equity placements with Ascent
and other minority stockholders. In 1995, OCV entered into a promissory note
agreement with Ascent to supplement OCV's ongoing financing needs. As of
December 31, 1995 and June 30, 1996, borrowings outstanding under the note
payable were $15.7 million and $29.3 million, respectively. Pursuant to the
promissory note agreement, these borrowings are due on demand and bear interest
at the prime rate. In connection with the Transactions, the promissory note
will be repaid.
During the year ended December 31, 1995, OCV's working capital deficit
increased by $19.3 million. This increase was primarily attributable to the
$15.1 million increase in the short-term note payable to Ascent used primarily
to fund the installation of on-demand systems, combined with a decrease in
accounts receivable of approximately $2.5 million. During the six months ended
June 30, 1996, OCV's working capital deficit increased by approximately $14.1
million, which is primarily attributable to OCV's borrowings under the
short-term note payable to Ascent used to fund continuing installation of
on-demand systems.
On Command Corporation
In connection with the consummation of the Transactions, On Command
Corporation will require approximately $90 million to refinance the
SpectraVision DIP Loan, to repay the OCV Debt, to pay closing and exit costs
related to consummating the Plan and to provide initial working capital. In
September 1996, On Command Corporation received a commitment from NationsBank of
Texas, N.A. ("NationsBank") for an aggregate $125 million credit facility
consisting of either of the following types of facilities: (i) a 364-day
revolving credit and competitive advance facility, which, subject to certain
conditions, will be renewable for four 364-day periods, and (ii) a five-year
revolving credit and competitive advance facility; provided, however, that any
amounts borrowed under the five-year facility will reduce the amount available
under the 364-day facility. The OCC Credit Facility will contain customary
covenants and agreements, including, among other things, compliance by On
Command Corporation with certain financial covenants, including a consolidated
ratio of EBITDA to cash interest expense (calculated in accordance with the OCC
Credit Facility) of at least 4.00 to 1.00 for any four consecutive fiscal
quarters and a consolidated ratio of total debt to EBITDA (calculated in
accordance with the OCC Credit Facility) of not more than 2.50 to 1.00 for any
fiscal quarter from the Closing through fiscal year end 1997 and 2.00 to 1.00
for any fiscal quarter thereafter. The OCC Credit Facility will also limit On
Command Corporation's ability to incur additional indebtedness and pay
dividends but will not preclude On Command Corporation from paying cash
dividends on its Common Stock.
Revolving loans extended under the OCC Credit Facility generally will
bear interest at either the London Interbank Offering Rate ("LIBOR") plus a
spread that may range from 0.375% to 0.625% depending upon On Command
Corporation's consolidated ratio of total debt to EBITDA (calculated in
accordance with the OCC Credit Facility) or the greater of prime rate or federal
funds rate plus a half percentage point. In addition, at On Command
Corporation's option, it may request bids from the lenders under the OCC Credit
Facility for competitive advance loans with specified maturities, in which case
On Command Corporation may choose to accept bids in ascending order based on the
interest rates bid by such lenders. Borrowings under the OCC Credit Facility
will be subject to certain customary conditions, including the absence of any
events of default and of any material adverse change in the financial condition
of On Command Corporation. In consideration for the lenders' commitment under
the OCC Credit Facility, On Command Corporation will pay the lenders an annual
fee ranging from 0.1875% to 0.25% of the unused amount of the OCC Credit
Facility, depending upon On Command Corporation's consolidated ratio of total
debt to EBITDA (calculated in accordance with the OCC Credit Facility) and
certain other fees.
On Command Corporation's principal cash requirements are expected to
include continued installation of on-demand systems, including installations for
new customers and the conversion of hotels currently under contract and
receiving only scheduled service. On Command Corporation will have material
commitments for capital expenditures for the installation of on-demand systems
by both OCV and Spectradyne, which installations will be completed when cash
flows are available and the overall liquidity of On Command Corporation is
sufficient for such expenditures. However, On Command Corporation anticipates
that capital expenditures in connection with the continued installation by OCV
of on-demand service will total approximately $35 million during the six-months
ended December 31, 1996. For 1997, On Command Corporation has not determined
estimated capital expenditures for the installation of on-demand service and/or
the conversion of select SpectraVision hotels to the OCV on-demand system due
to management's desire to further analyze the capabilities of the two systems
and manage the cash flows and liquidity needs of On Command Corporation. On
Command Corporation expects to have access to short-term and long-term
financing at favorable rates under the OCC Credit Facility. Management of On
Command Corporation believes that funds generated by operations and funds
available under the OCC Credit Facility will be sufficient for On Command
Corporation to satisfy its growth and finance working capital requirements
through 1997, subject to the limitations described in the following paragraph.
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On Command Corporation and Ascent will enter into the Corporate
Agreement, pursuant to which On Command Corporation will agree with Ascent not
to incur any indebtedness without Ascent's prior consent, other than
indebtedness under the OCC Credit Facility, and indebtedness incurred in the
ordinary course of operations which together shall not exceed $100 million in
the aggregate; provided that not more than $50 million of such indebtedness may
constitute long-term debt. In addition, pursuant to the COMSAT Agreement, Ascent
has agreed not to incur any indebtedness, other than under Ascent's existing
credit facility (and refinancings thereof) and indebtedness incurred in the
ordinary course of business, which together shall not exceed $175 million in the
aggregate, without COMSAT's consent. In contemplation of the closing of the
Transactions, COMSAT has consented to permit Ascent to incur consolidated
indebtedness (including indebtedness of On Command Corporation) of up to $216
million in the aggregate; provided that: (i) not more than $50 million of such
indebtedness may constitute long-term debt; and (ii) indebtedness in excess of
$175 million may only be incurred to provide funding requirements through the
balance of 1996. A primary purpose of the COMSAT Agreement is and a primary
purpose of the Corporate Agreement will be to require Ascent and On Command
Corporation to coordinate their capital requirements with COMSAT so that COMSAT
can monitor its compliance with the regulations of the FCC applicable to the
capital structure and debt financing activities of COMSAT and its consolidated
subsidiaries. COMSAT is required to submit a financial plan to the FCC for
review annually. Under existing FCC guidelines, COMSAT is subject to a maximum
long-term debt to total capital ratio of 45%, a limit of $200 million in
short-term debt and interest coverage ratio of 2.3 to 1. COMSAT has requested a
temporary decrease in the interest coverage ratio, which is renewed at year end,
to a minimum of 1.9 to 1 for the 1996 plan year and an increase in the
short-term debt limit to $325 million as long as the financial statements of
Ascent are consolidated with those of COMSAT. COMSAT has informed Ascent that
COMSAT was in compliance with both the long-term debt to total capital ratio and
the short-term debt limit at June 30, 1996 and expects to be in compliance with
those guidelines and the interest coverage ratio guideline at December 31, 1996
if the short-term debt limit and interest coverage ratio are modified as
requested. If the FCC approves COMSAT's request, COMSAT has further informed
Ascent that it expects that the cash flows from operations and COMSAT's
consolidated short-term borrowing capacity, including indebtedness authorized
under Ascent's credit facility and the refinancing thereof in connection with
the Transactions and the OCC Credit Facility, will be sufficient to fund
COMSAT's aggregate cash requirements for the balance of 1996. Management of On
Command Corporation and Ascent believes that, the $100 million limit on On
Command Corporation's indebtedness and the $216 million aggregate limit on
Ascent's indebtedness are adequate to fund their respective operations through
the end of 1996. A number of factors could cause the funding requirements of
COMSAT, Ascent and On Command Corporation to differ materially from those
projected, including, but not limited to, the performance of their respective
operating subsidiaries, unanticipated costs associated with the consummation fo
the Transactions or integration of SpectraVision's and OCV's businesses, the
level of ticket sales and other revenues by Ascent's professional sports
franchises, and market conditions. For 1997, management of On Command
Corporation and Ascent believes that it will be necessary for On Command
Corporation to seek approval from Ascent to increase its debt limit, and for
Ascent to seek approval from COMSAT to increase its debt limit. As part of
Ascent's 1997 operating and capital planning process, Ascent's management will
request that COMSAT increase Ascent's debt limit beginning in January 1997.
There can be no assurance, however, that COMSAT will approve any increase in
Ascent's debt limit. If Ascent were not to obtain approval to increase its debt
limit, it is highly unlikely that Ascent would approve an increase in On Command
Corporation's debt limit. If On Command Corporation's debt limit were not
increased, On Command Corporation may be required to reduce or reschedule
planned capital investments, reduce cash outlays, reduce debt, sell assets or
sell equity. Finally, COMSAT has informed Ascent that if COMSAT were to fail to
satisfy one or more of the FCC guidelines as of an applicable measurement date,
COMSAT would be required to seek advance FCC approval of future financing
activities on a case by case basis. If such approval were not granted for any
financing activities sought by On Command Corporation, it could be required to
reduce or reschedule planned capital investments, reduce cash outlays, reduce
debt or sell assets.
On Command Corporation believes that the risks of foreign currency
exchange rate fluctuations on its operations presently are not material to its
overall financial condition. However, should its foreign operations grow,
management of On Command Corporation will consider entering into foreign
currency contracts, swap arrangements or other financial instruments designed
to minimize exposure to both interest rate and exchange rate fluctuations on
its foreign operations.
ANTICIPATED ACCOUNTING TREATMENT
The Transactions will be accounted for using the historical book value
of the assets, liabilities and stockholders equity acquired from OCV by On
Command Corporation and On Command Corporation's management's estimate of the
fair value of Spectradyne's assets to be acquired and liabilities to be assumed
by On Command Corporation. The final purchase price allocation for the Debtors'
net assets will be determined at a future date (no later than one year from the
Closing Date), which may result in adjustments to the preliminary allocation.
However, in the opinion of On Command Corporation's management, the preliminary
allocation of the purchase price reflects On Command Corporation's best
estimate and all adjustments necessary to fairly state the pro forma financial
information presented in this Information Statement/Prospectus.
SEASONALITY
The business of each of OCV and Spectradyne is, and the business of On
Command Corporation is expected to be, seasonal, with higher revenues realized
during the summer months and lower revenues realized during the winter months
due to business and vacation travel patterns.
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BUSINESS
GENERAL
On Command Corporation is a newly formed Delaware corporation. From and
after the Closing Date, and after giving effect to the Transactions, On Command
Corporation will be a holding company the principal assets of which will be OCV,
Spectradyne and On Command Development, each of which will operate as a
separate, wholly owned subsidiary of On Command Corporation.
OCV is the leading provider (by number of hotel rooms served) of
on-demand in-room entertainment for the United States lodging industry. The OCV
system is a patented video selection and distribution system that allows guests
to select on a PPV basis from up to 50 motion pictures on computer controlled
television sets located in their rooms at any time. OCV also provides in-room
viewing of free-to-guest programming of select cable channels (such as HBO, the
Disney Channel, Showtime, ESPN and CNN) and other interactive services. OCV
provides its services under long-term contracts primarily to business and luxury
hotel chains such as Marriott, Hilton, Wyndham, Doubletree, Fairmont, Embassy
Suites and Holiday Inn, and to other select hotels. OCV has experienced rapid
growth in the past three years, increasing its base of installed on- demand
rooms from approximately 37,000 rooms at the end of 1992 to approximately
419,000 rooms at June 30, 1996. See "--On Command Video Corporation."
Spectradyne, a subsidiary of SpectraVision, is a leading provider of
interactive in-room video entertainment services to the lodging industry.
Founded in 1971, SpectraVision originally developed and patented a system which
provides in-room television viewing of recently released major and other motion
pictures on a PPV basis. SpectraVision, through Spectradyne, subsequently
expanded its services to include providing PPV movies in an on-demand format,
delivering free-to-guest programming and providing interactive services that
capitalize on Spectradyne's proprietary two-way communications equipment.
Spectradyne has been a major provider of these services to the lodging industry
since 1971 and, at June 30, 1996, provided PPV services to approximately 495,000
rooms in approximately 1,600 hotels. Spectradyne provides its services under
contracts to hotel chains, hotel management companies and individually owned and
franchised hotel properties.
In June 1993, SpectraVision entered into a ten-year exclusive contract
with EDS to install and maintain a digital satellite delivered hotel PPV system.
By late 1994, the costs associated with the EDS contract combined with
SpectraVision's high debt levels created financial difficulties for
SpectraVision. In early 1995, SpectraVision determined that a financial
restructuring would be required to ensure SpectraVision's long-term survival.
SpectraVision conducted restructuring negotiations with representatives of its
secured and unsecured creditors during April and May 1995, working toward the
development of an overall restructuring plan. In June 1995, SpectraVision
concluded that a filing for reorganization under Chapter 11 of the Bankruptcy
Code should be made in order to preserve the value of its assets and to ensure
that the business had sufficient cash resources to continue operations while it
completed the financial restructuring process. On June 8, 1995, the Debtors,
filed a petition for relief under the Bankruptcy Code in the Bankruptcy Court.
On Command Development, a newly formed subsidiary of On Command
Corporation, has been formed to develop new technologies to be used by OCV and
Spectradyne in order to support and improve OCV's and Spectradyne's operations
and to develop new applications to be marketed by OCV and Spectradyne. See "--On
Command Development."
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INDUSTRY OVERVIEW
Providing in-room video entertainment and information services to the
lodging industry includes offering pay-per-view major motion pictures,
free-to-guest programming of select pay cable channels and an increasing array
of interactive services. Pay-per-view services were introduced in the early
1970's and have since become a standard amenity offered by many hotels to their
guests. Historically, providers of programming to hotels delivered their content
on a fixed time schedule that did not provide the end- consumer flexibility in
choosing when to watch a movie. Typically, a hotel guest would be offered four
to eight movies, each of which would be shown once every two to four hours. The
development of video switches (including OCV's patented video switch) has
enabled providers of pay-per-view services to offer scheduling flexibility to
the end-consumer. It has been OCV's experience that rooms having the on- demand
format generate significantly greater movie revenues than comparable rooms
having only the scheduled movie format. Changes in technology have also led to
the ability to provide a number of on- demand interactive services such as folio
review, automatic checkout, survey completion, guest messaging and video games.
OPERATING AND GROWTH STRATEGIES
OCV's operating and growth strategy has been to (i) increase its
installed hotel customer base by obtaining contracts with business and luxury
hotels, and select mid-priced hotels, not presently under contract with existing
vendors or presently served by other vendors as the contracts covering such
hotels expire or may be acquired, (ii) create new revenue sources through an
expanding range of interactive and information services offered to the lodging
industry and (iii) expand into foreign markets and alternative markets,
including the corporate, educational, health care and residential markets.
Following the Transactions, it is anticipated that On Command
Corporation will follow a similar operating and growth strategy. On Command
Corporation has directed the Debtors to assume substantially all of the
Spectradyne hotel contracts in connection with the Plan. In particular, On
Command Corporation has directed Spectradyne to assume the contract with Hyatt
Corporation ("Hyatt"), which is currently served by Spectradyne's Digital Guest
Choice system and to continue to provide equivalent services to Hyatt under such
contract. On Command Corporation intends to operate OCV and Spectradyne as
separate operating entities, at least in the short term, until On Command
Corporation finalizes plans for integrating operations. As a result, in the
short term, On Command Corporation intends to service the Spectradyne hotel
contracts on a substantially similar basis as they were serviced by Spectradyne
prior to the Acquisition. However, On Command Corporation intends to pursue
quickly and diligently renewing or extending many of the contracts with existing
Spectradyne hotel customers by offering these customers the opportunity to enter
into contracts with OCV for the installation of OCV on-demand PPV movie service
and related services in place of the existing Spectradyne service. On Command
Corporation management believes that offering Spectradyne's customers the
opportunity to receive OCV products and services will result in the retention of
a majority of the Spectradyne hotel customers.
Certain of Spectradyne's customers will not be offered the opportunity
to receive OCV equipment. These customers are located in Hong Kong, Australia,
Singapore and Thailand. OCV is currently a party to an agreement with MagiNet
Corporation ("MagiNet") to provide OCV systems and technology to MagiNet in the
Asia Pacific region. See "--On Command Video Corporation." Because of the
existence
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of this agreement, OCV does not currently intend to allow any other parties to
use the OCV system to service customers in those countries.
In order to continue to provide the Guest Theater and Digital Guest
Choice services to Spectradyne customers, On Command Corporation has entered
into an agreement with EDS pursuant to which Spectradyne will continue to lease
certain equipment from EDS, and EDS will provide network services and
transponder support for these services for up to 45 months after closing. The
cost to On Command Corporation and Spectradyne of this new agreement will be
substantially less than SpectraVision had been committed to pay.
With respect to all of the other suppliers necessary or appropriate to
provide PPV and free-to-guest services to Spectradyne's hotel customers, On
Command Corporation is currently in negotiations with all of these parties and
expects to have agreements in place to provide uninterrupted service. In some
cases this will require the assumption of pre-petition Spectradyne agreements,
certain of which are expected to be amended in connection with such assumption.
In other cases, On Command Corporation anticipates that suppliers will agree to
a master agreement with On Command Corporation under which both OCV and
Spectradyne would receive products or services from the relevant suppliers.
Historically, substantially all of OCV's growth has derived from
obtaining contracts with hotels in the United States not presently under
contract with existing vendors or presently served by other vendors as the
contracts covering such hotels expired. On Command Corporation believes that,
following the consummation of the Transactions, opportunities for additional
growth in the United States will be more limited than in the past. As a result,
On Command Corporation intends to focus its strategy for obtaining new hotel
customers on international markets. On Command Corporation believes that,
relative to the United States, many international markets are underserved by the
hotel in-room entertainment industry.
ON COMMAND VIDEO CORPORATION
OCV is the leading provider (by number of hotel rooms served) of
on-demand in-room video entertainment for the United States lodging industry,
according to a report published by Paul Kagan Associates, Inc., an industry
analyst. The OCV system is a patented video selection and distribution system
that allows guests to select on a PPV basis from up to 50 motion pictures on
computer controlled television sets located in their rooms at any time. OCV has
experienced rapid growth in the past three years, increasing its base of
installed on-demand rooms from approximately 37,000 rooms at the end of 1992 to
approximately 419,000 rooms at June 30, 1996. OCV also provides in-room viewing
of free-to-guest programming of select cable channels (such as HBO, the Disney
Channel, Showtime, ESPN and CNN) and other interactive services. OCV provides
its services under long-term contracts primarily to business and luxury hotel
chains such as Marriott, Hilton, Wyndham, Doubletree, Fairmont, Embassy Suites
and Holiday Inn, and to other select hotels.
In addition to the on-demand in-room entertainment services offered by
OCV, since August 1, 1995, OCV also provided lower margin, satellite-delivered
PPV movies on a scheduled basis to the lodging industry through its Satellite
Cinema division. By June 1996, OCV had converted select Satellite Cinema hotel
properties to higher margin OCV services and had sold or discontinued Satellite
Cinema services at the remaining hotel properties.
At June 30, 1996, approximately 97% of OCV's installed on-demand rooms
were located in the United States, with the balance located in Canada, the
Caribbean and Europe. In addition to installing OCV systems in hotels served by
OCV, OCV sells its systems to certain other providers of in-room entertainment,
including MagiNet (formerly Pacific Pay Video Limited), which is licensed to use
OCV's
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system to provide on-demand in-room entertainment in the Asia Pacific region.
Services and Products
OCV provides on-demand in-room television viewing of major motion
pictures (including new releases) and independent non-rated motion pictures for
mature audiences for which a hotel guest pays on a per-view basis. Guests can
choose among 20 to 50 different video programs on demand, depending upon the
size of the hotel, with larger hotels offering a wider selection. The hardware
installed in OCV's systems consists of a microprocessor controlling the
television in each room, a handheld remote control and a central "head-end"
video rack and system computer located elsewhere in the hotel. The in-room
terminal unit may be integrated within, or located behind, the television. OCV
emphasizes sales and installations of full-scale OCV video on-demand systems to
business and luxury hotels. OCV is also marketing lower cost Video NOW(TM)
systems to select mid-priced hotels. The Video NOW(TM) system works with the
hotel's existing televisions and telephones, allowing guests to use their
touch-tone telephones to access on-demand movies and other programming.
OCV provides service under contracts with hotels that generally run for
a term of seven years. Under these contracts, OCV installs its system into the
hotel at OCV's cost and OCV retains ownership of all equipment utilized in
providing the service. Traditionally, the hotel provides and owns the
televisions; however, on occasion, OCV provides televisions to hotels that meet
certain economic criteria. OCV undertakes a significant investment when it
installs its system in a property, sometimes rewiring the entire hotel.
Depending on the size of the hotel property and the configuration of the system
installed, the installed cost of a new on-demand system with interactive and
video game services capabilities, including the head-end equipment, ranges from
$400 to $700 per room, or approximately $300 per room if the Video NOW(TM)
system is used. OCV's contracts with hotels provide that OCV will be the
exclusive provider of in-room, PPV television entertainment services to
the hotel and generally permit OCV to set the movie price. The hotels collect
movie viewing charges from their guests and retain a commission equal to a
percentage of the total PPV revenue that varies depending upon the size
and profitability of the system. Some contracts also require OCV to upgrade its
system to the extent that new technologies and features are introduced during
the term of the contract. At the scheduled expiration of a contract, OCV
generally seeks to extend the contract on terms substantially similar to the
current terms. Because of the capital investment that OCV has made in installing
its system in a particular hotel, OCV believes it will have a significant
competitive advantage over any other provider attempting to displace OCV as
provider to that hotel. There can be no assurance, however, that OCV will be
successful in renewing its contracts. See "--Competition."
Programming signals originate from video cassette players located
within the head-end rack and are transmitted to individual rooms by way of OCV's
proprietary video switching technology. Movie starts are controlled
automatically by the system computer. The system computer also records the
purchase by a guest of any title and reports billing data to the hotel's
accounting system, which posts the charge to the guest's bill. Manual functions
of the OCV equipment and system are limited to changing video cassettes once a
month, which is handled by OCV's field operations personnel. OCV's information
system is capable of generating regular reports of guests' entertainment
selections, permitting OCV to adjust its programming to respond to viewing
patterns. The number of guests that can view a particular movie at the same time
varies from hotel to hotel depending upon the popularity of the movie. OCV
provides more copies of the most popular programming to hotels. In a typical
hotel with 300 rooms, for example, the central "head-end" video rack would
consist of approximately 120 video cassette recorders containing up to ten
copies of the most popular movies and a total of up to 50 different titles. The
OCV system includes a computerized in-room on-screen menu that offers to guests
a list of only those movie selections available to the guest at that time. As a
result, even though the on-screen menu may not
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include a list of all titles available in the particular hotel, the list
includes all movies available to the guest at that particular time, eliminating
the possibility of a guest being disappointed when the guest's selection is not
available.
The revenue generated from OCV's PPV service is dependent upon
the occupancy rate at the property, the "buy rate" or percentage of occupied
rooms that buy movies or other services at the property and the price of the
movie or service. Occupancy rates vary by property based on the property's
location and competitive position within its marketplace and over time based on
seasonal factors and general economic conditions. Buy rates generally reflect
the hotel's guest mix profile, the popularity of the motion pictures or services
available at the hotel and the guests' other entertainment alternatives. Buy
rates also vary over time with general economic conditions. Movie price levels
are established by OCV and are set based on the guest mix profile at each
property and overall economic conditions. Currently, OCV's movie prices
typically are $8.95 for the first purchase by an end-consumer and $4.95 for each
subsequent buy by the same end-consumer on the same day.
OCV obtains non-exclusive rights to show motion pictures from motion
picture studios pursuant to a master agreement with each studio. The license
period and percentage fee for each motion picture are negotiated separately,
with the studio receiving a percentage generally ranging from 30% to 50% of
OCV's gross revenue from a major motion picture. For recently released motion
pictures, OCV typically obtains rights to exhibit the picture after the motion
picture has been released in theaters, but prior to its release to the home
video market or exhibition on cable television. OCV also obtains independent
motion pictures, most of which are non-rated and are intended for mature
audiences, for a one-time flat fee that is nominal in relation to the licensing
fees paid for major motion pictures.
In addition to PPV services, OCV provides television programming for
which the hotel, rather than its guests, typically pays the charges.
Free-to-guest services allow a hotel to receive one or more
satellite-distributed programming channels, which are delivered to the rooms via
a satellite earth station over the hotel's existing master antenna system. This
service requires much less significant capital expenditures by OCV because the
earth station equipment generally either is provided independently by the hotel
or is purchased or leased from OCV. OCV also provides certain interactive
services such as video check-out, room service ordering and guest satisfaction
surveys. The OCV system also enables hotel owners to broadcast informational and
promotional messages and to monitor room availability.
For free-to-guest services, the hotel typically pays OCV a monthly
charge per room for each programming channel selected and provides these
channels to its guests free-of-charge. Premium channels, such as HBO, Showtime
and The Disney Channel, broadcast major motion pictures and specialty
programming, while non-premium channels, such as CNN and ESPN, broadcast news,
sports and informational programs. OCV believes premium programming suppliers
typically contract only with cable companies and other large volume subscribers,
such as OCV, and generally will not provide programming directly to individual
hotel properties. OCV successfully competes with local cable television
operators by customizing packages of programming to provide only those channels
desired by the hotel subscriber, which typically reduces the overall cost of the
services provided. See "--Competition." OCV obtains its free-to-guest
programming pursuant to multi-year license agreements and pays its programming
suppliers a monthly fee for each room offering the service.
Sales and Marketing
On Command Corporation believes that, along with its technological
leadership, OCV sales and marketing strategy is key to OCV maintaining its high
revenues per room relative to its major competitors. OCV's marketing efforts are
focused on business and luxury hotels with at least 150 rooms, as OCV
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believes that such hotels consistently generate the highest revenues per room in
the lodging industry. OCV also targets smaller business and luxury hotels and
select mid-priced hotels that meet OCV's profitability criteria. On Command
Corporation intends to continue targeting established hotel chains and certain
luxury and business hotel management companies and independent hotels. OCV
markets its services to hotel guests by means of on-screen advertising that
highlights the services and motion picture selections of the month.
Installation and Service Operations
At June 30, 1996, OCV's installation and service organization consisted
of approximately 212 installation and service personnel in the United States and
Canada. Unlike a number of its competitors, OCV-employed installation and
service personnel are responsible for all of the on-demand hotel rooms served by
OCV. Installation and service personnel are responsible for system maintenance
and distribution of video cassettes. OCV's installation personnel prepare site
surveys to determine the type of equipment to be installed at each particular
hotel, install OCV's systems, train the hotel staff to operate the systems and
perform quality control tests. OCV also utilizes local installation
subcontractors supervised by full-time OCV personnel to install its backlog.
OCV maintains a toll-free technical support hot line that is monitored
24 hours a day by trained support technicians. The on-line diagnostic capability
of OCV's system enables OCV to identify and resolve a majority of the reported
system malfunctions from OCV's service control center without visiting the hotel
property. When a service visit is required, the modular design of OCV's systems
generally permits installation and service personnel to replace defective
components at the hotel site.
Technology
OCV's system incorporates OCV's proprietary communications system
design with commercially manufactured components and hardware such as video
cassette players, amplifiers and computers. Because OCV's systems utilize
industry standard interfaces, OCV can integrate new technologies as they become
economically viable. Such technologies might include digital compression and
store-and-forward, which would permit multiple users to access the same stored
movie at varying start times. OCV has chosen not to use a satellite-based movie
transmission system at the present time, primarily because of the inability of
such a system to provide on-demand services on a cost-effective basis. However,
OCV believes that it can integrate satellite transmission technology and other
technology into its systems when the economic viability of such technology is
established.
Manufacturing and Suppliers
OCV contracts directly with various electronics firms for the
manufacture and assembly of its systems hardware, the design of which is
controlled by OCV. Historically, OCV has found these suppliers to be dependable
and able to meet delivery schedules on time. OCV believes that, in the event of
a termination of any of its sources, alternate suppliers could be located
without incurring significant costs or delays. However, certain electronic
component parts used with OCV's products are available from a limited number of
suppliers and can be subject to temporary shortages because of general economic
conditions and the demand and supply for such component parts. If OCV were to
experience a shortage of any given electronic part, OCV believes that
alternative parts could be obtained or system design changes implemented. In
such event, OCV could experience a temporary reduction in the rate of new room
installations and/or an increase in the cost of such installation.
The head-end electronics are assembled at OCV's facilities for testing
prior to shipping. Following assembly and testing of equipment designed
specifically for a particular hotel, the system is
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shipped to each location, where it is installed by OCV-employed and trained
technicians, typically assisted by independent contractors.
OCV also maintains direct contractual relations with various suppliers
of PPV and free-to-guest programming, including the motion picture studios and
programming networks. OCV believes its relationships with all suppliers are
good, except for Showtime Networks Inc., ("Showtime") which is disputing OCV's
performance of the contract with Showtime in connection with OCV's termination
of scheduled satellite pay-per-view service.
In addition, OCV is negotiating the renewal of a contract with HBO
which expired in June 1996, although OCV continues to provide HBO programming
under the expired contract.
SPECTRADYNE, INC.
Spectradyne is the principal operating subsidiary of SpectraVision,
which is a leading provider of interactive in-room video entertainment services
to the lodging industry. Founded in 1971, SpectraVision originally developed and
patented a system, known as "SpectraVision(TM)," which provides in-room
television viewing of recently released major and other motion pictures on a PPV
basis. Spectradyne subsequently expanded its services to include providing PPV
movies in an on-demand format, delivering free-to-guest programming and
providing interactive services that capitalize on SpectraVision's proprietary
two-way communications equipment. Spectradyne has been a major provider of these
services to the lodging industry since 1971 and at June 30, 1996, provided PPV
services to approximately 495,000 rooms in approximately 1,600 hotels.
Spectradyne provides its services under contracts to hotel chains, hotel
management companies and individually owned and franchised hotel properties.
Pay-Per-View Services
Spectradyne's primary source of revenue is providing in-room television
viewing of recently released major movies and independently produced motion
pictures for mature audiences to hotel guests on a pay-per-view basis. This
service is attractive to hotel operators because it provides a service desired
by the guests at no or minimal cost to the hotel. The movie price is
automatically charged to the guest room in which the movie was viewed. At June
30, 1996, Spectradyne provided PPV service to approximately 495,000 rooms in
approximately 1,600 hotels. Spectradyne provides its PPV service through several
products including: (i) SpectraVision(TM), a scheduled tape-based play system;
(ii) SpectraVision Guest Theater(TM), a scheduled play system utilizing
satellite delivery; (iii) Guest Choice(TM), an analog tape system which provides
on-demand viewing of up to 200 videotapes; and (iv) Digital Guest Choice, the
industry's only digital video on-demand service.
SpectraVision(TM). Spectradyne's tape-based SpectraVision(TM) system
typically offers a hotel guest eight movies per day at predetermined times. The
movie schedule typically consists of a mix of major motion pictures available
after commencing first-run theatrical exhibition and before release on cable or
home video, and independently produced movies for mature audiences. On the first
day of each month, Spectradyne typically replaces a majority of the movies on
each schedule with new features. At June 30, 1996 Spectradyne had
SpectraVision(TM) installed in 581 hotels with a total of 152,123 rooms.
Guest Theater(TM). Spectradyne's Guest Theater(TM) system utilizing
digital satellite delivery technology was introduced in the fourth quarter of
1993. Guest Theater(TM) increases the number of movies available in a
SpectraVision(TM) system from eight to 20 by varying movie selections on a
nightly basis. At June 30, 1996, Spectradyne had Guest Theater installed in
1,099 hotels with a total of 352,612 rooms.
Guest Choice(TM). In 1991, Spectradyne introduced Guest Choice(TM) to
provide hotel guests with on-demand viewing from a library of up to 200
videotapes per hotel. At June 30, 1996, Guest Choice(TM) was installed in
229,618 rooms in 508 hotels, substantially all of which also offer either
SpectraVision(TM)
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or Guest Theater(TM) services. The on-demand capability significantly increases
usage of the PPV service by the hotel guests, and Spectradyne experienced
increases in viewership on average of approximately 40% in the hotels in which
Guest Choice(TM) systems have been installed. Through Guest Choice(TM),
Spectradyne provides on-demand viewing of major motion pictures, independently
produced movies for mature audiences, and a variety of other topics, such as
exercise programs, business information, children's programming and other
special interest tapes. The Guest Choice(TM) system includes SpectraVision's
proprietary equipment and software, and utilizes a patented video rack designed
and manufactured by a third party.
Digital Guest Choice(TM). During 1994, Spectradyne introduced its new
digital video on-demand service, Digital Guest Choice, that provides on-demand
viewing of digitally stored movies. Digital Guest Choice(TM) utilizes satellite
technology to deliver digitized movies to high capacity disk arrays. The
digitized movies are stored at the hotel site and then decoded and forwarded to
the guest instantaneously and on-demand. Digital Guest Choice allows multiple
users to access the same digitally stored movie image at the same time. This
on-demand system virtually eliminates lost views due to another guest already
viewing a particular videotape or if all tape players are in use. At June 30,
1996, Spectradyne had installed Digital Guest Choice(TM) in 105 hotels with a
total of approximately 57,615 rooms.
In addition to its operations in the United States, SpectraVision
offers its services in Canada, Mexico, Puerto Rico, the U.S. Virgin Islands,
Hong Kong, Singapore, Thailand, Australia and the Bahamas. The legal entities
located in Canada, Puerto Rico, the U.S. Virgin Islands, Hong Kong, Singapore,
Thailand, and Australia are not part of the Bankruptcy Case. These entities will
be acquired by On Command Corporation as part of the Acquisition, and On Command
Corporation intends to continue to expand Spectradyne's international
operations. Spectradyne is a leading provider of in-room video entertainment in
the Asia-Pacific region and in Australia. Spectradyne serves its international
hotel customers primarily with its tape-based systems, but generally experiences
higher revenues and operating cash flow per room than in the United States
because of higher prices, higher usage and the lack of programming alternatives.
Free-To-Guest Services
Spectradyne also markets a free-to-guest service pursuant to which a
hotel may elect to receive one or more satellite programming channels, such as
HBO, CNN, ESPN, WTBS and other cable networks. The hotel typically pays
Spectradyne a fixed monthly fee per room for each programming channel selected.
At June 30, 1996, Spectradyne provided free-to-guest services to 739 hotels
serving 262,371 guest rooms. Approximately 94% of these rooms also offer
Spectradyne's PPV services.
Spectradyne provides its free-to-guest programming pursuant to
affiliation license agreements. The free-to-guest programming agreements
typically are multi-year contracts under which SpectraVision pays the supplier a
fee for each room offering this programming. Spectra Vision's license agreements
for HBO, ESPN and CNN were rejected under the Plan, and On Command Corporation
expects to offer these programming services under OCV agreements or new
agreements.
Interactive And Other Services
In addition to entertainment services, Spectradyne provides interactive
services to the lodging industry. These services generate revenues and cash
flows for Spectradyne which are independent of viewing levels. These services
utilize the two-way interactive communications capability of the PPV equipment
and include Video Checkout(TM), Video Messaging(TM), Video Breakfast Menu(TM),
Video Bellman(TM), Smart Survey(TM) and room availability monitoring. The hotel
typically pays a fixed monthly fee for each service selected. Interactive
services are also currently available in Spanish, French, and certain other
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foreign languages. Spectradyne offers its interactive services only to hotels
that have PPV systems. In most cases, the interactive services are made a part
of the contract for pay-per-view services and the service term is concurrent
with the term of the pay-per-view contract, which is typically five years. At
June 30, 1996, Spectradyne provided one or more interactive services to 234,481
rooms in 508 hotels, all of which also offer Spectradyne's PPV service.
Other revenue sources include the sale and license of Spectradyne's
proprietary equipment, the installation, design and maintenance of hotel Master
Antenna Television ("MATV") systems, sales of satellite dishes, sales of
miscellaneous parts and supplies (including television remote controls) and
advertising revenues.
Programming
Spectradyne obtains the nonexclusive rights to show recently released
motion pictures from major motion picture studios generally pursuant to a master
agreement with each studio. The license period and fee for each motion picture
are negotiated individually with each studio, which typically receives a
percentage of that picture's gross revenues generated in Spectradyne's PPV
system. Negotiated fees are related to the popularity of a given movie and the
volume of pictures licensed by SpectraVision from a given studio. Those license
fees typically decline over the time the movie is played in Spectradyne's PPV
systems. Typically, Spectradyne obtains rights to exhibit major motion pictures
during the "Hotel/Motel PPV Window," which is the time period after initial
theatrical release and before release for home video distribution or cable
television exhibition. Spectradyne attempts to license pictures as close as
possible to a motion picture's theatrical release date to benefit from the
studios' advertising and promotional efforts.
With respect to most independently produced features, Spectradyne
obtains non-exclusive rights from the producers for a flat fee for an extended
period of time.
The EDS Service And Technology Agreement
In 1993, SpectraVision entered into a ten-year agreement with EDS to
install a satellite-based digital movie delivery system to replace its existing
tape-based delivery systems. In conjunction with the installation of this
system, SpectraVision introduced its new SPEXIS computer system which allows
SpectraVision to provide new and improved interactive services. SpectraVision
and EDS first installed equipment to enable SpectraVision to provide its
scheduled play movies in a compressed digital video format on a real time basis
via satellite (Guest Theater). In late 1994, SpectraVision and EDS began the
second phase of the technology conversion and initiated the installation of a
digital video on-demand system (Digital Guest Choice) in selected hotels. This
system consists of high capacity disk arrays, which are used to store digitized
movies, delivered to a hotel via satellite, for instantaneous on-demand viewing
by hotel guests.
SpectraVision also entered into a contract with EDS whereby EDS assumed
SpectraVision's field service and Management Information Services ("MIS")
functions. The transition of SpectraVision's field service to EDS involved
numerous difficulties for field service personnel in maintaining the normal
level of repairs and maintenance required. On February 1, 1996, the Bankruptcy
Court approved a modification to the EDS Service and Technology Agreement
whereby the field service and the MIS services operations would transition back
to SpectraVision. SpectraVision is currently in the process of implementing this
agreement.
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SpectraVision's ten-year exclusive contract was rejected under the
Plan, and On Command Corporation entered into a new agreement with EDS for the
continued delivery of the satellite delivered service for up to 45 months after
the Closing at a substantially lower cost than SpectraVision was paying.
Hotel Contracts
Spectradyne typically enters into a separate contract with each hotel
for the services provided. Contracts with the corporate-managed hotels in any
one chain generally are negotiated by that chain's corporate management, and the
hotels subscribe at the direction of corporate management. In the case of
franchised or independently owned hotels, the contracts are generally negotiated
separately with each hotel. Existing contracts generally have a term of five or
seven years from the date the system becomes operational. At the scheduled
expiration of a contract, Spectradyne typically seeks to extend the term of a
hotel's contract with market competitive terms. At June 30, 1996, approximately
19.4% of the pay-per-view hotels have contracts that have expired and are on a
month-to-month basis. Approximately 27.1% of the pay-per-view hotels served by
SpectraVision have contracts that expired and are on a month-to-month basis or
have contract expiration dates during 1996.
Spectradyne currently provides PPV services to hotels that are part of
chains including Hyatt, Loew's, Four Seasons, Stouffer and Harvey Hotels.
Spectradyne offers its free-to-guest services to the same type of hotels to
which it markets its pay-per-view services. The service is provided to hotels
pursuant to contracts similar to the pay-per-view contracts, although in certain
cases, the contracts are terminable after three years, at the option of the
hotel, upon payment of a fee to Spectradyne.
Manufacturing
Prior to 1994, SpectraVision manufactured substantially all of the
equipment used in its tape-based PPV and interactive hotel systems. In December
1993, Spectradyne manufacturing capability was sold to The Cerplex Group. In
connection with this sale, Spectradyne entered into a five year contract with
Certech Technology, Inc. ("Certech"), a wholly owned subsidiary of The Cerplex
Group, to provide manufacturing and repair services of certain equipment for use
in hotel PPV and interactive systems. The agreement with Certech has been
rejectd under the Plan.
COMPETITION
There are several providers of in-room on-demand video entertainment to
the lodging industry, at least three of which (including OCV and Spectradyne)
provide pay-per-view and free-to-guest programming and other interactive
services over the hotel television. Pay-per-view, the most profitable component
of the services offered, competes for a guest's entertainment resources with
broadcast television, free-to-guest programming and cable television services.
In addition, there are a number of potential competitors that could utilize
their existing infrastructure to provide in-room entertainment to the lodging
industry, including cable companies (including wireless cable),
telecommunications companies and direct-to-home and direct broadcast satellite
companies. Some of these potential competitors are already providing
free-to-guest services to hotels and testing video-on-demand.
On Command Corporation, through OCV and Spectradyne, will be the
leading provider (by number of hotel rooms served) of in-room television
entertainment services and the leading provider (by number of hotel rooms
served) of in-room on-demand television entertainment services to the United
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States lodging industry. On Command Corporation, through OCV and Spectradyne,
will compete on a national scale primarily with LodgeNet Entertainment
Corporation ("LodgeNet"), and on a regional basis with certain other smaller
entities. Based on publicly filed information, On Command Corporation estimates
that, at June 30, 1996, LodgeNet served approximately 335,623 pay-per-view rooms
(of which approximately 284,102 are equipped with on-demand services), compared
to OCV's approximately 419,000 on-demand rooms and SpectraVision's approximately
495,000 pay-per-view rooms (of which approximately 287,233 are on-demand rooms).
Competition with respect to new guest pay contracts centers on a
variety of factors, depending upon the circumstances important to a particular
hotel. Among the more important factors are (i) the features and benefits of the
entertainment systems, (ii) the quality of the vendor's technical support and
maintenance services and (iii) the financial terms and conditions of the
proposed contract. With respect to hotel properties already receiving in-room
entertainment services, the current provider may have certain informational and
installation cost advantages as compared to outside competitors.
On Command Corporation anticipates substantial competition in obtaining
new contracts with major hotel chains. On Command Corporation believes that
hotels view the provision of in-room on- demand entertainment both as a revenue
source and as a source of competitive advantage in that sophisticated hotel
guests are increasingly demanding a greater range of quality entertainment and
informational alternatives. At the same time, On Command Corporation believes
that certain major hotel chains have awarded contracts based primarily on the
level and nature of financial and other incentives offered by the pay-per-view
service provider. While On Command Corporation believes OCV's high revenue per
room will enable On Command Corporation to continue to offer hotels attractive
economics, its competitors may attempt to gain or maintain market share at the
expense of profitability. Even if it were able to do so, On Command Corporation
may not always be willing to match the incentives provided by its competitors.
On Command Corporation believes that its other competitive advantages, together
with its long-term contracts, will substantially offset the potentially negative
effect of any incentive-based pricing by its competitors.
REGULATION
The Federal Communications Commission (the "FCC") has broad
jurisdiction over electronic communications. The FCC does not directly regulate
OCV's or Spectradyne's pay-per-view or free-to- guest services. The FCC's
jurisdiction does, however, encompass certain aspects of OCV's and Spectradyne's
operations as they relate to the offering of satellite-delivered pay-per-view
movies.
The FCC's jurisdiction also encompasses certain aspects of
Spectradyne's operations as they relate to Spectradyne's use of the radio
frequency spectrum in certain hotels served by Spectradyne. Spectradyne has, as
a matter of practice, obtained optional licenses from the FCC for a number of
its downlink, television receive-only earth stations, which are used to receive
transmissions from communications satellites in connection with Spectradyne's
free-to-guest services and obtained the required licenses for the microwave
point-to-point relay facilities.
On February 1, 1996, Congress passed The Telecommunications Act of 1996
(the "Telecommunications Act"), which was signed into law on February 8, 1996.
The Telecommunications Act will alter federal, state and local laws and
regulations for telecommunications providers and services, and may affect OCV
and Spectradyne. There are numerous rulemakings to be undertaken by the FCC that
will interpret and implement the Telecommunications Act. It is not possible at
this time to predict the outcome of such rulemakings.
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PATENTS, TRADEMARKS AND COPYRIGHTS
OCV and Spectradyne own a number of patents and patent licenses.
Although OCV and Spectradyne maintain patents for some of their products, On
Command Corporation believes that the design, innovation and quality of OCV's
and Spectradyne's products and their relations with their customers are
substantially more important to the maintenance and growth of On Command
Corporation's business. Accordingly, On Command Corporation does not believe
that it is dependent to any material extent upon any single patent or group of
patents. OCV and Spectradyne also own various tradenames, trademarks and logos
used in their businesses, which On Command Corporation intends to actively
protect.
EMPLOYEES
Pursuant to the Acquisition Agreement, On Command Corporation may
extend offers of employment to those employees of the Debtors that On Command
Corporation desires to hire. The Debtors have agreed to waive any claims against
On Command Corporation or the Debtors' employees arising from such employment.
As of June 30, 1996, OCV had 391 employees worldwide and Spectradyne
had 374 employees worldwide. OCV and SpectraVision believe that their
relationship with their employees is good.
PROPERTIES
OCV currently leases its headquarters located in Santa Clara,
California. The headquarters contain approximately 67,000 square feet of office,
light manufacturing and storage space. OCV has entered into a new lease and will
relocate its headquarters, office, light manufacturing and storage space to a
131,000 square foot facility in San Jose, California in the fourth quarter of
1996. In connection with the Acquisition, On Command Corporation will acquire,
through Spectradyne, the SpectraVision headquarters building, which contains
approximately 84,000 square feet of manufacturing and office space, of which
45,000 square feet are currently leased to Certech, which lease will not be
assumed. SpectraVision also leases office space throughout the United States,
Canada, Mexico, Puerto Rico, Hong Kong and Australia for its customer support
operations. On Command Corporation will also direct the Debtors to assume
certain other SpectraVision leases to ensure that after the Acquisition,
SpectraVision's properties are suitable and adequate for SpectraVision's
business operations.
LEGAL PROCEEDINGS
OCV is a defendant, and may be potential defendant, in lawsuits and
claims arising in the ordinary course of its business. While the outcomes of
such claims, lawsuits, or other proceedings cannot be predicted with certainty,
management expects that such liability, to the extent not provided for by
insurance or otherwise, will not have a material adverse effect on the financial
condition of OCV.
Proceedings in connection with any lawsuit against Spectradyne have
been stayed as a result of the Bankruptcy Case. None of Spectradyne's
liabilities, actual or contingent, under any lawsuit to which it is a party will
be assumed by On Command Corporation in the Acquisition.
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MANAGEMENT
On Command Corporation will initially have a Board of Directors
consisting of seven directors, five of whom initially have been selected by
Ascent and two of whom initially will be selected by the Creditors' Committee
(subject to the approval of Ascent, such approval not to be unreasonably
withheld). All such directors will be subject to approval by the Bankruptcy
Court and to requirements as to independent directors if the OCC Common Stock is
listed on the Nasdaq National Market or on another securities exchange. The
initial officers of On Command Corporation will be selected by Ascent.
DIRECTORS AND THE EXECUTIVE OFFICERS
The following table sets forth the information concerning the
individuals who are or will be the directors and officers of On Command
Corporation as of the Closing Date.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert M. Kavner............................... 52 President and Chief Executive Officer and Director
Brian A.C. Steel............................... 36 Executive Vice President, Chief Financial Officer,
Chief Operating Officer and Director
James A. Cronin, III........................... 41 Director
Charles Lyons.................................. 42 Chairman of the Board
Gary L. Wilson................................. 56 Director
Warren Y. Zeger................................ 49 Director
Robert Snyder.................................. 60 Vice Chairman (not a director)
Arthur M. Aaron................................ 38 Vice President, Acting General Counsel and Secretary
Jean Devera.................................... 46 Vice President, National Accounts
Richard Fenwick, Jr............................ 38 Vice President, Engineering
Ronald Lessack................................. 49 Vice President, Operations
Edward B. Neumann.............................. 60 Vice President, Finance
Richard Swift.................................. 44 Vice President, Sales
</TABLE>
Robert M. Kavner has been President, Chief Executive Officer and a
Director of On Command Corporation September 1996. Prior thereto, Mr. Kavner was
a principal in Kavner & Associates, a consulting firm for media and
communication companies. From June 1994 through September 1995, Mr. Kavner was
an Executive Vice President of Creative Artists Agency, Inc. Prior to joining
Creative Artists Agency, Mr. Kavner was Executive Vice President of AT&T Corp.
("AT&T") and Chief Executive Office of AT&T's Multimedia Products and Services
Group. He was also a member of AT&T's Management Executive Committee.
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From 1992 to 1994, Mr. Kavner was Group Executive for Communications Products
Group of AT&T. From 1988 to 1991, Mr. Kavner was President of AT&T's Data
Systems Group. Mr. Kavner is also a director of the Fleet Financial Corp. and
Tandem Computers, Incorporated.
Brian A.C. Steel has been Executive Vice President, Chief Financial
Officer and Chief Operating Officer of On Command Corporation since September
1996 and will become a Director of On Command Corporation on the Closing Date.
Prior thereto, Mr. Steel was Executive Vice President, Strategic Development
and Chief Financial Officer for TELE-TV since August 1995. Prior to joining
TELE-TV, Mr. Steel was Vice President, Strategic Development of Pacific Telesis
Enhanced Services, General Manager of Pacific Telesis Electronic Publishing
Services and Executive Director, Corporate Development from January 1994 to July
1995. Prior to joining Pacific Telesis, Mr. Steel was a principal in Conversion
Management Associates from January 1993 to December 1993. From June 1986 to
December 1992, Mr. Steel was employed by Shearson Lehman Brothers Inc. as
Senior Vice President, Real Estate Merchant Banking Group and First Vice
President, E.F. Hutton Properties.
James A. Cronin, III has been a Director of On Command Corporation
since its formation in July 1996 and was Vice President and Acting Chief
Financial Officer from July 1986 until September 1996. Mr. Cronin has been Chief
Operating Officer and Executive Vice President -- Finance for Ascent since June
1996. Prior to joining Ascent, Mr. Cronin served as a financial and management
consultant from 1992 through June 1996 and as a partner in Alfred Checchi
Associates, a merchant bank, from 1990 through 1991. Mr. Cronin is also a
director of Landair Services, Inc. and Eastbay, Inc.
Charles Lyons has been Chairman of the Board of On Command Corporation
since its formation in July 1996. Mr. Lyons has been President, Chief
Executive Officer and a director of Ascent Entertainment Group, Inc. since
October 1995, and prior to that he was President and a director of Ascent's
predecessors since February 1992. He was Vice President and General Manager,
COMSAT Video Enterprises, now Ascent Network Services, Inc., from October 1990
to January 1992. Prior to joining COMSAT, Mr. Lyons was with Marriott
Corporation from 1982 to October 1990 in various executive positions. Mr. Lyons
has been Chairman of the Board of Directors of OCV since December 1994 and a
director since 1992.
Gary L. Wilson will become a Director of On Command Corporation on the
Closing Date. Mr. Wilson has been co-chairman of the board and a principal
investor in NWA, Inc., a parent of Northwest Airlines and several other
transportation-related subsidiaries since January 1991. He served as Executive
Vice President and Chief Financial Officer of the Walt Disney Company from
1985 to 1990. Mr. Wilson is also a director of The Walt Disney Company and CB
Commercial.
Warren Y. Zeger will become a Director of On Command Corporation on
the Closing Date. He has been Vice President, General Counsel and Secretary of
COMSAT since August 1994. He was Vice President and General Counsel of COMSAT
from March 1992 to July 1994, Acting General Counsel from September 1991 to
March 1992 and Associate General Counsel of COMSAT and Vice President, Law of
its World Systems Division from February 1988 to September 1991. Mr. Zeger was
a director of OCV from December 1994 through April 1996.
Robert Snyder has been Vice Chairman, but not a Director, of On
Command Corporation since September 1996, prior to which he was President and
Chief Executive Officer of On Command Corporation since August 1996. Mr. Snyder
has been President and a director of OCV since 1987 and Chief Executive Officer
of OCV since July 1995.
Arthur M. Aaron has been Vice President, Acting General Counsel and
Secretary of On Command Corporation since its formation in July 1996. Mr. Aaron
has been Vice President, Business and Legal Affairs for Ascent since April
1995. Prior thereto, he was a General Attorney in the Office of the General
Counsel of COMSAT since July 1993. From October 1987 to July 1993, Mr. Aaron
was an attorney at the law firm of Skadden, Arps, Slate, Meagher & Flom in
Boston, Massachusetts.
Jean Devera has been Vice President, National Accounts of On Command
Corporation since September 1996. Prior to joining On Command
Corporation, Ms. Devera was Vice President, National Accounts of OCV since
January 1994 and prior to that she was Director of Sales Administration of
COMSAT Video Enterprises.
Richard Fenwick, Jr. has been Vice President, Engineering of On
Command Corporation since September 1996. Mr. Fenwick has been
Vice President, Engineering of OCV since September 1992, prior to which Mr.
Fenwick served in various engineering and program management positions at
Electrospace Systems, Inc.
Ronald Lessack has been Vice President, Operations of On Command
Corporation since September 1996. Prior to joining On Command Corporation, Mr.
Lessack was Vice President, Operations of OCV since January 1994. Prior to that
he was self employed as a consultant from July 1992 to February 1994 and prior
to that he was a Vice President of Watkins Johnson Co. Group.
Edward B. Neumann has been Vice President, Finance of On Command
Corporation since September 1996. Prior to joining On Command
Corporation, Mr. Neumann was Vice President, Finance and Chief Financial
Officer of OCV for more than five years.
Richard Swift has been Vice President, Sales of On Command Corporation
since September 1996. Prior to joining On Command Corporation,
Mr. Swift was Vice President, Sales of OCV since August 1995 and prior to that
he was Vice President, Sales of COMSAT Video Enterprises since 1991.
COMMITTEES OF THE BOARD OF DIRECTORS
On Command Corporation intends to create an Audit and Finance
Committee, which will include independent directors and will review the results
and scope of the audit and other services provided by On Command Corporation's
independent auditors. The On Command Corporation Board of Directors also intends
to create a Nominating and Compensation Committee. The On Command Corporation
Board of Directors will appoint members to these committees within three to six
months after the completion of the Transactions.
DIRECTORS' COMPENSATION
On Command Corporation intends to pay directors who are not employees
of On Command Corporation, its subsidiaries or, for so long as Ascent owns 50%
of the outstanding OCC Common Stock, Ascent or Ascent's subsidiaries or
affiliates, compensation, which may be annual, quarterly, and/or for each
attended meeting of the On Command Corporation Board of Directors or committee
thereof and each meeting held pursuant to a special assignment in amounts to be
determined shortly after the Closing. On Command Corporation also intends to
reimburse directors for ordinary and necessary out-of-pocket expenses incurred
in connection with attending meetings of the Board of Directors or its
committees.
EXECUTIVE COMPENSATION
The following table shows the compensation received for the three
fiscal years ended December 31, 1995 by (i) the Vice Chairman of On Command
Corporation in his capacity as President and Chief Executive of OCV, (ii)
Richard Fenwick, Vice President, Engineering of On Command Corporation in his
capacity as Vice President, Engineering of OCV since September 1992, (iii)
Ronald Lessack, Vice President, Operations, of On Command Corporation in his
capacity as Vice President, Operations of OCV and (iv) Arthur M. Aaron, Vice
President and Acting General Counsel of On Command Corporation in his
capacity as Vice President, Business and Legal Affairs of Ascent (the officers
identified in clauses (i), (ii), (iii) and (iv) above being hereinafter referred
to as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION
NAME AND POSITION YEAR ($) ($) ($)(1) ($)(2) (#)(2) ($)(3)
- ------------------------- ---- -------- -------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert Snyder 1995 $285,779 $150,000 -- $ -- 100,000* $4,620
Vice Chairman 5,000**
1994 199,273 100,000 -- 137,500 10,000** 4,620
1993 168,840 50,000 -- 508,126 -- --
Richard Fenwick, Jr. 1995 151,250 15,000 -- -- 10,000* 1,540
Vice President, 2,500**
Engineering 1994 112,664 -- -- -- -- 14,275
1993 102,186 -- -- -- -- --
Ronald Lessack 1995 161,663 20,000 -- -- 10,000* 4,620
Vice President, 2,500**
Operations 1994 108,461 50,000 -- -- -- 3,425
Arthur M. Aaron 1995 122,400 30,000 2,690 19,688 100,000* 20,084
Vice President and 1994 83,882 15,000 -- 27,500 1,500** 11,699
Acting General Counsel 1993 38,308 7,500 -- 13,125 700** 5,639
</TABLE>
(1) Other Annual Compensation shown for 1993, 1994 and 1995 does not include
perquisites and other personal benefits because the aggregate amount of such
compensation does not exceed the lesser of (i) $50,000 or (ii) 10% of
individual combined salary and bonus for the Named Executive Officer in
each year.
(2) Restricted stock awards include COMSAT restricted stock awards ("RSAs"),
COMSAT restricted stock units ("RSUs") and COMSAT phantom stock units
("PSUs"). Dividends are paid on RSAs granted in 1993 and 1995. For
performance-based RSAs granted in 1994, dividend equivalents are paid with
respect to the performance period, and dividends will be paid during the
subsequent vesting period on shares earned under the applicable performance
measures. Half of the RSAs granted to the Named Executive Officers in 1994
will be forfeited in 1996 based on the non-satisfaction of certain required
performance measures during 1994 and 1995. Dividend equivalents are paid
on RSUs and PSUs. The number and value of the aggregate restricted stock
holdings of Messrs. Snyder and Aaron as of December 31, 1995, are as
follows:
(footnotes continued on next page)
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<PAGE> 78
<TABLE>
<CAPTION>
NUMBER OF RSAs/RSUs/PSUs VALUE AS OF 12/31/95
------------------------ ---------------------
<S> <C> <C>
Mr. Snyder............................. 25,000 476,563
Mr. Aaron.............................. 2,400 45,750
</TABLE>
All options marked with a single asterisk (*) are options to purchase Ascent
Common Stock, and options marked with a double asterisk (**) are options to
purchase COMSAT Common Stock.
(3) For 1995, all other compensation for Mr. Snyder, Mr. Fenwick and
Mr. Lessack consisted of contributions by OCV to OCV's 401(k) Savings Plan
on behalf of each such Named Executive Oficer. All other compensation for
Mr. Aaron in 1995 includes the following elements: (i) unused credits under
Ascent's cafeteria plan that were paid in cash; (ii) time off buy-back
under Ascent's cafeteria plan that was paid in cash; (iii) supplemental
bonuses; (iv) contributions by Ascent to COMSAT's 401(k) Plan and (v)
dividend matching payments and moving expenses.
4. Mr. Lessack's employment with OCV commenced in February 1994.
OPTION GRANTS
The following table sets forth information on options granted to the Named
Executive Officers in 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES EXERCISE PRICE PRESENT VALUE
GRANTED (#)(1) IN FY (2) ($/SH) EXPIRATION DATE (3)
NAME
<S> <C> <C> <C> <C> <C>
ASCENT COMMON
STOCK
Robert Snyder 100,000 10.83 $15.000 12/18/05 $711,000
Arthur M. Aaron 100,000 10.83 15.00 12/18/05 711,000
Richard Fenwick, Jr. 10,000 1.08 15.00 12/18/05 71,100
Ronald Lessack 10,000 1.08 15.00 12/18/05 71,100
COMSAT COMMON
STOCK
Robert Snyder 5,000 0.57 19.3125 01/20/05 $26,700
Arthur M. Aaron 1,500 0.17 19.3125 01/20/05 8,010
Richard Fenwick, Jr. 2,500 0.28 19.3125 01/20/05 13,350
Ronald Lessack 2,500 0.28 19.3125 01/20/05 13,350
</TABLE>
(1) The Ascent option grants were made effective December 18, 1995 and vest as
follows: 10% on December 18, 1996; 15% on December 18, 1997; 25% on December
18, 1998; another 25% on December 18,1999; and the remaining 25% on December
18, 2000; provided that these options will not vest to any extent prior to
December 18, 1998, if COMSAT continues to own at least 80% of Ascent. The
COMSAT options shown were granted on January 20, 1995, to acquire COMSAT's
Common Stock and vest as follows: 25% on January 20, 1996; another 25% on
January 20, 1997; and the remaining 50% on January 20, 1998.
(2) The total number of Ascent options granted to Ascent employees in 1995 was
923,000; the total number of COMSAT options granted to key employees of
COMSAT and its subsidiaries in 1995 was 877,650.
(3) Ascent and COMSAT used the Black-Scholes option pricing model to determine
grant date present values using the following assumptions; a dividend yield
of 0.0% for Ascent and 3.38% for COMSAT; stock price volatility of 0.28%; a
10-year option term; a risk-free rate of return of 5.71% for Ascent and
5.84% for COMSAT; a retention discount of 3.0%; and the vesting schedule
described in footnote 1 above for Ascent and COMSAT. The use of this model
is in accordance with SEC rules; however, the actual value of an option
realized will be measured by the difference between the stock price and the
exercise price on the date the option is exercised.
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<PAGE> 79
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information on (1) options exercised by
the Named Executive Officers in 1995, and (2) the number and value of their
unexercised options as of December 31, 1995
AGGREGATED OPTION EXERCISES IN 1995, AND 12/31/95 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF THE UN-
UNDERLYING UNEXERCISED EXERCISED IN-THE-MONEY
OPTIONS AT 12/31/95 OPTIONS AT 12/31/95
---------------------- ----------------------
SHARES
UNDERLYING UN- UN-
OPTIONS VALUE EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
EXERCISED REALIZED (#) (#) ($) ($)
----------------- ------------- --------------- --------------- ---------------- ------------
NAME
<S> <C> <C> <C> <C> <C> <C>
ASCENT OPTIONS
Robert Snyder* -0- -0- -0- 100,000 -0- $25,000
Arthur M. Aaron -0- -0- -0- 100,000 -0- 25,000
Richard Fenwick, Jr.* -0- -0- -0- 10,000 -0- 2,500
Ronald Lessack -0- -0- -0- 10,000 -0- 2,500
COMSAT OPTIONS
Robert Snyder* -0- -0- 2,500 12,500 -0- -0-
Arthur M. Aaron -0- -0- 175 2,025 -0- -0-
Richard Fenwick, Jr. -0- -0- -0- 2,500 -0- -0-
Ronald Lessack -0- -0- -0- 2,500 -0- -0-
</TABLE>
* Messrs. Snyder, Fenwick and Lessack also hold options to purchase 40,000,
17,500 and 20,000 shares of the Common Stock of OCV, respectively of which
14,000, 9,500 and 4,000, respectively were exercisable at December 31, 1995.
The value of these options is not reported because OCV Common Stock is not
publicly traded and the fair market value at December 31,1995 is not readily
determinable.
Employment Agreements
On Command Corporation and each of Messrs. Kavner and Steel entered into
employment agreements that expire on September 11, 2000. Pursuant to the
agreements, Mr. Kavner's and Mr. Steel's base salary will be $500,000 and
$290,000 per year, respectively, subject to increases at the discretion of the
board of directors of On Command Corporation. Messrs. Kavner and Steel will also
be eligible for annual bonuses based on performance measures determined by the
Compensation Committee of the Board of Directors (the "Compensation Committee")
with a target bonus equal to 70% each such executive's respective base salary
for achieving 100% of the target level for the performance measures. In
addition, Messrs. Kavner and Steel have been granted options to purchase
1,041,562 and 385,312 shares of OCC Common Stock, respectively, exercisable at
the following per-share prices: (i) 80% of each such executive's options shall
be exercisable at a per-share price equal to $15.33 and (ii) 20% of each such
executive's options shall be exercisable at a per-share price equal to $17.63;
provided, however, that if the average of the daily high and low bid prices of
the OCC Common Stock on the Nasdaq National Market for the 20 trading days
following the third trading day after On Command Corporation's public release of
financial results for the third quarter of 1996 is less than $17.63 per share,
then the exercise price will be such average. The options will vest 25% on
September 11, 1997, an additional 25% on September 11, 1998 and the remaining
50% on September 11, 1999. The options will expire at the earlier of (i) three
months after the date upon which such executive is terminated for "cause" (as
defined in each such executive's employment agreement); (ii) one year after each
such executive's employment agreement is terminated as a result of such
executive's death or (iii) on September 11, 2006. Messrs. Kavner and Steel will
also be entitled to participate in group health, dental and disability insurance
programs and any group profit sharing, deferred compensation, life insurance or
other benefit plans as are generally made available by On Command Corporation to
its senior executive officers on a favored nations basis.
In addition, the employment agreements for each of Messrs. Kavner and
Steel provide that upon a "Change of Control Event" (as defined in such
agreement), each of Messrs. Kavner and Steel will be entitled to elect to
terminate his employment with On Command Corporation and, for the longer of (a)
the remainder of the term of such executive's employment agreement as if such
agreement had not been terminated and (b) one year following the date of such
termination (such period being the "Duration Period"), will receive: (i) his
then current base salary; (ii) an annual bonus equal to 70% of his then current
base salary for each year during the Duration Period; and (iii) all other
benefits provided pursuant to such executive's employment agreement. A "Change
of Control Event" is defined in the employment agreements as an affirmative
determination, either jointly by either Mr. Kavner or Mr. Steel, respectively,
and the Board of Directors or pursuant to an arbitration which either Mr. Kavner
or Mr. Steel, respectively, has the right to invoke, that any "change of
control" of On Command Corporation (defined as an event as result of which (i) a
single person or entity other than Ascent owns 50% or more of the voting stock
of On Command Corporation or (ii) a single person or entity other than COMSAT
owns 50% or more of the voting stock of Ascent) or prospective change of control
would be reasonably likely to have a materially detrimental effect on either the
day-to-day circumstances of Mr. Kavner's or Mr. Steel's employment,
respectively, or the compensation payable to Mr. Kavner or Mr. Steel,
respectively, under his employment agreement.
The employment agreement with Mr. Steel provides that, in order to
facilitate such executive's transition to On Command Corporation, Ascent will
cause a $240,000 unsecured, no interest loan (the "Transition Loan") to be made
to Mr. Steel at the Effective Time. The Transition Loan will be due and payable
by Mr. Steel on the first anniversary of the Effective Time; provided that
Mr. Steel is still employed by Ascent, On Command Corporation, OCV or any of
their successors or affiliates on such first anniversary date. If Mr. Steel's
employment has terminated other than for cause prior to such date, the
Transition Loan will be forgiven in its entirety.
OCV and Mr. Snyder have entered into an employment agreement that
expires in 1999. Pursuant to the agreement, Mr. Snyder's salary for 1996 was set
by the board of directors of OCV at $300,000, and Mr. Snyder is eligible for
incentive bonus compensation to be established by mutual consent of Mr. Snyder
and the board of directors of OCV. The agreement also provides that, upon
termination of his employment with OCV, Mr. Snyder will provide exclusive
consulting services to OCV for a period of seven years, for which OCV will pay
Mr. Snyder $20,000 per year.
ON COMMAND CORPORATION STOCK OPTION PLAN
OCV adopted a stock option plan (the "OCV Stock Option Plan"), expiring
in June 1999, under which employees, directors and consultants of OCV may be
granted incentive or nonstatutory stock options for the purchase of OCV Common
Stock. Incentive stock options are granted at fair value on the date of grant as
determined by the OCV Board of Directors and nonstatutory stock options are
granted at a price per share fixed by the OCV Board of Directors, but not less
than 85% of the fair value on the date of grant. Options granted under the OCV
Stock Option Plan generally vest over a five-year period and are exercisable in
installments of 20% one year from the date of grant and ratably per month
thereafter. Unvested options are cancelled upon termination of employment.
Certain OCV employees have also received options to purchase shares of
common stock of Ascent pursuant to the 1995 Ascent Key Employee Stock Plan (the
"Ascent Stock Plan"). It is currently
77
<PAGE> 80
anticipated that such employees shall retain these options at least so long as
Ascent retains a beneficial ownership of at least 50% of the outstanding shares
of OCC Common Stock.
All of SpectraVision's employee stock options were terminated in
connection with the confirmation of the Plan.
Effective upon consummation of the Transactions, On Command Corporation
will adopt a stock incentive plan substantially similar to the Ascent Stock Plan
(the "On Command Corporation Stock Plan"). The On Command Corporation Stock
Plan is intended to assist On Command Corporation in attracting and retaining
management employees of outstanding ability and to promote the identification
of their interests with those of the stockholders of On Command Corporation.
The On Command Corporation Stock Plan permits the grant of non-qualified stock
options and incentive stock options to purchase shares of OCC Common Stock,
stock appreciation rights (in connection with option grants and alone), awards
of shares of restricted stock and other stock and stock-based awards covering
up to 3,000,000 authorized but unissued or reacquired shares of OCC Common
Stock, subject to adjustment to reflect events such as stock dividends, stock
splits, recapitalizations, mergers or reorganizations of or by On Command
Corporation.
Unless sooner terminated by the On Command Corporation Board of
Directors, the On Command Corporation Stock Plan will expire ten years after
the Closing Date. Such termination will not affect the validity of any option
or other award outstanding under the On Command Corporation Stock Plan on the
date of termination.
The On Command Corporation Stock Plan is administered by the
Compensation Committee and is intended to satisfy the requirements of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"). Subject to the terms and conditions of the On Command Corporation
Stock Plan, the Compensation Committee has the authority to select the persons
to whom grants are to be made, to designate the number of shares of Common
Stock to be covered by such grants, to determine the exercise price of options,
to establish the period of exercisability of awards, and to make all other
determinations and to take all other actions necessary or advisable for the
administration of the On Command Corporation Stock Plan.
Without limiting the Committee's authority to establish another
exercise price, awards granted under the On Command Corporation Stock Plan will
generally be granted at an exercise price equal to the then fair market value
per share of OCC Common Stock. Grants under the On Command Corporation Stock
Plan may provide, in the Compensation Committee's discretion, for their
expiration or acceleration upon the occurence of certain events set forth in
the On Command Corporation Stock Plan.
On Command Corporation expects to make grants of non-qualified stock
options to purchase Common Stock (the "Options") contemporaneously with the
Closing at an exercise price to be determined by the Compensation Committee.
The Compensation Committee may provide in the terms of an individual Option
that exercisability of the Option will depend on On Command Corporation's
achievement of certain performance goals. The Compensation Committee also may,
in its discretion, provide that Options expire at specified times following, or
become exercisable in full upon, the occurrence of certain events, including a
change of control, death, disability or retirement.
The On Command Corporation Stock Plan permits the payment of the Option
exercise price to be made in cash (which may include an assignment of the right
to receive the cash proceeds from the sale of Common Stock subject to the
Option pursuant to a "cashless exercise" procedure) or by delivery of shares of
Common Stock valued at their fair market value on the date of exercise, or by
delivery of property of any kind constituting good and valuable consideration
or by delivery of an interest bearing recourse promissory note payable to On
Command Corporation, or by delivery of a combination of the foregoing.
Options granted under the On Command Corporation Stock Plan shall not
be transferable otherwise than by will, the laws of descent and distribution
and may be exercised during the optionee's lifetime only by the optionee. See
"The Transactions--The Merger--Treatment of OCV Employee Stock Options."
78
<PAGE> 81
BENEFICIAL OWNERSHIP OF OCV AND OCC COMMON STOCK
The following table sets forth, as of September 15, 1996, (i) the
number of shares and percentage of OCV Common Stock beneficially owned by each
person known to OCV who may be deemed to be the beneficial owner of more than 5%
of the outstanding OCV Common Stock, each director of OCV, the Named Executive
Officers and all directors and executive officers of each of OCV and On Command
Corporation as a group and (ii) the number of shares and percentage of OCC
Common Stock that would have been owned by each such person had the
Transactions occurred on such date (assuming no holder of OCV Common Stock
exercises its appraisal rights and before giving effect to any Reserved Stock
and, unless otherwise indicated, the exercise of any Warrants):
<TABLE>
<CAPTION>
OCV On Command Corporation
------------------------------ -------------------------------
Number of Number of
Name and Address Shares Percentage(1) Shares Percentage(1)
---------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Ascent Entertainment Group, Inc. (2)(5)........... 6,038,650 78.9% 18,273,394 58.7%
Hilton Hotels Corporation(1)...................... 821,122 10.8 2,331,986 7.8
9336 Civic Center Drive
Beverly Hills, California 90210
Richard C. Fenwick, Sr............................ 175,000 2.3 497,000 1.7
2 Arrowhead Way
Westin, Connecticut 06883
Robert Snyder (3)(4).............................. 86,498 1.0 245,654 *
Robert M. Kavner (3).............................. -- -- -- --
Brian A.C. Steal.................................. -- -- -- --
Charles Lyons (5)................................. -- -- -- --
C.J. Silas (5).................................... -- -- -- --
James A. Cronin, III (3).......................... -- -- -- --
Wesley D. Minami (5).............................. -- -- -- --
Gary L. Wilson (6)................................ -- -- 3,450,000 10.3
Warren Y. Zeger................................... -- -- -- --
Arthur M. Aaron (5)............................... -- -- -- --
Richard Fenwick, Jr. (3)(4)....................... 15,166 * 43,071 *
Ronald Lessack (3)(4)............................. 12,000 * 34,080 *
All executive officers and directors of OCV
as a group (4 persons)............................ 292,786 3.8 831,512 2.8
All executive officers and directors of On Command
Corporation as a group (11 persons) (4)........... 117,786 1.5 3,784,512 11.3
</TABLE>
* Less than 1%.
(footnotes continued on next page)
(1) Assumes the exercise by Hilton of its option to purchase 410,561 shares of
OCV Common Stock anticipated to occur before the Effective Time.
(2) COMSAT owns 80.7% of the outstanding common stock of Ascent. COMSAT and
Ascent have entered into agreements governing certain relationships between
the companies. The number of shares of On Command Corporation shown to be
owned by Ascent includes shares purchasable under Series A Warrants to be
issued to Ascent, but excludes shares purchasable by Gary Wilson Partners
upon exercise of the Series C Warrants. Gary Wilson Partners has agreed to
vote such shares at the direction of Ascent.
(3) The address of each such person is c/o On Command Video Corporation, 3301
Olcott Street, Santa Clara, California 95054.
(4) Includes shares of OCV Common Stock purchaseable upon exercise of options as
follows: Mr. Snyder, 31,498 shares; Mr. Fenwick, 14,166 shares; Mr.
Lessack, 11,000 shares; and Mr. Neumann, 2,000 shares.
(5) The address of such person is c/o Ascent Entertainment Group, Inc., One
Tabor Center, 1200 Seventeenth Street, Denver, Colorado 80202.
(6) Includes shares purchasable under the Series C Warrants to be issued to Gary
Wilson Partners. The address of such person is c/o Gary Wilson Partners,
9665 Wilshire Boulevard, Suite 200, Beverly Hills, California 90212.
In July 1993, OCV sold 410,561 shares of OCV Common Stock then
representing a 10% ownership interest to Hilton Hotels Corporation ("Hilton")
for $10.3 million pursuant to a stock purchase agreement, dated July 7, 1993
(the "Stock Purchase Agreement"). The Stock Purchase Agreement provided that,
until May 1998, Hilton may sell the shares back to OCV after the earlier of (i)
June 1, 1995 or (ii) the date Hilton determines that ownership of such shares
may directly or indirectly jeopardize its ability to retain material licenses in
connection with its business, at a price equal to the original purchase price
plus interest from the date the shares were initially purchased, at an interest
rate equal to the average of the one-year U.S. Treasury Bill rate compounded
annually.
In conjunction with the Stock Purchase Agreement, Hilton received an
option (the "Hilton Option") to purchase an additional 410,561 shares of OCV
Common Stock at the initial price of the OCV
79
<PAGE> 82
Common Stock sold to Hilton under the Stock Purchase Agreement, escalating 10%
per year. The Hilton Option is currently exercisable at $27.50 per share.
The Stock Purchase Agreement was amended by a letter agreement dated
December 8, 1995 in response to certain concerns of Hilton with respect to the
valuation of the consideration received by OCV in connection with the
contribution by Ascent of certain assets included in its Satellite Cinema
division for OCV Common Stock (the "Contribution"). The December 8, 1995 letter
agreement provided that: (a) an independent investment banking firm would be
engaged to review, by February 10, 1996, the Contribution with respect to the
value of the consideration received by OCV and the value of the OCV shares
issued in such transaction (the "Valuation"); (b) the parties agreed to be bound
by the recommendation of such investment banking firm, including, if necessary,
at Ascent's option, paying cash to OCV or the minority stockholders of OCV; (c)
an investment banking firm selected by Hilton will, if Hilton requests and at
its expense, be engaged to attempt to locate a buyer for its equity interests in
OCV at fair market value; and (d) if Ascent disposes of any or all of its
interests in OCV to any person that is not an affiliate of OCV, the minority
stockholder will be afforded an opportunity to dispose of a pro rata portion of
its position in OCV on the same terms. In the COMSAT Agreement, COMSAT agreed to
indemnify Ascent for the cost to Ascent of any adjustments to its interest in
OCV as a result of the Valuation.
In early 1996, Ascent, OCV and Hilton agreed that Hilton would engage a
valuation consultant, and, based on the results of that consultant's work,
Ascent, OCV and Hilton negotiated a resolution of the concerns raised by Hilton.
As a result, the parties entered into a letter agreement in August 1996,
providing for the cancellation of 470,588 shares of OCV Common Stock issued to
Ascent pursuant to the Contribution. Pursuant to the COMSAT indemnity set forth
in the COMSAT Agreement, this adjustment will result in a payable from COMSAT to
Ascent of approximately $1.8 million. In connection with the August 1996 letter
agreement, Hilton and OCV entered into an amendment of the Stock Purchase
Agreement that provided for the extension of the date on which the exercise
price of the Hilton Option would increase from June 1, 1996 to the later of (i)
90 days after the closing or the abandonment of the Transactions or (ii)
December 1, 1996. The amendment also provides that if in connection with the
Transactions, OCV Common Stock or On Command Corporation securities into which
it is converted are registered under the Exchange Act and Hilton's shares of OCV
Common Stock (or On Command Corporation securities into which they are
converted) are freely tradeable, (a) all of OCV's obligations under Section 5 of
the Stock Purchase Agreement (including Hilton's right to sell the shares back
to OCV described above) will terminate and (b) the Hilton Option will terminate
as of the closing of the Transactions, unless exercised before such closing. OCV
has declared a contingent dividend to holders of its common stock on September
18, 1996 payable out of the proceeds of the exercise of the Hilton Option. The
amendment provides that Hilton may pay a portion of the exercise price of its
option in the form of a promissory note secured by the stock purchased, which
note would be dividended to Ascent, would be payable in 90 days and would be
subject to mandatory prepayment in 60 days if the OCC Common Stock is trading at
a price in excess of 120% of Hilton's exercise price.
The August 1996 letter agreement provides that if Hilton exercises the
Hilton Option by reason of the closing of the Transactions, Hilton will have the
right to put to Ascent all, but not less than all, of those Hilton Option shares
of OCV Common Stock (or OCC Common Stock or Warrants into which they are
converted) Hilton still owns on the date 90 days after the closing of the
Transactions at the same exercise price in the Hilton Option.
80
<PAGE> 83
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following describes the principal federal income tax consequences
of the Merger and of the ownership of OCC Common Stock and Series A Warrants,
assuming that the Merger is consummated as contemplated herein. This discussion
is based on current laws and interpretations thereof, and there can be no
assurance that future legislation, regulations, administrative rulings or court
decisions will not adversely affect the accuracy of the statements contained
herein. The discussion assumes that the OCV Common Stock exchanged by each
holder in the Merger is held as a capital asset and does not take account of
rules that may apply to holders of OCV Common Stock that are subject to special
treatment under the Code (including, without limitation, insurance companies,
dealers in securities, certain retirement plans, financial institutions,
tax-exempt organizations, holders who are not U.S. Holders (as defined below)
and OCV stockholders who acquired OCV Common Stock pursuant to the exercise of
an employee stock option or otherwise as compensation). Also, the discussion
does not address state, local or foreign tax consequences. Consequently, each
OCV stockholder should consult its own tax advisor as to the specific tax
consequences of the Merger and ownership of OCC Common Stock and Series A
Warrants to that stockholder.
As used in this section, a "U.S. Holder" of a share of OCC Common
Stock means a holder that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate or
trust the income of which is subject to federal income taxation regardless of
its source.
The Merger
Tax Opinions. The obligations of OCC and of OCV to consummate the
Merger are subject to the receipt of the opinion of tax counsel outlined below,
unless waived. Neither OCC nor OCV has requested or will request an advance
ruling from the Internal Revenue Service (the "IRS") as to the tax consequences
of the Merger.
As of the date of this Information Statement/Prospectus, Latham &
Watkins, counsel to OCV, has advised OCV that, in their opinion, based on
certain customary representations and assumptions referred to in such opinions,
(i) the Merger will be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 368(a) of the Code and (ii) On
Command Corporation, Merger Sub and OCV will each be a party to the
reorganization within the meaning of Section 368(b) of the Code.
Tax Treatment of Holders of OCV Common Stock. Exchanges of OCV Common
Stock pursuant to the Merger will have the federal income tax consequences
described below. In considering the following discussion, a holder should be
aware that (under Section 318 of the Code) the holder may be considered to own,
after the Merger, OCC Common Stock owned (and in some cases constructively
owned) by certain related individuals and entities and OCC Common Stock which
the holder (or such individuals and entities) has the right to acquire upon the
exercise of options.
Exchange of OCV Common Stock for a Combination of OCC Common Stock
and Series A Warrants. A holder of OCV Common Stock who, pursuant to the Merger,
exchanges all of the OCV Common Stock actually owned by him for a combination of
OCC Common Stock and Series A Warrants will not recognize any loss on such
exchange. Such holder will realize gain equal to the excess, if any, of (i) the
sum of the fair market value of the Series A Warrants and the aggregate fair
market value of the OCC Common Stock received in the Merger over (ii) such
holder's tax basis in the OCV Common Stock exchanged therefor. However, any such
gain will be recognized (and thus subject to tax)
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only to the extent of the fair market value of the Series A Warrants received.
In addition, such holder may recognize additional gain if cash is received in
lieu of a fractional share of OCC Common Stock, as discussed below.
The gain recognized by a holder of OCV Common Stock who receives a
combination of OCC Common Stock and Series A Warrants pursuant to the Merger
will be treated as long- or short-term capital gain (depending on whether such
holder held the OCV Common Stock for more than one year) unless the receipt of
the Series A Warrants has the effect of a distribution of a dividend as provided
in Section 356(a)(2) of the Code, in which case such recognized gain would be
treated as dividend income to the extent of such holder's ratable share of the
accumulated earnings and profits of OCV (or possibly the total earnings and
profits of OCV and On Command Corporation).
The principles applicable under Section 302 of the Code are used to
determine dividend equivalency under Section 356(a)(2). Section 302 determines
whether a stockholder who received a distribution in redemption of stock of a
corporation will be treated as having received a dividend or as recognizing a
capital gain or loss. In applying the principles of Section 302, a holder of OCV
Common Stock will be treated as if he first exchanged all his shares of OCV
Common Stock solely for OCC Common Stock and then On Command Corporation
immediately redeemed a portion of such OCC Common Stock in exchange for the
Series A Warrants such stockholder actually received in the Merger.
Under the principles of Section 302, gain recognized by a holder on the
exchange that is attributable to the Series A Warrants will be taxed as capital
gain if the deemed redemption from such holder (i) is a "substantially
disproportionate redemption" of stock or (ii) is "not essentially equivalent to
a dividend" with respect to such holder (taking into account, in either case,
the constructive ownership rules of Section 318 of the Code and all other actual
and deemed redemptions from such holder and other holders of OCC Common Stock
and other transactions undertaken as part of the plan or reorganization).
The deemed redemption of a holder's OCC Common Stock will be a
"substantially disproportionate redemption" if, as a result of the deemed
redemption, there is a greater than 20% reduction in (1) the percentage of all
shares of OCC Common Stock owned by the holder measured immediately after the
redemption as compared to such percentage measured immediately before the
redemption and (2) the percentage of the voting power of all OCC Common Stock
represented by all OCC Common Stock owned by the holder measured immediately
after the redemption as compared to such percentage measured immediately before
the redemption.
Whether the deemed exchange and subsequent redemption transaction would
be "not essentially equivalent to a dividend" with respect to a holder of OCV
Common Stock will depend upon the holder's particular circumstances. If the
deemed redemption is to qualify as "not essentially equivalent to a dividend,"
however, it must, in any event, result in a "meaningful reduction" in such
holder's deemed percentage stock ownership of On Command Corporation. In
determining whether a reduction in such holder's percentage ownership has
occurred, (i) the percentage of the outstanding stock of On Command Corporation
that such OCV stockholder is deemed actually and constructively to have owned
immediately before the deemed redemption by On Command Corporation is compared
to (ii) the percentage of the outstanding stock of On Command Corporation
actually and constructively owned by such holder immediately after the deemed
redemption by On Command Corporation. Based upon a published ruling of the IRS,
the receipt of Series A Warrants in the Merger would not be characterized as a
dividend if a holder's percentage stock ownership interest in On Command
Corporation and OCV prior to the Merger is minimal, such holder exercises no
control over the affairs of On Command Corporation or OCV and the holder's
percentage equity interest in On Command Corporation is reduced in the deemed
redemption to any extent.
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The aggregate tax basis of OCC Common Stock received by an OCV
stockholder who, pursuant to the Merger, exchanges his OCV Common Stock for a
combination of OCC Common Stock and Series A Warrants will be the same as the
aggregate tax basis of the OCV Common Stock surrendered therefor (except to the
extent cash is received for fractional shares), decreased by the fair market
value of Series A Warrants received and increased by the amount of gain
recognized, if any (including any portion of such gain that is treated as a
dividend). The holding period of the OCC Common Stock will include the holding
period of the OCV Common Stock surrendered therefor. The aggregate tax basis of
the Series A Warrants received by such holder will be the fair market value of
such Series A Warrants at the Effective Time. The holding period of the Series A
Warrants received will commence on the date of the Effective Time.
Cash Received in Lieu of Fractional Shares of OCC Common Stock. No
fractional shares of OCC Common Stock will be issued in the Merger. Cash
received in lieu of a fractional share of OCC Common Stock will be treated as
received in redemption of such fractional share, and gain or loss will be
recognized, measured by the difference between the amount of cash received and
the portion of the basis of the OCV Common Stock allocable to such fractional
share. If such redemption meets the "not essentially equivalent to a dividend"
test discussed above, such gain or loss would be capital gain or loss and should
be long-term capital gain or loss if the holding period for such OCV Common
Stock was greater than one year at the Effective Time.
Tax Consequences of Ownership of OCC Common Stock
Taxation of Dividends. The gross amount of dividends paid to holders of
OCC Common Stock will be treated as dividend income to such holders, to the
extent paid out of current or accumulated earnings and profits, as determined
under federal income tax principles. Such income will be includable in the gross
income of a holder as ordinary income on the day received by the holder.
To the extent that the amount of any distribution is not paid out of On
Command Corporation's current or accumulated earnings and profits for a taxable
year, the distribution will first be treated as a tax-free return of capital,
causing a reduction in the adjusted basis of the OCC Common Stock (thereby
increasing the amount of gain, or decreasing the amount of loss, to be
recognized by a holder on a subsequent disposition of the OCC Common Stock), and
the balance in excess of adjusted basis will be taxed as capital gain.
Sale or other Taxable Disposition. A holder will recognize taxable gain
or loss on any sale or other taxable disposition of a share of OCC Common
Stock in an amount equal to the difference between the amount realized for the
share of OCC Common Stock and the holder's basis in such share of OCC Common
Stock. Such gain or loss will be capital gain or loss and will be long-term
capital gain or loss if the share of OCC Common Stock has been held for more
than one year on the date of the sale or exchange.
Tax Consequences of Ownership of Series A Warrants
Sale or other Taxable Disposition. The sale or other taxable
disposition of a Series A Warrant will result in the recognition of gain or loss
to the holder in an amount equal to the difference between the amount realized
and the holder's tax basis therein. Such a sale or other taxable disposition
(other than a redemption by OCC) will result in capital gain or loss. Such
capital gain or loss will be long-term gain or loss if the Series A Warrants
have been held for more than one year.
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If the redemption of a Series A Warrant by On Command Corporation
is treated as a sale or other taxable exchange of a capital asset, any gain
or loss recognized on the transaction will be capital gain or loss. However,
it is unclear whether the redemption of Series A Warrants by On Command
Corporation will be treated as the sale or other taxable exchange of a
capital asset, and if such redemption is not so treated, the holder of a
Series A Warrant would recognize ordinary income or loss on such redemption.
Adjustments. Under Section 305 of the Code, certain actual or
constructive distributions of stock (including warrants to purchase stock) may
be taxable to a holder of On Command Corporation. Adjustments (or a lack
thereof) in the exercise price of the Series A Warrants or the number of
shares of OCC Common Stock purchasable upon exercise of the Series A Warrants
may result in a taxable constructive distribution which is taxable as a dividend
under the Code to the holders of the Series A Warrants to the extent of current
or accumulated earnings and profits of On Command Corporation.
Exercise. No gain or loss will be recognized to a holder of Series A
Warrants on the purchase of OCC Common Stock upon exercise of the Series A
Warrants (except to the extent of cash, if any, received in lieu of fractional
shares). The adjusted initial basis of the Common Stock so acquired would be
equal to the adjusted basis of the exercised Series A Warrants plus the
exercise price. For tax purposes, the holding period of the OCC Common Stock
acquired upon the exercise of the Series A Warrants will not include the
holding period of the Series A Warrants exercised.
Lapse. If the Series A Warrants are not exercised and are allowed to
expire, the Series A Warrants will be deemed to have been sold or exchanged on
the expiration date. Any loss to the holder will be a capital loss, and the
classification of the loss as long-term or short-term will depend upon the date
the Series A Warrants were acquired and the length of time the Series A Warrants
were held.
Backup Withholding and Information Reporting.
The receipt of dividends with respect to OCC Common Stock by a holder
made by a paying agent, broker or other intermediary in the United States may be
subject to U.S. information reporting requirements.
The payment of the proceeds from the disposition of OCC Common Stock
or Series A Warrants by a U.S. broker generally will be subject to information
reporting. Backup withholding of 31% also will be required with respect to such
payments unless such holder (i) is a corporation or other exempt recipient and,
when required, demonstrates that fact, or (ii) provides a correct taxpayer
identification number, certifies, when required, that such holder is not subject
to backup withholding, and otherwise complies with applicable requirements of
the backup withholding rules. Backup withholding is not an additional tax; any
amounts so withheld are creditable against the holder's federal income tax,
provided the required information is provided to the IRS.
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DESCRIPTION OF ON COMMAND CORPORATION CAPITAL STOCK
The following summary does not purport to be complete and is subject in
all respects to the applicable provisions of the Certificate of Incorporation
and the Bylaws of On Command Corporation. The Certificate of Incorporation and
the Bylaws of On Command Corporation are included as exhibits to the
Registration Statement of which this Information Statement/Prospectus forms a
part.
THE FOLLOWING DESCRIPTIONS OF THE ON COMMAND CORPORATION CAPITAL STOCK
SHOULD BE READ CAREFULLY BY OCV STOCKHOLDERS SINCE, AT THE EFFECTIVE TIME, EACH
ISSUED AND OUTSTANDING SHARE OF OCV COMMON STOCK, OTHER THAN DISSENTING SHARES
AND SHARES HELD BY OCV OR BY ITS DIRECT OR INDIRECT SUBSIDIARIES, WILL BE
CONVERTED INTO THE RIGHT TO RECEIVE OCC COMMON STOCK.
GENERAL
The authorized capital of On Command Corporation consists of 50,000,000
shares of OCC Common Stock, par value $.01 per share, and 10,000,000 shares of
preferred stock, par value $.01 per share (the "On Command Corporation Preferred
Stock"). The Bank of New York will act as transfer agent and registrar for the
OCC Common Stock.
OCC COMMON STOCK
Dividend Rights. Holders of OCC Common Stock are entitled to receive
dividends declared on each share of OCC Common Stock held.
Voting Rights. Holders of OCC Common Stock are entitled to one vote per
share on all matters to be voted on by holders of OCC Common Stock, except that
there is cumulative voting in elections of directors as described in
"Comparison of Stockholder Rights--Voting Rights." Any matter to be voted on by
holders of OCC Common Stock shall be decided by a majority of the votes cast on
the matter, except with respect to certain amendments to the Certificate of
Incorporation of On Command Corporation, which will require an affirmative vote
of at least 80% of the shares eligible to vote. Action by written consent of
stockholders in lieu of a meeting will not be effective until On Command
Corporation or any stockholder provides all other stockholders with 20-days'
prior written notice thereof. See "Comparison of Stockholder Rights--Stockholder
Vote Required for Certain Actions."
Board of Directors. Upon the consummation of the Transactions, the
Board of Directors of On Command Corporation will be fixed by, or in the manner
provided in, the On Command Corporation Bylaws; provided, however, that so long
as there is cumulative voting On Command Corporation will maintain a board of
not less than seven directors.
Preemptive, Subscription, Redemption and Conversion Rights. Holders of
OCC Common Stock have no preemptive, subscription, redemption or conversion
rights.
Liquidation Rights. Subject to the rights and preferences of any holder
of On Command Corporation Preferred Stock, upon the liquidation, dissolution or
winding up of On Command Corporation, whether voluntary or involuntary, the
holders of OCC Common Stock are entitled to receive ratably the net assets of On
Command Corporation.
Assessment. The outstanding shares of OCC Common Stock to be issued in
the Transactions will be fully paid and nonassessable.
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ON COMMAND CORPORATION PREFERRED STOCK
The Board of Directors of On Command Corporation is authorized, subject
to limitations prescribed by law and the provisions of the Certificate of
Incorporation of On Command Corporation, to provide for the issuance of shares
of On Command Corporation Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
COMPARISON OF STOCKHOLDER RIGHTS
OCV and On Command Corporation are both corporations organized under
the laws of the State of Delaware and subject to the DGCL. However, certain
differences, including but not limited to those described below, exist between
the rights of OCV stockholders and the rights of holders of OCC Common Stock.
The following summary does not purport to be complete and is subject in
all respects to the applicable provisions of the DGCL, the Certificate of
Incorporation and Bylaws of On Command Corporation and the Certificate of
Incorporation and Bylaws of OCV, which are included as exhibits to the
Registration Statement of which this Information Statement/Prospectus forms a
part.
GENERAL
The authorized capital stock of OCV consists of 9,000,000 shares of OCV
Common Stock, par value of $.01 per share. As of the date of this Information
Statement/Prospectus, there were 7,219,768 shares of OCV Common Stock and
Redeemable Common Stock outstanding, excluding any shares issuable upon
exercise of outstanding warrants or options to purchase OCV Common Stock.
The authorized capital stock of On Command Corporation consists of a
total of 60,000,000 shares, divided into (i) 50,000,000 shares of OCC Common
Stock, par value of $.01 per share, and (ii) 10,000,000 shares of On Command
Corporation Preferred Stock, par value of $.01 per share.
Subject to the rights and preferences of any holder of On Command
Corporation Preferred Stock issuable from time to time under On Command
Corporation's Certificate of Incorporation, upon the liquidation, dissolution or
winding up of On Command Corporation, whether voluntary or involuntary, the
holders of OCC Common Stock are entitled to receive ratably the net assets of On
Command Corporation. The rights, preferences and privileges of holders of OCC
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of On Command Corporation Preferred Stock which
On Command Corporation may designate and issue from time to time in the future.
Following the Transactions, and assuming there are no Dissenting
Shares, there will be 30,000,000 shares of OCC Common Stock outstanding and no
shares of On Command Corporation Preferred Stock outstanding. In addition,
Warrants to purchase 7,500,000 additional shares of OCC Common Stock will have
been issued, as well as options for the purchase of approximately 3,000,000
shares of OCC Common Stock to be issued under the On Command Corporation Stock
Option Plan.
VOTING RIGHTS
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Holders of OCV Common Stock are entitled to one vote per share on all
matters to be voted on by OCV stockholders, except that there is cumulative
voting in all elections of directors if the candidates' names have been placed
in nomination prior to the commencement of the voting and a stockholder has
given notice prior to commencement of the voting of such stockholder's intention
to cumulate votes. If such conditions are met, each stockholder entitled to vote
at the election of directors may cast a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which that
stockholder's shares are entitled. Cumulative votes may be cast for one
candidate or distributed among any or all of the candidates as the stockholder
chooses. OCV stockholders are not entitled to any preemptive or subscription
rights.
Subject to the voting rights provided by law or granted to any series
of On Command Corporation Preferred Stock, all voting power is exclusively
vested in the OCC Common Stock. Holders of OCC Common Stock are entitled to one
vote per share on all matters to be voted on by holders of OCC Common Stock,
except that there will be cumulative voting in all elections of directors under
the circumstances described below.
Until the Termination Date (as defined below), each holder of shares of
OCC Common Stock will be entitled at all elections of directors to as many votes
as shall equal the number of votes which (except for this provision as to
cumulative voting) he would be entitled to cast for the election of directors
with respect to his shares of OCC Common Stock multiplied by the number of
directors to be elected, and such holder may cast all of such votes for a single
director or may distribute them among the number to be voted for, or for any two
or more of them as he may see fit. Upon the occurrence of the Termination Date,
the holders of OCC Common Stock no longer will be entitled to cumulative voting
rights with respect to the election of directors and, from and after the
Termination Date, all directors will be elected by straight voting.
As used herein, the term "Termination Date" means the first date on
which any "person" or related group (within the meaning of Rule 13d-3 or Rule
14d-2 promulgated under the Exchange Act), including any "group" acting for the
purpose of acquiring or disposing of securities (within the meaning of Rule
13d-5(b)(1) promulgated under the Exchange Act), other than the Excluded Persons
(as defined below), holds, directly or indirectly, more than 15% of the
outstanding shares of capital stock of On Command Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class), and, for the purpose of this provision, all shares of OCC Common Stock
issuable upon the exercise or conversion of all currently exercisable or
convertible warrants, options or other securities held by such person or related
group shall be deemed to be outstanding and held by such person or related
group.
"Excluded Person" means each person holding OCV Common Stock
immediately prior to the Merger which is converted into OCC Common Stock, and
any other person who, individually or collectively with its affiliates, receives
upon original issuance thereof shares of OCC Common Stock and Warrants that
represent more than 5% of the Applicable Securities. "Applicable Securities"
means all shares of OCC Common Stock (including shares of OCC Common Stock
purchasable upon exercise of the Warrants) to be issued and outstanding
immediately upon consummation of the Transactions.
On Command Corporation stockholders are not entitled to any preemptive
or subscription rights.
DIVIDENDS
Holders of OCV Common Stock are entitled to receive dividends declared
on each share of OCV Common Stock held.
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Subject to the preferential rights of any series of On Command
Corporation Preferred Stock, holders of OCC Common Stock are entitled to receive
dividends declared on each share of OCC Common Stock held.
BOARD OF DIRECTORS
Each director of OCV is elected at the annual meeting of stockholders
of OCV and serves a one-year term until the next annual meeting of stockholders.
Director nominees receiving a plurality of the votes cast by the holders of
outstanding shares of OCV represented at the annual meeting of stockholders, in
person or by proxy, will be elected as directors of OCV. The number of directors
constituting the Board of Directors of OCV is currently set at eight.
Vacancies in the OCV Board of Directors may be filled by the remaining
directors, except that a vacancy created by the removal of a director by the
vote or written consent of the stockholders or by court order may be filled only
by the vote of a majority of the shares entitled to vote for that director's
position represented at a duly held meeting at which a quorum is present or by
the written consent of holders of a majority of the outstanding shares entitled
to vote. Each director so elected shall hold office until the next annual
meeting of stockholders and until a successor has been elected and qualified. A
majority of directors shall constitute a quorum at any meeting of the Board of
Directors.
Following the Transactions, the On Command Corporation Board of
Directors will consist of seven directors and each director of On Command
Corporation will be elected at the annual meeting of stockholders of On Command
Corporation and will serve a one-year term until the next annual meeting of
stockholders. Director nominees receiving a plurality of the votes cast by the
holders of outstanding shares of On Command Corporation represented at the
annual meeting of stockholders, in person or by proxy, will be elected as
directors of On Command Corporation. Any vacancies in the Board of Directors of
On Command Corporation for any reason, and any directorships resulting from any
increase in the number of directors, may be filled by the On Command Corporation
Board of Directors, acting by a majority of the directors then in office,
although less than a quorum, and any directors so chosen will hold office until
the next election at which such directors successors have been elected and
qualified. Notwithstanding the foregoing, and except as otherwise required by
law, whenever the holders of any one or more series of On Command Corporation
Preferred Stock have the right, voting separately as a class, to elect one or
more directors of the corporation, the terms of the director or directors
elected by such holders will expire at the next succeeding annual meeting of
stockholders.
Notwithstanding any other provisions of the Certificate of
Incorporation Bylaws of On Command Corporation, any director or the entire Board
of Directors may be removed at any time, with or without cause, by the
holders of a majority of the outstanding shares of On Command Corporation
capital stock entitled to vote generally in the election of directors, except
that, prior to the Termination Date, if less than the entire Board of Directors
is to be removed, no director may be removed without cause if the votes cast
against his removal would be sufficient to elect him if then cumulatively voted
at an election of the entire Board of Directors. Notwithstanding the foregoing,
and except as otherwise required by law, whenever the holders of any one or more
series of On Command Corporation Preferred Stock have the right, voting
separately as a class, to elect one or more directors of On Command Corporation,
the preceding sentence will not apply with respect to the director or directors
elected by such holders of Preferred Stock.
REPORTS TO STOCKHOLDERS; OTHER PUBLIC INFORMATION
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OCV is not subject to the periodic reporting or other informational
requirements of the Exchange Act. Stockholders of OCV are entitled to receive a
copy of the latest annual, semi-annual and quarterly income statement which OCV
has prepared and a balance sheet as of the end of that period. The reports,
statements and other information sent by OCV to its stockholders can be
inspected and copied at OCV's principal executive offices.
On Command Corporation currently is not subject to the informational
requirements of the Exchange Act. As a result of the registration of OCC Common
Stock and Series A Warrants to be issued as part of the Merger Consideration in
the Merger, On Command Corporation will become subject to the periodic reporting
and other informational requirements of the Exchange Act and in accordance
therewith will file reports and other information with the Commission. Following
the Merger, On Command Corporation will furnish to the holders of OCC Common
Stock annual reports containing audited consolidated financial statements
prepared in accordance with GAAP, with an opinion thereon by On Command
Corporation's external auditors, and quarterly reports containing unaudited
consolidated financial information prepared in accordance with GAAP. See
"Available Information."
RIGHTS OF INSPECTION
The DGCL allows any stockholder of a Delaware corporation to inspect,
upon written demand, the stockholder list for such corporation and such
corporation's other books and records for a purpose reasonably related to such
person's interest as a stockholder.
STOCKHOLDER MEETING PROCEDURES
Calling of Special Meeting
A special meeting of OCV stockholders, for any purpose or purposes,
unless otherwise prescribed by statute or by the OCV Certificate of
Incorporation, may be called at any time by (i) the Board of Directors, (ii) the
Chairman of the Board, (iii) the president of OCV or (iv) one or more
stockholders holding shares in the aggregate entitled to cast not less than 10%
of the votes at that meeting. If a special meeting is called by any of the
persons listed above other than the OCV Board of Directors, then such person
shall provide written notice specifying the time of the meeting and the general
nature of the business proposed to be transacted at the meeting to the Chairman
of the Board, the president of OCV, any vice-president of OCV or the secretary
of OCV, and the recipient will cause the notice to be sent to the stockholders.
A special meeting of On Command Corporation stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the On Command
Corporation Certificate of Incorporation, may be called by the chief executive
officer, by a majority of the entire Board of Directors, or at the written
request of stockholders owning at least a majority of the outstanding shares of
capital stock entitled to vote in an election of directors (the "On Command
Corporation Voting Stock"). Such request must state the purpose or purposes of
the proposed meeting. Business transacted at the special meeting will be limited
to the purposes stated in the notice.
Written Action in Lieu of Meeting
Any action that may be taken at any annual or special meeting of OCV
stockholders may be taken without a meeting and without prior notice if a
consent in writing setting forth the action so taken is signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take that action at a meeting at which all shares
entitled to vote on that action
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were present and voted. In the election of directors, such a consent is
effective only if it is signed by the holders of all outstanding shares entitled
to vote in the election (except that only a majority of the stockholders is
required to fill a vacancy on the OCV Board of Directors not otherwise filled by
the directors).
Any action required or permitted to be taken at any annual or special
meeting of On Command Corporation stockholders may be taken without a meeting,
without prior notice and without a vote if a consent in writing setting forth
the action so taken is signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take that action at a meeting at which all shares entitled to vote on that
action were present and voted, provided that such action shall not become
effective until 20 days after notice to all stockholders.
Quorum Requirements
The holders of stock having a majority of the votes attributable to the
capital stock of OCV issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the OCV stockholders for the transaction of business except as
otherwise provided by statute or by the OCV Certificate of Incorporation or
Bylaws.
The holders of a majority of the capital stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the On Command Corporation stockholders
for the transaction of business except as otherwise provided by statute or by
the On Command Corporation Certificate of Incorporation or Bylaws.
STOCKHOLDER VOTE REQUIRED FOR CERTAIN ACTIONS
The OCV Certificate of Incorporation requires the affirmative vote of
the holders of at least two-thirds of the voting power of the then outstanding
shares of capital stock ("OCV Voting Stock") (i) to change the number of
directors on the Board of Directors, (ii) to create any securities of the
corporation, (iii) to increase the authorized number of shares of stock, (iv) to
approve the conveyance of all or substantially all of the assets of the
corporation or any of its subsidiaries, to approve the reorganization,
consolidation or merger of the corporation or any of its subsidiaries, to
approve any reclassification or other change in any stock, or to approve any
recapitalization of the corporation or (v) to amend the OCV Certificate of
Incorporation or the OCV Bylaws.
The Certificate of Incorporation of On Command Corporation reserves to
On Command Corporation the right at any time, and from time to time, to amend,
alter, change or repeal any provision contained in the Certificate of
Incorporation, and other provisions authorized by the laws of the State of
Delaware at the time in force may be added or inserted, in the manner prescribed
by law; provided, however, that any amendment, alteration, change or repeal of
the provisions (i) limiting the effectiveness of action by written consent in
lieu of meeting until 20 days after delivery of the notice to stockholders
required by Section 228(d) of the DGCL, and (ii) requiring at least seven
directors on the On Command Corporation Board of Directors for so long as
cumulative voting is in effect and (iii) regarding amendments to the Certificate
of Incorporation of On Command Corporation, shall require the affirmative vote
of the holders of at least 80% of the outstanding shares of capital stock of On
Command Corporation entitled to vote thereon.
Under the DGCL, any other amendment, alteration or repeal of any
article of the OCV Certificate of Incorporation or On Command Corporation
Certificate of Incorporation requires the affirmative vote of a majority of the
outstanding stock entitled to vote thereon and of a majority of the outstanding
stock of each class entitled to vote thereon, voting as a class. Even if not
otherwise entitled to vote upon a
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proposed amendment, the holders of the outstanding shares of any class (or
series of any class) are entitled under the DGCL to vote as a class upon such
proposed amendment if it would alter the number of authorized shares or par
value of the shares of such class (or series) or adversely affect the powers,
preferences or special rights of the shares of such class (or series). The On
Command Corporation Certificate of Incorporation permits the Board of Directors
to amend the On Command Corporation Bylaws without stockholder action, but
subject to the stockholders' power to alter or repeal any bylaw made by the
Board of Directors.
Furthermore, the On Command Corporation Bylaws provide that only
business properly brought before an annual meeting of On Command Corporation
stockholders can be acted upon at such meeting. To be properly brought before an
annual meeting business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the On Command Corporation
Board of Directors, (b) otherwise properly brought before the meeting by or at
the direction of the On Command Corporation Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of On Command
Corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the corporation, not less
than 60 days nor more than 90 days prior to the meeting; provided, however, that
in the event that less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
10th day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting (a) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Notwithstanding anything in the On Command Corporation Bylaws to the contrary,
no business shall be conducted at any annual meeting except in accordance with
the procedures set forth above. The chairman of the annual meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the provisions of the
On Command Corporation Bylaws, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
The On Command Corporation Bylaws also provide that only persons who
are nominated in accordance with the procedures set forth in the On Command
Corporation Bylaws shall be eligible for election as directors. Section 8 of the
On Command Corporation Bylaws provides that nominations of persons for election
to the On Command Corporation Board of Directors may be made at a meeting of
stockholders by or at the direction of the On Command Corporation Board of
Directors or by any stockholder entitled to vote for the election of directors
at the meeting who complies with the following procedures described below. Such
nominations, other than those made by or at the direction of the On Command
Corporation Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of On Command Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at On Command
Corporation's principal executive offices not less than 60 days nor more than 90
days prior to the meeting; provided, however, that in the event that less than
70 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, (i) the name, age, business address and residence address of such
91
<PAGE> 94
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of On Command Corporation capital stock which are
beneficially owned by such person and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
without limitation such persons' written consent to be named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the stockholder giving the notice (i) the name and address, as they appear on
the corporation's books, of such stockholder and (ii) the class and number of
shares of the corporation which are beneficially owned by such stockholder. At
the request of the On Command Corporation Board of Directors any person
nominated by the On Command Corporation Board of Directors for election as a
director shall furnish to the Secretary of On Command Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director unless nominated in accordance with the procedures set forth in Section
8 of the On Command Corporation Bylaws. The chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by the Bylaws, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
A provision in OCV's Certificate of Incorporation limits the liability
of the OCV Board of Directors for monetary damages to OCV and to OCV
stockholders that may result from a breach of fiduciary duty by a director. The
provision does not, however, limit the liability of a director (a) for any
breach of the director's duty of loyalty to OCV or OCV stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) to the extent the director is liable under Section
174 of the DGCL for unlawful payment of dividends or (d) for any transaction
from which the director derived an improper personal benefit.
A provision in On Command Corporation's Certificate of Incorporation
limits the liability of the On Command Corporation Board of Directors for
monetary damages to On Command Corporation and to On Command Corporation
stockholders that may result from a breach of fiduciary duty by a director,
except to the extent such exemption from liability would not be permitted under
the DGCL.
STOCKHOLDER SUITS
Under the DGCL, a stockholder of a Delaware corporation may institute a
lawsuit in the name and on behalf of such corporation. An individual stockholder
also may commence a lawsuit on behalf of himself and other similarly situated
stockholders where the requirements for maintaining a class action under
Delaware law have been met. Neither the Certificate of Incorporation nor the
Bylaws of either OCV or On Command Corporation prescribe any procedure for the
exercise of these rights.
APPRAISAL RIGHTS
Under the DGCL, stockholders of a Delaware corporation who follow
prescribed statutory procedures are entitled, in the event of certain mergers or
consolidations, to surrender their shares to the corporation in exchange for the
judicially determined "fair value" of such shares. See "The
Transactions--Appraisal Rights." Such a stockholder, however, is not entitled to
such appraisal rights if (a) at the record date fixed to determine the
stockholders entitled to receive notice and to vote at the meeting of
stockholders, the shares held by the stockholder are part of a class of shares
which is listed on a national securities exchange or designated as a national
market system security on an interdealer
92
<PAGE> 95
quotation system by the NASD or held of record by more than 2,000 holders at
such record date and (b) the stockholder is not required by the terms of the
plan of merger to accept for his shares anything except (i) shares of stock of
the corporation surviving or resulting from such merger or consolidation, (ii)
shares of stock of any other corporation which at the effective date of the
merger or consolidation will either be listed on a national securities exchange
or designated as a national market system security on an interdealer quotation
system by the NASD or held of record by more than 2,000 stockholders, (iii) cash
in lieu of fractional shares of the corporations described in (i) or (ii) above
or (iv) any combination of the shares of stock and cash in lieu of fractional
shares described in (i), (ii) and (iii) above.
93
<PAGE> 96
EXPERTS
The financial statements of On Command Video Corporation as of December
31, 1995 and 1994 and for each of the two years in the period ended December 31,
1995 included in this Information Statement/Prospectus and the related financial
statement schedule as of December 31, 1995 and 1994 and for each of the two
years in the period ended December 31, 1995 included elsewhere in the
registration statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in the
registration statement, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
The statement of operations, stockholders' equity, and cash flows for
the year ended December 31, 1993, included in this Information
Statement/Prospectus, which is referred to and made part of this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements and schedule of SpectraVision and
subsidiaries as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995, have been included herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and in the
registration statement, and upon the authority of said firm as experts in
accounting and auditing.
The reports of KPMG Peat Marwick LLP covering the December 31, 1995
consolidated financial statements and schedule of SpectraVision contain an
explanatory paragraph that states that SpectraVision's filing under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court on June 8, 1995 and its expected
noncompliance with certain covenants related to its debtor-in-possession
financing raises substantial doubt about SpectraVision's ability to continue as
a going concern. The consolidated financial statements and schedule of
SpectraVision do not include any adjustments that might result from the outcome
of this uncertainty.
LEGAL MATTERS
Latham & Watkins, New York, New York, has rendered an opinion with
respect to the validity of the OCC Common Stock and the Series A Warrants to be
issued in connection with the Merger and will pass upon certain United States
federal income tax matters related to the Merger.
94
<PAGE> 97
INDEX TO PRO FORMA FINANCIAL STATEMENTS OF ON COMMAND CORPORATION
Unaudited Pro Forma Combined Balance Sheet at June 30, 1996................ P-3
Unaudited Pro Forma Combined Statement of Operations for the
Six Months Ended June 30, 1996......................................... P-4
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 1995 .......................................... P-5
Notes to Unaudited Pro Forma Combined Financial Statements................. P-6
P-1
<PAGE> 98
The following unaudited pro forma combined financial information for On
Command Corporation ("OCC") consists of the Unaudited Pro Forma combined
statements of operations for the six months ended June 30, 1996 and for the year
ended December 31, 1995 and the Unaudited Pro Forma consolidated balance sheet
as of June 30, 1996 (collectively, the "Pro Forma Statements"). The Pro Forma
Statements give effect to the formation of OCC and the acquisition of the
assets by OCC of OCV and Spectradyne, the principal operating subsidiary of
SpectraVision. The unaudited pro forma combined statement of operations for the
year ended December 31, 1995 and the six months ended June 30, 1996 reflects the
transaction as if it had taken place on January 1, 1995. The unaudited pro forma
combined balance sheet gives effect to the formation and acquisitions
as if they had taken place on June 30, 1996. The SpectraVision financial
information included in the Pro Forma Statements was previously reported in
SpectraVision's Form 10-Q for the period ended June 30, 1996 and Form 10-K for
the year ended December 31, 1995. Adjustments have been made to the
SpectraVision financial information to eliminate the net assets of SpectraVision
and SPI Newco, Inc., the principal holding companies of Spectradyne, as their
assets are not being acquired.
The pro forma financial information reflects the historical book value
of the assets, liabilities, and stockholders equity acquired from OCV by OCC and
management's estimate of the fair value of the SpectraVision assets to be
acquired and liabilities to be assumed by OCC. The final purchase price
allocation for the SpectraVision assets will be determined at a future date (no
later than one year from the Closing Date), which may result in adjustments to
the preliminary allocation. However, in the opinion of management, the
preliminary allocation of the purchase price reflects OCC's best estimate and
all adjustments necessary to state fairly such pro forma financial information
have been made.
The Pro Forma Statements should be read in conjunction with the notes
included in this document. The pro forma financial information is not
necessarily indicative of what the actual financial results would have been had
the transaction taken place on January 1, 1995 or June 30, 1996 or what the
future financial results will be.
As a result of the transaction, OCC expects its subsidiaries to achieve
substantial operating cost savings through the consolidation of certain
operations and the elimination of redundant costs. These operating cost savings
are expected primarily through reductions in personnel and related benefit costs
and consolidation and elimination of support operations, including
administration, marketing, data processing, and centralized support functions.
There can be no assurance that the operating cost savings will be realized. The
extent to which the operating cost savings will be achieved depends, among other
things, on the regulatory environment and economic conditions and may be
affected by unanticipated changes in business activities, inflation, and
operating costs. No adjustment has been included in the unaudited Pro Forma
Statements for the possible operating cost savings, except for the expected
reduction in payments due to EDS (in the approximate amount of $700,000 monthly)
that would result from amended agreements with EDS.
P-2
<PAGE> 99
ON COMMAND CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AT JUNE 30, 1996
(In thousands)
<TABLE>
<CAPTION>
OCV SPECTRAVISION PRO FORMA OCC
ACTUAL ACTUAL ADJUSTMENTS NOTE COMBINED
------ ------ ----------- ---- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 145 $ 4,918 $ (1) (1) $ 5,062
Accounts receivable, net ....................... 13,819 13,763 95 (2) 27,677
Other current assets ........................... 2,165 6,323 (246) (1) 6,414
(1,250) (5)
(578) (2)
-------- --------- --------- --------
Total current assets ......................... 16,129 25,004 (1,980) 39,153
-------- --------- --------- --------
Video Systems, net ............................... 207,504 98,581 (11,581) (5) 294,504
Land ............................................. -- 2,559 (559) (5) 2,000
Property and equipment, net ...................... 3,263 6,301 (2,051) (5) 7,513
Hotel contracts, net ............................. -- 46,104 (39,354) (5) 6,750
Debt issuance costs .............................. -- 5,662 (5,344) (1) --
(318) (4)
Other assets, net ................................ 6,019 10,426 (10,426) (5) 6,019
Other intangibles ................................ -- -- 10,000 (5) 10,000
Goodwill ......................................... -- -- 25,400 (5) 25,400
-------- --------- --------- --------
Total assets ................................... $232,915 $ 194,637 $ (36,213) $391,339
======== ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 8,761 $ 12,289 $ 6,000 (5) $ 27,050
Accrued compensation and (74) (1)
other liabilities ............................ 6,835 12,255 (1,749) (2) 17,267
Notes payable .................................. 29,270 37,919 -- 67,189
Capitalized lease obligations .................. -- 3,379 (3,379) (3) --
-------- --------- --------- --------
Total current liabilities .................... 44,866 65,842 798 111,506
-------- --------- --------- --------
Other liabilities ................................ 1,816 -- 5,128 (2)(3) 6,944
Liabilities subject to settlement under -- 576,040 (494,875) (1) --
reorganization (81,165) (6)
Deferred income taxes ............................ 1,012 4,920 (4,920) (8) 1,012
-------- --------- --------- --------
Total liabilities .............................. 47,694 646,802 (575,034) 119,462
-------- --------- --------- --------
Contingent value rights .......................... -- 20,000 (20,000) (1) --
Redeemable common stock .......................... 12,007 -- (12,007) (7) --
Stockholders' equity:
Common stock ................................... 73 24 203 (1)(7) 300
Additional paid-in capital ..................... 168,604 392,185 98,436 (5)(7) 267,040
(392,185) (1)
Retained earnings (deficit) .................... 4,537 (863,075) 901,567 (1) 4,537
(38,492) (7)
Foreign currency translation ................... -- (1,299) 1,299 (7) --
-------- --------- --------- --------
Total stockholders' equity ................... 173,714 (472,165) 570,828 271,877
-------- --------- --------- --------
Total liabilities & stockholders' equity ... $232,915 $ 194,637 $ (36,213) $391,339
======== ========= ========= ========
</TABLE>
See Notes to Pro Forma Financial Statements.
P-3
<PAGE> 100
ON COMMAND CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(In thousands)
<TABLE>
<CAPTION>
OCV SPECTRAVISION PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS NOTE OCC
------ ------ ----------- ---- ---
<S> <C> <C> <C> <C> <C>
Revenues ................................ $62,490 $ 58,012 $ -- $120,502
Costs and expenses:
Direct Cost of revenues ............... 27,940 27,088 -- 55,028
Operating expenses .................... 5,240 20,016 (4,200) (12) 21,056
Depreciation and amortization ......... 21,293 20,519 (4,105) (9) 37,707
Marketing, general and administrative . 2,212 7,186 600 (13) 9,998
Research and development .............. 1,929 988 -- 2,917
------- -------- ------- --------
Total costs and expenses .......... 58,614 75,797 (7,705) 126,706
------- -------- ------- --------
Income (loss) from operations ........... 3,876 (17,785) 7,705 (6,204)
------- -------- ------- --------
Interest and other income (loss) ........ 19 (234) -- (215)
Interest expense ........................ (1,008) (3,062) 1,528 (11) (2,542)
Reorganization items .................... -- (1,827) 1,827 (10) --
------- -------- ------- --------
Income (loss) before taxes .............. 2,887 (22,908) 11,060 (8,961)
Provision (benefit) for income taxes .... 1,263 (122) (1,263) (14) (122)
------- -------- ------- --------
Net Income (loss) ....................... 1,624 (22,786) 12,323 (8,839)
------- -------- ------- --------
Redeemable common stock accretion ....... (323) -- 323 (7) --
------- -------- ------- --------
Net income applicable to non-redeemable
common stock .......................... $ 1,301 $(22,786) $12,646 $ (8,839)
======= ======== ======= ========
Net income (loss) per common and
equivalent share ...................... $ 0.16 $ (0.95) $ (0.29)
======= ======== ========
Shares used in per share calculation .... 7,903 23,984 30,000
======= ======== ========
EBITDA(1) ............................... $25,169 $ 2,734 $ 31,503
======= ======== ========
</TABLE>
(1) EBITDA is presented because it is a widely accepted financial indicator
used by certain investors and analysts to analyze and compare companies
on the basis of operating performance. EBITDA is not intended to
represent cash flows for the period, nor has it been presented as an
alternative to operating income as an indicator of operating
performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
See Notes to Pro Forma Financial Statements.
P-4
<PAGE> 101
ON COMMAND CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands)
<TABLE>
<CAPTION>
OCV SPECTRAVISION PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS NOTE OCC
------ ------ ----------- ---- ---
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 102,059 $ 123,986 $ -- $ 226,045
Costs and expenses:
Direct cost of revenues ................. 48,417 52,813 -- 101,230
Operating expenses ...................... 9,054 46,843 (8,400) (20) 47,497
Depreciation and amortization ........... 28,737 39,364 (6,536) (15) 61,565
Marketing, general and administrative ... 3,118 22,203 1,200 (19) 26,521
Research and development ................ 2,642 1,769 -- 4,411
Other ................................... 1,540 247 -- 1,787
--------- --------- --------- ---------
Total costs and expenses ............ 93,508 163,239 (13,736) 243,011
--------- --------- --------- ---------
Income (loss) from operations ............. 8,551 (39,253) 13,736 (16,966)
--------- --------- --------- ---------
Interest and other income (loss) .......... 61 508 -- 569
Interest expense .......................... (413) (28,177) 1,406 (17) (1,155)
26,029 (18)
Reorganization items ...................... -- (7,563) 1,552 (16) (6,011)
--------- --------- --------- ---------
Income (loss) before taxes ................ 8,199 (74,485) 42,723 (23,563)
Provision (benefit) for income taxes ...... 3,297 (840) (3,297) (21) (840)
--------- --------- --------- ---------
Income (loss) before extraordinary item ... 4,902 (73,645) 46,020 (22,723)
Extraordinary loss from debt extinguishment -- (915) -- (915)
--------- --------- --------- ---------
Net income (loss) ......................... 4,902 (74,560) 46,020 (23,638)
--------- --------- --------- ---------
Redeemable common stock accretion ......... (641) -- 641 (7) --
--------- --------- --------- ---------
Net income applicable to non-redeemable
common stock ......................... $ 4,261 $ (74,560) $ 46,661 $ (23,638)
========= ========= ========= =========
Net income (loss) per common and common
equivalent share ........................ $ 0.62 $ (3.11) $ (0.79)
========= ========= =========
Shares used in per share calculations ..... 6,833 23,984 30,000
========= ========= =========
EBITDA(1) ................................. $ 37,288 $ 866 $ 44,599
========= ========= =========
</TABLE>
(1) EBITDA is presented because it is a widely accepted financial
indicator used by certain investors and analysts to analyze and compare
companies on the basis of operating performance. EBITDA is not intended
to represent cash flows for the period, nor has it been presented as an
alternative to operating income as an indicator of operating
performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
See Notes to Pro Forma Financial Statements.
P-5
<PAGE> 102
ON COMMAND CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS
AT AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1996:
1. To eliminate the net assets and liabilities of SpectraVision and
SPI NEWCO, Inc. ("SPI NEWCO") which are not being acquired as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Other liabilities........................ $ 74
Liabilities subject to settlement
under reorganization................. 494,875
Contingent value rights.................. 20,000
Common stock............................. 24
Paid-in capital.......................... 392,185
Deficit.................................. $901,567
Cash..................................... 1
Debt issuance costs...................... 5,344
Pre-paids and other assets............... 246
</TABLE>
2. To adjust selected current assets and liabilities as contemplated
by the Acquisition Agreement.
3. To reclassify certain liabilities to other long-term
liabilities.
4. To write-off debt issuance costs incurred by and capitalized by
Spectradyne.
5. The purchase price for the net assets acquired from
SpectraVision was $86.7 million and was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Estimated fair value of assets acquired:
Current assets, including cash of $4,917 ............ $ 23,024
Fixed assets:
Video equipment .................................. 87,000
Office equipment and vehicles .................... 2,750
Building ......................................... 1,500
Land ............................................. 2,000
Intangible assets, including hotel
contracts and intellectual property ................ 16,750
Goodwill ............................................ 25,400
--------
158,424
Less the fair value of the liabilities
assumed:
Current liabilities ................................. (28,721)
Note payable - Foothill Capital Corp. ............... (37,919)
Capital lease obligations ........................... (5,128)
--------
$ 86,656
========
</TABLE>
Both the current assets and current liabilities to be acquired
are recorded at their historical cost basis, which approximates
fair value. The fair value of the non-current assets to be
acquired was determined based on an appraisal conducted by a
nationally known firm. The note payable to Foothill Capital
Corporation has been reflected at historical cost, as both
principal and interest amounts (which reflect current market
rates) due under this obligation will be repaid at closing. The
capital lease obligations to be assumed have been reflected at
historical cost, which approximates the estimated contractual
obligation that OCC will assume at closing under these lease
obligations. Accordingly, the fair value of the acquired assets
and liabilities, based on management's preliminary estimate of
their fair value, as noted above, results in the following
adjustments: (a) a decrease in other current assets of $1.2
million; (b) a decrease in video equipment of $11.6 million; (c)
a decrease in land of $0.6 million; (d) a decrease in building
and office equipment and computers of $2.1 million; (e) a
decrease in hotel contracts of $39.4 million; (f) to record
goodwill relating to the acquisition of $25.4 million; (g) a
write-down of deferred contract concession costs of $10.4
million; (h) to record other intangible assets, including
technology, software, patents and trademarks, of $10.0 million;
and (i) to record direct acquisition costs.
6. To eliminate pre-petition liabilities on Spectradyne's balance
sheet that will not be assumed by OCC.
7. To reflect the capitalization of OCC as follows: (a) the issuance
of 30,000,000 shares of OCC Common Stock at the closing; (b)
the issuance of warrants to purchase OCC Common Stock at the
closing; (c) the conversion of OCV redeemable common stock to
OCC Common Stock at the closing; (d) the retained earnings of OCV
as the ongoing entity and (e) to allocate the net assets acquired
of SpectraVision.
8. To reduce SpectraVision's net deferred tax liability to reflect
the new tax basis established in OCC. Fair value adjustments
result in a net deferred asset balance for OCC that is
anticipated to be fully reserved due to uncertainties regarding
the recoverability of the net deferred tax assets.
P-6
<PAGE> 103
Unaudited Pro Forma Combined Statement of Operations for the Six months ended
June 30, 1996:
<TABLE>
<S> <C>
9. To adjust depreciation and amortization
expense as follows:
Amortization of goodwill............................. $ 620
Reduction in depreciation and other amortization..... (4,725)
----------
Total................................................ $ (4,105)
==========
</TABLE>
Amortization of goodwill is based on amortization over 20 years
and other identifiable intangibles are amortized over 10 years.
The change in depreciation and other amoritization expense
results from the decrease in depreciable basis in connection
with the allocation of purchase price offset by revisions to the
estimated useful lives of the purchased assets. The useful lives
of the purchased assets is as follows: video equipment, three
years; office equipment, five years; building, 20 years; hotel
contracts, seven years.
10. To reduce restructuring costs for non-recurring bankruptcy costs
incurred by SpectraVision as a result of its bankruptcy filing.
11. To reflect the terms of the anticipated bank credit agreement
and the pro forma borrowings based on (i) average total
borrowings of $20.0 million outstanding throughout the period at
an average interest rate of 8.5% and (ii) the amortization of
deferred financing cost incurred in connection with the
transaction. The effect on income of a 1/8% variance in interest
rates would approximate $38,000 based on the average borrowings
outstanding for the six months ended June 30, 1996.
12. To reduce operating expenses for the anticipated cost savings
attributed to the EDS contract (estimated at $700,000 per month)
being renegotiated.
13. To adjust general and administrative expenses to reflect the
anticipated management fee of $1.2 million per year payable to
Ascent.
14. No adjustment is made to reflect the income tax effects of the
foregoing adjustments as the net operating losses incurred are
still significant to shelter any taxable earnings of OCV.
However, OCV's tax provision has been eliminated as it is
anticipated that OCC would not record tax expense on a combined
basis.
Unaudited Pro Forma Combined Statement of Operations for the Year ended December
31, 1995:
15. To adjust depreciation and amortization expense
as follows:
<TABLE>
<S> <C>
Amortization of goodwill.............................. $ 1,238
Reduction in depreciation and other amortization...... (7,774)
--------
Total................................................. $ (6,536)
========
</TABLE>
Amortization of goodwill is based on amortization over 20 years
and other identifiable intangibles are amortized over 10 years.
The change in depreciation and other amortization expense
results from the decrease in depreciable basis in connection
with the
P-7
<PAGE> 104
allocation of purchase price offset by revisions to the
estimated useful lives of the purchased assets. The useful lives
of the purchased assets is as follows: video equipment, three
years; office equipment, five years; building, 20 years; hotel
contracts, seven years.
16. To reduce restructuring costs for non-recurring bankruptcy costs
incurred by SpectraVision as a result of its bankruptcy filing.
17. To reflect the terms of the anticipated bank credit agreement
and the pro forma borrowings, based on (i) average total
borrowings of $59.1 million and an average interest rate of 8.5%
for the year ended December 31, 1995 and (ii) amortization of
deferred financing costs incurred in connection with the
transaction. The effect on income of a 1/8% variance in interest
rates would approximate $16,000 based on the average borrowing
outstanding for the year ended December 31, 1995.
18. To eliminate non-recurring interest expense incurred by
SpectraVision and SPI NEWCO. This interest expense relates to
the reorganization indebtedness that is not being assumed by
OCC.
19. To adjust general and administrative expenses to reflect
anticipated management fee payable of $1.2 million per year
payable to Ascent.
20. To reduce operating expenses for the anticipated costs savings
attributed to the new EDS contract at $700,000 per month.
21. No adjustment is made for the income tax effects of the
foregoing adjustments (an income tax benefit) as the
recoverability of a net deferred asset would be uncertain.
However, OCV's tax provision is eliminated as it is anticipated
that OCC would not record tax expense on a combined basis.
P-8
<PAGE> 105
INDEX TO FINANCIAL STATEMENTS OF ON COMMAND VIDEO CORPORATION
Page
Audited Financial Statements for the Years Ended December 31, 1995,
1994 and 1993:
Report of Deloitte & Touche LLP................................ F-2
Report of Ernst & Young LLP, Independent Auditors.............. F-3
Balance Sheets at December 31, 1995 and 1994................... F-4
Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993.......................... F-5
Statements of Stockholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993.................... F-6
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993.......................... F-7
Notes to Financial Statements.................................. F-8
Unaudited Condensed Financial Statements for the Six Months
Ended June 30, 1996 and 1995:
Condensed Balance Sheets at June 30, 1996 and
December 31, 1995........................................ F-16
Condensed Statements of Income for the Six
Months Ended June 30, 1996 and 1995...................... F-17
Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995.................. F-18
Notes to Condensed Financial Statements....................... F-19
F-1
<PAGE> 106
REPORT OF DELOITTE & TOUCHE LLP
The Board of Directors and Stockholders of
On Command Video Corporation:
We have audited the accompanying balance sheets of On Command Video
Corporation (a majority owned subsidiary of Ascent Entertainment Group, Inc.) as
of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1995 and 1994 financial statements present fairly,
in all material respects, the financial position of On Command Video Corporation
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Jose, California
September 19, 1996
F-2
<PAGE> 107
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
On Command Video Corporation:
We have audited the accompanying statement of operations, stockholders'
equity, and cash flows of On Command Video Corporation (a majority owned
subsidiary of Comsat Video Enterprises, Inc.) for the year ended December 31,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of On
Command Video Corporation for the year ended December 31, 1993, in conforming
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
January 26, 1994
F-3
<PAGE> 108
ON COMMAND VIDEO CORPORATION
BALANCE SHEETS
AT DECEMBER 31, 1995 AND 1994
(In thousands)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 956 $ 8,323
Accounts receivable (less allowance for doubtful
accounts of $100 in 1995 and 1994) ............ 9,853 7,882
Accounts receivable from stockholder ............. -- 4,500
Other current assets ............................. 831 312
Deferred income taxes ............................ 1,163 1,290
-------- --------
Total current assets ........................... 12,803 22,307
Video Systems, net ................................. 188,910 113,588
Property and equipment, net ........................ 2,971 2,339
Other assets, net .................................. 6,321 650
-------- --------
Total assets ................................... $211,005 $138,884
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 3,910 $ 7,145
Accounts payable to stockholder................... 2,300 5,200
Accrued compensation ............................. 1,715 2,070
Taxes payable .................................... 1,813 67
Other accrued liabilities ........................ 934 1,148
Deferred revenue ................................. 803 1,181
Current portion of stockholders' notes payable ... 15,942 817
-------- --------
Total current liabilities ...................... 27,417 17,628
Other accrued liabilities ........................ 1,841 719
Long-term portion of stockholders' note payable .. -- 208
Deferred income taxes ............................ 259 337
-------- --------
Total liabilities .............................. 29,517 18,892
Commitments and contingencies ...................... -- --
Redeemable common stock, $.01 par value: shares
issued and outstanding -- 411 in 1995 and 1994.... 11,684 11,043
Stockholders' equity:
Common stock, $.01 par value: shares authorized--
9,000 in 1995 and 7,000 in 1994; shares issued
and outstanding--7,277 in 1995 and 5,396 in 1994 73 54
Additional paid-in capital ....................... 166,495 109,920
Retained earnings (deficit) ...................... 3,236 (1,025)
-------- --------
Total stockholders' equity ..................... 169,804 108,949
-------- --------
Total ........................................ $211,005 $138,884
======== ========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 109
ON COMMAND VIDEO CORPORATION
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Revenues:
Movie revenues ......................... $ 75,009 $45,931 $23,415
Video systems sales .................... 22,852 31,698 6,009
Video management services .............. 4,198 3,980 780
-------- ------- -------
Total revenues (see Note 9 for
related party revenues)............. 102,059 81,609 30,204
-------- ------- -------
Direct costs of revenues:
Movie revenues ......................... 24,052 16,593 7,213
Video systems sales .................... 20,015 27,600 4,936
Video management services .............. 4,350 3,593 763
-------- ------- -------
Total direct costs of revenues ....... 48,417 47,786 12,912
-------- ------- -------
Operating expenses:
Depreciation and amortization .......... 28,737 17,534 7,820
Field service .......................... 9,054 5,274 3,300
Research and development ............... 2,642 1,771 1,216
Marketing, general and administrative .. 3,118 3,397 2,619
Settlement of litigation ............... 1,540 -- --
-------- ------- -------
Total operating expenses ............. 45,091 27,976 14,955
-------- ------- -------
Income from operations ................... 8,551 5,847 2,337
Interest income .......................... 61 178 300
Interest expense ......................... (413) (256) (317)
-------- ------- -------
Income before income taxes ............... 8,199 5,769 2,320
Provision for income taxes ............... 3,297 2,313 962
-------- ------- -------
Net income ............................... 4,902 3,456 1,358
Redeemable common stock accretion......... (641) (600) (179)
Net income applicable to non-redeemable
common stock............................ $ 4,261 $ 2,856 $1,179
======== ======= =======
Net income per common and equivalent share $ 0.62 $ 0.51 $ 0.30
======== ======= =======
Shares used in per share computations .... 6,833 5,571 3,896
======== ======= =======
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 110
ON COMMAND VIDEO CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1993 ........ 3,243 $ 33 $ 45,702 $ (5,060) $ 40,675
Sale of common stock to investors 881 9 24,191 -- 24,200
Exercise of stock options ........ 136 1 868 -- 869
Income tax benefit of stock option
transactions ................... -- -- 390 -- 390
Issuance of warrants ............. -- -- 504 -- 504
Accretion of redeemable common
stock .......................... -- -- -- (179) (179)
Net income ....................... -- -- -- 1,358 1,358
-------- -------- -------- -------- --------
Balances, December 31, 1993 ...... 4,260 43 71,655 (3,881) 67,817
Sale of common stock to investors 1,075 10 37,490 -- 37,500
Exercise of stock options ........ 61 1 601 -- 602
Income tax benefit of stock option -- -- 174 -- 174
transactions
Accretion of redeemable common
stock .......................... -- -- -- (600) (600)
Net income ....................... -- -- -- 3,456 3,456
-------- -------- -------- -------- --------
Balances, December 31, 1994 ...... 5,396 54 109,920 (1,025) 108,949
Common stock issued in connection 1,879 19 56,520 -- 56,539
with contribution agreement with
COMSAT (Note 9)
Exercise of stock options ........ 2 -- 35 -- 35
Income tax benefit of stock option
transactions ................... -- -- 20 -- 20
Accretion of redeemable common
stock .......................... -- -- -- (641) (641)
Net income ....................... -- -- -- 4,902 4,902
-------- -------- -------- -------- --------
Balances, December 31, 1995 ...... 7,277 $ 73 $166,495 $ 3,236 $169,804
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 111
ON COMMAND VIDEO CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 4,902 $ 3,456 $ 1,358
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................................ 28,737 17,534 7,820
Deferred income taxes, net ............................................... 4,506 (383) (1,013)
Loss on disposal of fixed assets ......................................... 232 -- 56
Changes in assets and liabilities net of effects from acquired operations:
Pledged cash ........................................................... -- -- 436
Accounts receivable .................................................... 3,959 (2,711) (3,843)
Accounts receivable from stockholder ................................... 4,500 (3,100) (1,200)
Other current assets ................................................... (499) (192) (55)
Note receivable from employee .......................................... -- -- 150
Accounts payable ....................................................... (3,235) 482 3,893
Accounts payable to stockholder ........................................ (2,900) 4,000 1,000
Accrued compensation ................................................... (355) 838 880
Income taxes payable ................................................... 1,746 (1,120) 1,685
Other accrued liabilities .............................................. 159 1,054 605
Deferred revenue ....................................................... (378) 193 (12)
-------- -------- --------
Net cash provided by operating activities ............................ 41,374 20,051 11,760
-------- -------- --------
Cash flow from investing activities:
Capital expenditures ....................................................... (63,693) (64,110) (56,153)
Proceeds from sale of property and equipment ............................... -- -- 30
-------- -------- --------
Net cash provided by investing activities ............................ (63,693) (64,110) (56,123)
-------- -------- --------
Cash flows from financing activities:
Proceeds from stockholders' notes payable .................................. 15,734 -- --
Principal payments on stockholders' notes payable .......................... (817) (817) (792)
Proceeds from issuance of redeemable common stock .......................... -- -- 10,264
Proceeds from issuance of common stock ..................................... 35 38,102 15,069
Collection of note receivable from stockholder ............................. -- 10,000 23,000
-------- -------- --------
Net cash provided by financing activities ............................ 14,952 47,285 47,541
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......................... (7,367) 3,226 3,178
Cash and cash equivalents, beginning of year ................................. 8,323 5,097 1,919
-------- -------- --------
Cash and cash equivalents, end of year ....................................... $ 956 $ 8,323 $ 5,097
======== ======== ========
Supplemental information:
Cash paid for income taxes ................................................. $ 1,426 $ 3,762 $ 349
======== ======== ========
Cash paid for interest ..................................................... $ 413 $ 256 $ 317
======== ======== ========
Common stock issued in connection with contribution agreement
with Comsat .............................................................. $ 56,539 $ -- $ --
======== ======== ========
Common stock issued for notes receivable ................................... $ -- $ -- $ 10,000
======== ======== ========
Ascribed value for issuance of warrants to purchase common
stock .................................................................... $ -- $ -- $ 840
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE> 112
ON COMMAND VIDEO CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
ORGANIZATION AND NATURE OF BUSINESS -- On Command Video Corporation
(the Company) designs, develops, manufactures and installs proprietary
video systems. The Company's video system is a patented video selection
and distribution system that allows guests to select motion pictures on
computer controlled television sets located in their rooms at any time.
The Company also provides in-room viewing of free-to-guest programming
of select cable channels and other interactive services under long-term
contracts to hotels and businesses. The Company is a majority owned
subsidiary of Ascent Entertainment Group, Inc. (Ascent). Ascent is a
majority owned subsidiary of COMSAT Corporation (Comsat).
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
debt instruments, with insignificant interest rate risk, acquired
with an original maturity of less than three months to be cash
equivalents. Cash equivalents, consisting primarily of municipal
obligations, money market funds, certificates of deposit and bank
savings accounts, are stated at amortized cost which approximates
market.
The Company adopted Statement of Financial Accounting Standards No. 115
(SFAS No. 115), "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994. There was no cumulative effect
of adopting SFAS No. 115 on the Company's financial position or results
of operations.
VIDEO SYSTEMS, PROPERTY AND EQUIPMENT -- Video systems and property and
equipment are stated at cost less accumulated depreciation and
amortization. Installed video systems consist of equipment and related
costs of installation at hotel locations. Construction in progress
consists of purchased and manufactured parts of partially constructed
video systems. Depreciation and amortization are provided using the
straight-line method over the shorter of the estimated useful lives,
generally five to seven years, or lease terms.
Effective October 1, 1994, the Company changed the estimated useful
life of installed video systems from five years to the following:
Video systems.............. Five years
All other costs............ Term of the contract, five to seven years
The effect in 1994 from this change in estimate was to increase net
income and net income per common and equivalent share by approximately
$420,000 and $.07, respectively.
OTHER ASSETS -- Other assets consist of the warrants referred to in
Note 7 plus payments made to customers as inducements for them to enter
into contracts with the Company for the installation of pay-per-view
video systems. These assets are amortized on a straight-line basis over
the term of the contracts, five to seven years. Additionally, other
assets at December 31, 1995 include an investment of $1,265,000 in
MagiNet Corporation accounted for at cost.
F-8
<PAGE> 113
REVENUE RECOGNITION -- The Company installs pay-per-view video systems
in hotels, generally under five- to seven-year agreements, whereby it
recognizes revenues at the time of viewing. Revenue from the sale of
video systems is recognized when the equipment is shipped, except for
systems requiring installation by the Company, which is recognized upon
completion of the installation. Revenues from video management services
and royalties are recognized when earned.
NET INCOME PER SHARE -- Net income per share is based on the weighted
average number of common and dilutive common equivalent shares
outstanding during the periods. Common equivalent shares include
redeemable common stock and common stock options and warrants.
INCOME TAXES -- The Company accounts for income taxes under Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" which requires an asset and liability approach to account for
income taxes.
FOREIGN CURRENCY -- Transaction gains and losses, which are included
in the statements of income, have not been material in any of the years
presented.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such management estimates include the allowance for
doubtful accounts receivable, the estimated useful lives of video
systems and property and equipment, reducing construction in progress
to its net realizable value and the amounts of certain accrued
liabilities.
The Company participates in the highly competitive in-room
entertainment industry and believes that changes in any of the
following areas could have a material adverse affect on the Company's
future financial position or results of operations: decline in hotel
occupancy as a result of general business, economic, seasonal or other
factors; loss of one or more of the major hotel chain customers;
ability to obtain additional capital to finance capital expenditures;
ability to retain senior management and key employees; and risks of
technological obsolescence.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified
to conform to the current year presentation.
2. VIDEO SYSTEMS
Video systems at December 31, consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Installed video systems .... $ 210,335 $ 110,180
Construction in progress ... 31,805 30,381
--------- ---------
242,140 140,561
Accumulated depreciation ... (53,230) (26,973)
--------- ---------
Video systems, net ......... $ 188,910 $ 113,588
========= =========
</TABLE>
F-9
<PAGE> 114
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, consist of the following (in
thousands):
<TABLE>
1995 1994
------- -------
<S> <C> <C>
Machinery and equipment ...................... $ 3,767 $ 2,485
Furniture, fixtures and leasehold improvements 914 785
------- -------
4,681 3,270
Accumulated depreciation and amortization .... (1,710) (931)
------- -------
Property and equipment, net .................. $ 2,971 $ 2,339
======= =======
</TABLE>
4. STOCKHOLDERS' NOTES PAYABLE
Stockholders' notes payable at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Ascent.............................. $ 15,734 $ --
Other stockholders.................. 208 1,025
--------- --------
15,942 1,025
Less current portion................ (15,942) (817)
-------- --------
Long-term........................... $ -- $ 208
======== ========
</TABLE>
In 1995, the Company entered into a promissory note agreement with
Ascent which is payable upon demand. Interest on principal up to
$12,500,000 bears interest at the prime rate (8.5% at December 31,
1995), and principal in excess of $12,500,000 bears interest at the
prime rate plus 0.5% per annum.
In 1990 and 1991, the Company entered into promissory note agreements
with certain of its stockholders. The notes are payable to the
stockholders in sixty equal monthly installments with interest at 14%
per annum.
5. COMMITMENTS
FACILITY LEASES
The Company leases its principal facilities from a stockholder under
a noncancelable operating lease which expires in December 1999. In
addition to lease payments, the Company is responsible for taxes,
insurance and maintenance of the leased premises.
Rental payments to the stockholder were approximately $538,000,
$538,000 and $255,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Rental expense under all operating leases was
approximately $616,000, $572,000 and $284,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Future minimum annual payments under noncancelable operating leases
at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996...................................... $ 627,000
1997...................................... 669,000
1998...................................... 699,000
1999...................................... 653,000
----------
$2,648,000
==========
</TABLE>
F-10
<PAGE> 115
PURCHASE COMMITMENTS
Noncancelable commitments for the purchase of video systems amounted to
approximately $7,500,000 at December 31, 1995.
6. REDEEMABLE COMMON STOCK
In July 1993, pursuant to a stock purchase agreement the Company sold
410,561 shares of common stock at $25.00 per share, subject to a put
option. The stock purchase agreement provides that, until May 1998, the
stockholder may elect to sell the shares back to the Company upon the
earlier of (i) June 1, 1995 or (ii) the date the stockholder determines
that ownership of such shares may directly or indirectly jeopardize its
ability to retain material licenses in connection with its business.
The put price is equal to the original purchase price plus interest
from the date the shares were initially purchased, at an interest rate
equal to the average of the one-year U.S. Treasury Bill rate compounded
annually. Accordingly, the Company has accreted the value assigned to
the redeemable common stock for the increasing put price.
7. STOCKHOLDERS' EQUITY
STOCK OPTION PLAN
The Company has adopted a stock option plan (the Plan), expiring in
June 1999, under which employees, directors and consultants may be
granted incentive or nonstatutory stock options for the purchase of
common stock of the Company. Incentive stock options are granted at
fair value on the date of grant as determined by the Board of Directors
and nonstatutory stock options are granted at a price per share fixed
by the Board of Directors of the Company but not less than 85% of the
fair value of the date of grant. Options generally vest over a
five-year period and are exercisable in installments of 20% one year
from the date of grant and ratably per month thereafter. Unvested
options are canceled upon termination of employment.
<TABLE>
<CAPTION>
Options Options Outstanding
------- -------------------
Available Number of Price
for Grant Shares Per Share
--------- ------ ---------
<S> <C> <C> <C>
Balance at January 1, 1993 . 169,800 281,607 $ 1.25 - $20.00
Granted .................... (60,000) 60,000 25.00
Exercised .................. -- (135,656) 1.25 - 16.84
------- -------
Balance at December 31, 1993 109,800 205,951 5.00 - 25.00
Granted .................... (20,000) 20,000 32.50
Exercised .................. -- (60,965) 5.00 - 20.00
Canceled ................... 3,085 (3,085) 20.00
-------- -------
Balance at December 31, 1994 92,885 161,901 7.50 - 32.50
Exercised .................. -- (2,250) 13.41 - 16.84
-------- -------
Balance at December 31, 1995 92,885 159,651 $ 7.50 - $32.50
======== =======
</TABLE>
At December 31, 1995, options to purchase 100,154 shares of common
stock were exercisable.
F-11
<PAGE> 116
WARRANTS
In August 1991, the Company issued warrants to two stockholders to
purchase 27,964 shares of common stock at $20.12 per share. The
warrants are currently exercisable and expire in July 1996.
In July 1993, in connection with the sale of common stock, the Company
issued warrants to a related party to purchase 410,561 shares of common
stock at $27.50 per share through May 1996, increasing to $30.25 per
share in June 1996 and $33.28 per share in June 1997. The original
value ascribed to the warrants of $840,000 is included in other assets
and is being amortized over the estimated period of benefit of seven
years. Amortization expense was $120,000 in both 1995 and 1994. The
warrants are currently exercisable and expire in May 1998.
SHARES RESERVED FOR FUTURE ISSUANCE
Common stock reserved for future issuance at December 31, 1995 as
follows:
<TABLE>
<S> <C>
Redeemable common stock.......... 410,561
Option plan...................... 252,536
Warrants......................... 438,525
---------
1,101,622
=========
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARD
The Company is required to adopt Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" in
fiscal year 1996. SFAS No. 123 establishes accounting and disclosure
requirements using a fair value based method of accounting for
stock-based employee compensation plans. Under SFAS No. 123, the
Company may either adopt the new fair value based accounting method or
continue the intrinsic value based method and provide pro forma
disclosures of net income and earnings per share as if the accounting
provisions of SFAS No. 123 has been adopted. The Company plans to adopt
only the disclosure requirements of SFAS No. 123; therefore, for
options issued to employees, such adoption will have no effect on the
Company's net income or cash flows.
8. INCOME TAXES
In August 1995, Comsat's ownership interest in the Company exceeded 80%
and the Company became a member of Comsat's consolidated tax group for
income tax purposes. The Company has prepared its tax provision for
1995 based on inclusion in Comsat's consolidated return. However, the
provision as calculated would approximate the provision if prepared on
a separate return basis. The current and deferred tax expense represent
the Company's separately computed tax liability.
F-12
<PAGE> 117
The provision for income taxes at December 31 consists of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
Current:
<S> <C> <C> <C>
Federal $ (714) $ 2,525 $ 1,579
State ........... 48 171 396
------- ------- -------
(666) 2,696 1,975
------- ------- -------
Deferred:
Federal 3,572 (508) (847)
State ........... 391 125 (166)
------- ------- -------
3,963 (383) (1,013)
------- ------- -------
Total ............... $ 3,297 $ 2,313 $ 962
======= ======= =======
</TABLE>
The provision for income taxes differs from the amount obtained by
applying the federal statutory rate (35%) to income before income taxes
at December 31 as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Tax computed at federal statutory rate $ 2,870 $ 2,019 $ 812
State taxes, net of federal benefit .. 439 296 103
Other ................................ (12) (2) 47
------- ------- -------
Provision for income taxes ........... $ 3,297 $ 2,313 $ 962
======= ======= =======
</TABLE>
Deferred income taxes, which result from the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss and credit carryforwards $ 1,856 $ 3,165
Accruals not recognized for tax purposes ...... 839 823
Deferred revenue .............................. 322 467
Other ......................................... 120 155
------- -------
Total deferred tax assets .......................... 3,137 4,610
Deferred tax liabilities:
Depreciation and amortization ................. (2,233) (3,657)
------- -------
Net deferred tax assets ............................ $ 904 $ 953
======= =======
</TABLE>
Alternative minimum tax credit carryforwards of approximately
$1,512,000 and $270,000 are available to offset future regular federal
and state tax liabilities, respectively. Research and development tax
credit carryforwards of approximately $32,000 and $80,000 are available
to offset future federal and state tax liabilities, respectively. The
federal research and development credit carryforwards begin expiring in
2006. Additionally, the Company has state net operating loss
carryforwards of approximately $1,500,000 which expire beginning in
2000 and may be subject to limitation in the event of certain defined
changes in stock ownership.
F-13
<PAGE> 118
9. RELATED PARTY TRANSACTIONS
On August 1, 1995, the Company entered into a Contribution Agreement
with Ascent, whereby the Company acquired various assets and
liabilities (primarily installed video systems and related construction
in progress, accounts receivable, deferred income taxes and other
assets) from Ascent with a net book value of approximately $56,539,000
in exchange for 1,878,624 shares of common stock of the Company. This
transfer of net assets and shares between companies under common
control has been accounted for at historical cost.
The Company sold video systems and provided video management services
to Ascent totaling approximately $18,900,000, $28,100,000 and
$4,200,000 in 1995, 1994 and 1993, respectively. The Company had
approximately $2,300,000 in payables to Ascent at December 31, 1995.
The Company had approximately $4,500,000 in accounts receivable from,
and $5,200,000 in payables to, Ascent at December 31, 1994. Marketing,
general and administrative expenses in the accompanying financial
statements are net of $732,000, $1,316,000 and $226,000 in 1995, 1994
and 1993, respectively, paid by Ascent based on a percentage of video
system sales to Ascent. Research and development expenses in the
accompanying financial statements are net of $436,000, $742,000 and
$224,000 in 1995, 1994 and 1993, respectively, paid by Ascent based on
a percentage of video system sales to Ascent.
The Company earned revenues of approximately $15,000,000, $12,400,000
and $4,900,000 in 1995, 1994 and 1993, respectively, from another
company and its affiliates, which is a related party by virtue of its
ownership of the Company's common stock. The Company also earned video
system sales of approximately $3,000,000 and movie revenues of
approximately $362,000 in 1995 from a company which is a related party
by virtue of the Company's preferred stock investment in this company.
Interest expense to related parties was approximately $413,000,
$243,000 and $315,000 in 1995, 1994 and 1993, respectively.
10. CONCENTRATION OF CREDIT RISK
The Company generates the majority of its revenues from the guest usage
of proprietary video systems located in various hotels primarily
throughout the United States and Canada. The Company performs periodic
credit evaluations of its installed hotel locations and generally
requires no collateral. While the Company does maintain allowances for
potential credit losses, actual bad debt losses have not been
significant. The Company invests its cash in high-credit quality
institutions. These instruments are short-term in nature and,
therefore, bear minimal risk.
Three customers and their affiliates accounted for 35%, 18% (related
party), and 15% (related party) of revenues in 1995 (29%, 34% and
15%, respectively, in 1994; and 39%, 14% and 16%, respectively, in
1993).
F-14
<PAGE> 119
11. EMPLOYEE BENEFIT PLAN
Qualified employees are eligible to participate in the Company's 401(k)
tax-deferred savings plan. Participants may contribute up to 20% of
their eligible earnings (to a maximum of approximately $9,000 per year)
to this plan, for which the Company, at the discretion of the Board or
Directors, may make matching contributions. Contributions made by the
Company were approximately $351,000 and $227,000 in 1995 and 1994,
respectively (none in 1993).
12. LEGAL MATTERS
In 1995, the Company recorded a charge of $1,540,000 related to the
settlement with a former employee who alleged wrongful termination and
breach of contract.
Additionally, in 1995 the Company settled a lawsuit in which it claimed
a competitor had infringed certain of the Company's patents. The
settlement had no significant impact on the Company's financial
position or results of operations or cash flows.
13. SUBSEQUENT EVENTS
In March 1996, a competitor filed suit against the Company alleging
patent infringement and seeking unspecified damages. The Company
intends to contest the suit vigorously and believes the claim is
without merit and will not result in a material adverse effect to the
Company's financial position or results of operations or cash flows.
On April 19, 1996 Ascent, On Command Video and SpectraVision, Inc
("SpectraVision") entered into an agreement (the agreement) which
provides that all of On Command Video's assets and liabilities will be
combined with certain assets and liabilities of SpectraVision to form a
new company (On Command Corporation ("OCC")). The agreement provides
that the stockholders of On Command Video will receive 72.5% of the OCC
common stock and SpectraVision's bankruptcy estate will receive 27.5%
of the OCC common stock, subject to certain adjustments as defined in
the agreement. The agreement also provides that OCC will issue warrants
to purchase 20% of OCC's common stock, 65% of which are to be issued to
the stockholders of On Command Video and 35% of which are to be issued
to SpectraVision's bankruptcy estate. The proposed business combination
will be accounted for as a purchase.
Ascent, On Command Video and Hilton Hotels Corporation ("Hilton")
entered into a letter agreement in August 1996, providing for the
cancellation of 470,588 shares of On Command Video common stock issued
to Ascent pursuant to the Contribution Agreement more fully described
in Note 9. The letter agreement also provided for the extension of the
date on which the exercise price of the 410,561 warrants issued to
Hilton would increase from June 1, 1996 to the later of (i) 90 days
after the closing or the abandonment of the proposed transaction with
SpectraVision described above or (ii) December 1, 1996. The letter
agreement also provides that if in connection with the proposed
transaction with SpectraVision, On Command Video common stock or OCC
securities into which it is converted are registered under the
Securities Exchange Act of 1933 and Hilton's shares of On Command
Video's common stock (or OCC common stock into which they are
converted) are freely tradeable, both the Hilton put option with
respect to the redeemable common stock and the Hilton warrants, unless
exercised before such closing, will terminate as of the closing of the
proposed transaction with SpectraVision.
F-15
<PAGE> 120
In addition, the letter agreement provides that if Hilton exercises its
warrants by reason of the closing of the proposed transaction with
SpectraVision, Hilton will have the right to put to Ascent all, but not
less than all, of those Hilton warrant shares of On Command Video
common stock (or OCC common stock into which they are converted)
Hilton still owns on the date 90 days after the closing of the proposed
transaction with SpectraVision at the same exercise price in the Hilton
warrant.
F-16
<PAGE> 121
ON COMMAND VIDEO CORPORATION
CONDENSED BALANCE SHEETS
AT JUNE 30, 1996 AND DECEMBER 31, 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 145 $ 956
Accounts receivable ................................................. 13,819 9,853
Other current assets ................................................ 922 831
Deferred income taxes ............................................... 1,243 1,163
-------- --------
Total current assets .............................................. 16,129 12,803
Video Systems, net .................................................... 207,504 188,910
Property and equipment, net ........................................... 3,263 2,971
Other assets, net ..................................................... 6,019 6,321
-------- --------
Total assets ...................................................... $232,915 $211,005
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 7,051 $ 3,910
Accounts payable to stockholder...................................... 1,710 2,300
-------- --------
Accrued compensation ................................................ 1,610 1,715
Taxes payable ....................................................... 3,298 1,813
Other accrued liabilities ........................................... 1,456 934
Deferred revenue .................................................... 471 803
Current portion of stockholders' notes payable ...................... 29,270 15,942
-------- --------
Total current liabilities ......................................... 44,866 27,417
Other accrued liabilities ........................................... 1,816 1,841
Deferred income taxes ............................................... 1,012 259
-------- --------
Total liabilities ................................................. 47,694 29,517
Commitments and contingencies ......................................... -- --
Redeemable Common Stock, $.01 par value: shares issued
and outstanding -- 411 12,007 11,684
Stockholders' equity:
Common stock, $.01 par value: shares authorized--9,000; shares issued
and outstanding--7,279 in 1996 and 7,277 in 1995 .................. 73 73
Additional paid-in capital .......................................... 168,604 166,495
Retained earnings ................................................... 4,537 3,236
-------- --------
Total stockholders' equity ........................................ 173,214 169,804
-------- --------
Total ........................................................... $232,915 $211,005
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
F-17
<PAGE> 122
ON COMMAND VIDEO CORPORATION
CONDENSED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
Revenues:
Movie revenues.................................. $ 55,999 $ 31,431
Video systems sales............................. 6,491 16,372
Video management services....................... -- 3,528
-------- --------
Total revenues................................ 62,490 51,331
-------- --------
Direct costs of revenues:
Movie revenues.................................. 22,931 9,472
Video systems sales............................. 5,009 14,405
Video management services....................... -- 3,654
-------- --------
Total direct costs of revenues................ 27,940 27,531
-------- --------
Operating expenses:
Depreciation and amortization................... 21,293 11,496
Field service................................... 5,240 4,341
Research and development........................ 1,929 1,131
Marketing, general and administrative........... 2,212 1,016
Settlement of litigation........................ -- 1,540
-------- --------
Total operating expenses...................... 30,674 19,524
-------- --------
Income from operations............................ 3,876 4,276
Interest income................................... 19 46
Interest expense.................................. (1,008) (99)
-------- --------
Income before income taxes........................ 2,887 4,223
Provision for income taxes........................ 1,263 1,715
-------- --------
Net income........................................ 1,624 2,508
======== ========
Redeemable common stock accretion................. (323) (334)
-------- --------
Net income applicable to non-redeemable
common stock.................................... $ 1,301 $ 2,174
======== ========
Net income per common and equivalent share........ $ 0.16 $ 0.36
======== ========
Shares used in per share computations............. 7,903 6,015
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
F-18
<PAGE> 123
ON COMMAND VIDEO CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 1,624 $ 2,508
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................................. 21,293 11,496
Deferred income taxes, net................................................. 673 --
Loss on disposal of fixed assets........................................... 4 231
Changes in assets and liabilities net of effects from acquired operations:
Accounts receivable...................................................... (3,966) 436
Accounts receivable from stockholder..................................... -- (1,257)
--------- --------
Other current assets..................................................... (91) (82)
Accounts payable......................................................... 3,141 2,280
Accounts payable to stockholder.......................................... (590) (1,571)
--------- --------
Accrued compensation..................................................... (105) (71)
Income taxes payable..................................................... 1,485 839
Other accrued liabilities................................................ 497 13
Deferred revenue......................................................... (332) (58)
--------- --------
Net cash provided by (used in) operating activities.................... 23,633 14,764
--------- --------
Cash flow from investing activities:
Capital expenditures......................................................... (37,717) (24,718)
Other assets................................................................. (70) --
--------- --------
Net cash used in investing activities.................................. (37,787) (24,718)
--------- --------
Cash flows from financing activities:
Proceeds from stockholders' notes payable.................................... 13,500 5,000
Principal payments on stockholders' notes payable............................ (172) (454)
Proceeds from issuance of common stock..................................... 15 35
--------- --------
Net cash provided by financing activities.............................. 13,343 4,581
--------- --------
Net decrease in cash and cash equivalents...................................... (811) (5,373)
Cash and cash equivalents, beginning of period................................. 956 8,323
--------- --------
Cash and cash equivalents, end of period....................................... $ 145 $ 2,950
========= ========
Supplemental information:
Cash paid for income taxes................................................... $ 224 $ 1,180
========= ========
Cash paid for interest....................................................... $ 260 $ 99
========= =========
Common stock issued in connection with contribution agreement
with Ascent................................................................ $ 2,094 $ --
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
F-19
<PAGE> 124
ON COMMAND VIDEO CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
1. In the opinion of management, these unaudited condensed financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's
financial position as of June 30, 1996 and the results of operations
and cash flows for the six months ended June 30, 1996 and 1995.
The results of operations for the six months ended June 30, 1996 may
not necessarily be indicative of the results of operations for the
fiscal year ending December 31, 1996.
These condensed financial statements should be read in conjunction with
the financial statements and related notes for the years ended December
31, 1995, 1994 and 1993, included elsewhere herein.
2. NET INCOME PER SHARE
Net income per share is based on the weighted average number of common
and dilutive common equivalent shares outstanding during the periods.
Common equivalent shares include redeemable common stock and common
stock options and warrants.
3. RELATED PARTY TRANSACTION
On August 1, 1995, the Company entered into a Contribution Agreement
with Ascent, whereby the Company acquired various assets and
liabilities (primarily installed video systems and related construction
in progress, accounts receivable, deferred income taxes and other
assets) from Comsat with a net book value of approximately $56,539,000
in exchange for 1,878,624 shares of common stock of the Company. The
transfer of net assets and shares between companies under common
control has been accounted for at historical cost.
4. LITIGATION
In March 1996, a competitor filed suit against the Company alleging
patent infringement and seeking unspecified damages. The Company
intends to contest the suit vigorously and believes the claim is
without merit and will not result in a material adverse effect to the
Company's financial position or results of operations.
5. PROPOSED BUSINESS COMBINATION
On April 19, 1996 Ascent, On Command Video and SpectraVision entered
into an agreement (the "agreement") which provides that all of On
Command Video's assets and liabilities will be combined with certain
assets and liabilities of SpectraVision to form a new company (On
Command Corporation ("OCC")). The agreement provides that the
stockholders of On Command Video will receive 72.5% of the OCC common
stock and SpectraVisions' bankruptcy estate will receive 27.5% of the
OCC common stock, subject to certain adjustments as defined in the
agreement. The agreement also provides that OCC will issue warrants to
purchase 20% of OCC's
F-20
<PAGE> 125
common stock, 65% of which are to be issued to the stockholders of On
Command Video and 35% of which are to be issued to SpectraVision's
bankruptcy estate. The proposed business combination will be accounted
for as a purchase.
6. SUBSEQUENT EVENTS
Ascent, On Command Video and Hilton Hotels Corporation ("Hilton")
entered into a letter agreement in August 1996 providing for the
cancellation of 470,588 shares of On Command Video common stock issued
to Ascent pursuant to the Contribution Agreement more fully described
in Note 3. The letter agreement also provided for the extension of the
date on which the exercise price of 410,561 warrants issued to Hilton
would increase from June 1, 1996 to the later of (i) 90 days after the
closing or the abandonment of the proposed transaction with
SpectraVision described above or (ii) December 1, 1996. The letter
agreement also provides that if in connection with the proposed
transaction with SpectraVision, On Command Video common stock or OCC
securities into which it is converted are registered under the
Securities Exchange Act of 1933 and Hilton's shares of On Command
Video's common stock (or OCC Common Stock into which they are
converted) are freely tradeable, both the Hilton put option with
respect to the redeemable common stock and the Hilton warrants, unless
exercised before such closing, will terminate as of the closing of the
proposed transaction with SpectraVision.
In addition, the letter agreement provides that if Hilton exercises its
warrants by reason of the closing of the proposed transaction with
SpectraVision, Hilton will have the right to put to Ascent all, but not
less than all, of those Hilton warrant shares of On Command Video
common stock (or OCC Common Stock into which they are converted)
Hilton still owns on the date 90 days after the closing of the proposed
transaction with SpectraVision at the same exercise price in the Hilton
warrant.
F-21
<PAGE> 126
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF SPECTRAVISION
Audited Financial Statements for the Years Ended December 31, 1995, 1994 and
1993:
Independent Auditors' Report.............................. F-23
Consolidated Statements of Financial Position
at December 31, 1995 and 1994........................... F-24
Consolidated Statements of Operations for the
Years Ended December 31, 1995, 1994 and 1993............ F-25
Consolidated Statements of Stockholders'
Deficit for the Years Ended December 31, 1995,
1994 and 1993........................................... F-26
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993............ F-27
Notes to Consolidated Financial Statements................ F-28
Unaudited Interim Financial Statements for the Six Months
ended June 30, 1996 and 1995:
Condensed Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995..................... F-59
Condensed Consolidated Statements of Operations
for the Six Months Ended June 30, 1996 and 1995......... F-60
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995......... F-61
Notes to Condensed Consolidated Financial Statements...... F-62
F-22
<PAGE> 127
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SpectraVision, Inc.:
We have audited the accompanying balance sheets of SpectraVision, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
years in the three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SpectraVision, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
notes 1 and 3 to the consolidated financial statements, the Company, together
with four of its subsidiaries, filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court on June 8, 1995. Although the Company and the subsidiaries are
currently operating their businesses as debtors-in-possession under the
jurisdiction of the Bankruptcy Court, the continuation of their businesses as
going concerns is contingent upon, among other things, the ability to formulate
a plan of reorganization which will gain approval of the creditors and
confirmation by the Bankruptcy Court and the ability to generate sufficient cash
from operations and financing sources to meet obligations as they come due. In
addition, as discussed in Note 7, the Company does not expect that it will be in
compliance in 1996 with certain financial covenants related to its
debtor-in-possession financing, which could permit its lenders to accelerate the
due date of such financing. The Company's filing under Chapter 11 and its
expected noncompliance with certain covenants related to its
debtor-in-possession financing raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are discussed in Note 3 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Dallas, Texas
March 1, 1996, except as to the second paragraph
of Note 7, which is as of March 22, 1996
F-23
<PAGE> 128
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents ............................................ $ 3,438 $ 1,317
Accounts Receivable (net of allowance for doubtful accounts of $1,812
and $1,072 in 1995 and 1994, respectively) ......................... 16,428 20,417
Debt Issuance Costs (net) ............................................ 5,827 6,797
Prepaids and Other Assets ............................................ 8,125 8,108
Video Systems:
In Process Video Systems ........................................... 11,329 38,144
Installed Video Systems ............................................ 247,987 242,003
--------- ---------
Subtotal ......................................................... 259,316 280,147
Less Accumulated Depreciation and Amortization ....................... (155,604) (148,290)
--------- ---------
Total Video Systems .................................................. 103,712 131,857
Building and Equipment Building ...................................... 4,300 4,294
Furniture, Fixtures and Other Equipment .............................. 8,002 6,887
--------- ---------
Subtotal ........................................................... 12,302 11,181
Less Accumulated Depreciation ........................................ (5,921) (4,965)
--------- ---------
Total Building and Equipment ......................................... 6,381 6,216
Land ................................................................. 2,559 2,559
Hotel Contracts (net) ................................................ 47,403 50,000
Deferred Contract Concession Costs (net) ............................. 11,749 15,551
--------- ---------
TOTAL ASSETS ........................................................... $ 205,622 $ 242,822
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable ..................................................... $ 8,128 $ 48,807
Accrued Liabilities
Interest ........................................................... -- 3,413
Compensation ....................................................... 2,112 4,495
Other .............................................................. 9,086 21,522
Income Taxes ......................................................... 183 290
Deferred Income Taxes ................................................ 5,467 6,757
Debt
Revolving Credit Facility .......................................... -- 12,500
Canadian Bank Credit Facility ...................................... -- 7,350
Foothill Revolving Credit Facility ................................. 26,703 --
11.5% Senior Discount Notes ........................................ -- 172,295
11.65% Senior Subordinated Reset Notes ............................. -- 294,768
Capitalized Lease Obligations ...................................... 1,964 23,492
Other Debt ......................................................... -- 158
--------- ---------
Total Debt ........................................................... 28,667 510,563
Liabilities Subject to Settlement Under Reorganization ................. 579,587 --
--------- ---------
Total Liabilities ...................................................... 633,230 595,847
Contingent Value Rights Subject to Settlement Under Reorganization ..... 20,000 20,000
Stockholders' Deficit
Class A Common Stock--$0.001 par value, authorized 6,000,000 shares,
issued and outstanding, 4,593,526 shares in 1995 and 1994 .......... 5 5
Class B Common Stock--$0.001 par value, authorized 144,000,000 shares,
issued and outstanding, 19,390,379 shares in 1995 and 1994 ......... 19 19
Additional Paid in Capital ........................................... 392,185 392,185
Retained Deficit ..................................................... (840,289) (765,729)
Foreign Currency Translation Adjustment .............................. 472 495
--------- ---------
Total Stockholders' Deficit ............................................ (447,608) (373,025)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ............................ $ 205,622 $ 242,822
========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-24
<PAGE> 129
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Revenues ........................................... $123,986 $ 142,384 $162,993
Costs and Expenses:
Total direct costs ............................... 52,813 58,015 58,834
Depreciation and amortization .................... 39,364 50,534 44,103
Write-down of hotel contracts .................... -- 196,256 --
Technology and field service charge .............. -- -- 7,000
Loss on sale of manufacturing assets and inventory -- -- 649
Operating expenses ............................... 17,563 13,205 24,583
Contracted service costs ......................... 29,280 21,029 1,716
Selling and marketing expenses ................... 4,883 8,741 5,054
General and administrative expenses .............. 17,320 19,595 15,431
Research and development (net) ................... 1,769 3,814 1,585
Exchange loss .................................... 247 581 833
-------- --------- --------
Total costs and expenses ....................... 163,239 371,770 159,788
-------- --------- --------
Operating Income (Loss) ............................ (39,253) (229,386) 3,205
Non-operating Income ............................... (508) (1,163) --
Interest expense, net (Contractual interest expense
of $67,959 in 1995) .............................. 28,177 54,981 48,990
-------- --------- --------
Loss before Reorganization Items, Income Taxes
and Extraordinary Item ........................... (66,922) (283,204) (45,785)
Reorganization items ............................... 7,563 -- --
-------- --------- --------
Loss before Income Taxes and Extraordinary Item .... (74,485) (283,204) (45,785)
Income Taxes:
State and foreign provision (benefit) ............ 126 (448) 1,739
Deferred benefit ................................. (966) (28,472) (4,467)
-------- --------- --------
Total Income Tax Benefit ....................... (840) (28,920) 2,728
-------- --------- --------
Loss Before Extraordinary Item ..................... (73,645) (254,284) (43,057)
Extraordinary Item--loss from debt extinguishment .. 915 -- 2,699
-------- --------- --------
Net Loss ........................................... $(74,560) $(254,284) $(45,756)
======== ========= ========
Loss Per Common Share:
Before extraordinary item ........................ $ (3.07) $ (10.60) $ (2.37)
Extraordinary item ............................... (0.04) -- (0.15)
-------- --------- --------
Net Loss ......................................... $ (3.11) $ (10.60) $ (2.52)
======== ========= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-25
<PAGE> 130
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Class A Common Stock
Beginning balance ....... $ 5 $ 5 $ 5
--------- --------- ---------
Ending balance .......... 5 5 5
--------- --------- ---------
Class B Common Stock
Beginning balance ....... 19 19 11
Issued in public offering -- -- 8
--------- --------- ---------
Ending balance .......... 19 19 19
--------- --------- ---------
Additional Paid in Capital
Beginning balance ....... 392,185 392,185 314,544
Issued in public offering -- -- 77,641
--------- --------- ---------
Ending balance .......... 392,185 392,185 392,185
--------- --------- ---------
Retained Deficit
Beginning balance ....... (765,729) (511,445) (465,689)
Net loss ................ (74,560) (254,284) (45,756)
--------- --------- ---------
Ending balance .......... (840,289) (765,729) (511,445)
--------- --------- ---------
Translation Adjustment
Beginning balance ....... 495 622 206
Translation adjustment .. (23) (127) 416
--------- --------- ---------
Ending balance .......... 472 495 622
--------- --------- ---------
Total Stockholders' Deficit $(447,608) $(373,025) $(118,614)
========= ========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-26
<PAGE> 131
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
------------- ----------- ----------
<S> <C> <C> <C>
Operating Activities:
Net loss......................................................$ (74,560) $ (254,284) $ (45,756)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization............................... 39,364 50,534 44,103
Loss on sale of manufacturing assets and inventory.......... -- -- 649
Payment of 1992 Restructuring costs......................... -- -- (9,236)
Other non-cash items:
Write-down of hotel contracts............................. -- 196,256 --
Technology and field service charge....................... -- -- 7,000
Deferred income tax benefit............................... (966) (28,472) (4,467)
Extraordinary loss from debt extinguishment............... 915 -- 2,699
Conversion of non-cash interest to secondary notes........ 18,494 33,973 --
Accretion of discount on senior notes..................... 8,609 18,240 4,074
Amortization and write-off of debt issuance costs......... 1,148 1,261 1,055
Loss on disposal of assets................................ 1,344 -- --
Exchange loss............................................. 247 581 833
Other items (net)......................................... (777) (948) 86
Increase (decrease) in:
Accounts Payable.......................................... 30,367 27,463 1,377
Accrued interest.......................................... (1,004) 816 (1,248)
Other accrued liabilities................................. (9,383) (2,138) 2,374
Income taxes payable...................................... (107) (370) (124)
Decrease (increase) in:
Accounts receivable....................................... 3,989 (2,504) 559
Prepaids and other assets................................. 1,024 (4,243) 2,282
------------- ------------ ----------
Total adjustments............................................. 93,264 290,449 52,016
------------- ------------ ----------
Net cash provided by operating activities............... 18,704 36,165 6,260
------------- ------------ ----------
Investing Activities:
Proceeds from sale of manufacturing assets and inventory.... -- -- 5,201
Decrease (increase) in raw materials........................ -- -- (313)
Cost of in-process systems, deferred contract concession
costs and capital expenditures............................ (16,131) (57,362) (36,097)
-------------- ----------- ----------
Net cash used in investing activities..................... (16,131) (57,362) (31,209)
-------------- ----------- ----------
Financing Activities:
Borrowings under Revolving Credit Facility.................. 7,396 12,500 --
Borrowings under Supplemental Bank Credit Facility.......... -- -- 23,000
Repayment of Supplemental Bank Credit Facility.............. -- -- (31,000)
Repayment of Bank Credit Facility........................... -- -- (180,120)
Repayment of other debt and capitalized leases.............. (6,366) (4,187) (1,432)
Borrowing under Foothill Revolving Credit Facility.......... 88,618 -- --
Repayment of Foothill Revolving Credit Facility............. (61,915) -- --
Repayment of Revolving Credit Facility...................... (20,811) -- --
Repayment of Canadian Bank Credit Facility.................. (7,350) -- --
Issuance of class B common stock............................ -- -- 84,150
Stock issuance costs........................................ -- -- (6,501)
Issuance of senior discount notes........................... -- -- 149,981
Payment of debt issuance costs.............................. -- -- (8,417)
------------- ------------ -----------
Net cash provided by financing activities................. (428) 8,313 29,661
-------------- ------------ -----------
Effect of exchange rate changes on cash....................... (24) (84) (20)
-------------- ------------ -----------
Net Increase (Decrease) in cash and cash equivalents.......... 2,121 (12,968) 4,692
Cash and cash equivalents at beginning of period.............. 1,317 14,285 9,593
-------------- ------------ -----------
Cash and cash equivalents at end of period....................$ 3,438 $ 1,317 $ 14,285
============== ============ ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-27
<PAGE> 132
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
SpectraVision, Inc., (the "Company" or "SpectraVision"), previously
known as SPI Holding, Inc., is a leading provider of in-room entertainment
services to the lodging industry and conducts all operations through
Spectradyne, Inc., and Spectradyne's wholly-owned foreign subsidiaries. Founded
in 1971, the Company originally developed and patented a system, known as
"SpectraVision," which provides in-room television viewing of recently released
major and other motion pictures on a pay-per-view ("PPV") basis.
From September 1979 until October 1987, Spectradyne, Inc.
("Spectradyne"), a Texas corporation, was a public company whose common stock
was traded on the Nasdaq over-the-counter market. In October 1987,
SpectraVision, Inc. acquired all of the outstanding stock of Spectradyne in a
highly leveraged transaction following which Spectradyne remained the surviving
entity and a wholly owned subsidiary of the Company (the "1987 Acquisition"). On
April 12, 1989, DP Acquisition Corp. ("DP"), a company controlled by Mr. Marvin
Davis, acquired all of the outstanding common stock of SpectraVision (the "1989
Acquisition"). In December, 1990, DP was dissolved into its parent, Rainbow
Company ("Rainbow"), a partnership controlled by Mr. Marvin Davis. On September
17, 1992, after obtaining the necessary votes on a prepackaged joint plan of
reorganization, the Company and certain of its subsidiaries, including SPI
Newco, Inc. ("SPI Newco") and Spectradyne filed a voluntary petition for
bankruptcy in the United States Bankruptcy Court for the District of Delaware.
On October 29, 1992, the Bankruptcy Court issued an order confirming
the plan of reorganization (the "Reorganization Plan"). On November 23, 1992,
the Reorganization Plan became effective, and the Company completed a
restructuring of its debt and capital structure (the "1992 Restructuring"). The
1992 Restructuring included, among other things, (i) the purchase by Rainbow of
4,995,864 shares of Class A Common Stock, (ii) the exchange of previously
outstanding 14.875% reset notes for $260.8 million of 11.5% Senior Subordinated
Reset Notes, due 2002 ("Reset Notes"), (iii) the exchange of previously
outstanding 14.75% debentures for newly issued Class B Common Stock and (iv) the
exchange of previously outstanding preferred stock for shares of Class B Common
Stock and Contingent Value Rights ("CVRs").
On October 5, 1993 the Company issued 7,650,000 shares (including
650,000 shares exercised under an over-allotment option) of its Class B Common
Stock and $209.5 million aggregate principal amount of 11.5% Senior Discount
Notes, due 2001 (the "Senior Notes") through a public offering, (the debt and
equity offerings referred to herein as the "1993 Offerings") resulting in net
proceeds to the Company of $223.8 million. The net proceeds from the 1993
Offerings were used to refinance an aggregate principal amount of $182.6 million
of outstanding obligations under the Company's previous senior bank loan (the
"Bank Credit Facility") and previous revolving credit loan (the "Supplemental
Credit Facility") and were used for general corporate purposes, including
funding capital expenditures required for the implementation of the EDS Service
and Technology Agreement and the Company's expansion plans. See Note 4, "EDS
Service and Technology Agreement". In connection with the common stock offering,
the underwriters exercised an over-allotment option and purchased 400,000 shares
of Class B Common Stock from Rainbow upon Rainbow's conversion of 400,000 shares
of Class A Common Stock. The Company did not receive any of the proceeds from
the shares sold by Rainbow.
F-28
<PAGE> 133
In early 1995, the Company determined that a financial restructuring
would be required to ensure the Company's long-term survival. The Company
conducted restructuring negotiations with representatives of its secured and
unsecured creditors during April and May 1995, working toward the development of
an overall restructuring plan. In June 1995, the Company concluded that a filing
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") should be
made in order to preserve the value of its assets and to ensure that the
business had sufficient cash resources to continue operations while it completed
the financial restructuring process.
On June 8, 1995 (the "Petition Date"), SpectraVision, Inc., together
with SPI Newco, Inc., Spectradyne, Inc., Spectradyne International, Inc., and
Kalevision Systems, Inc.--USA, filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") and are
currently operating their respective businesses as debtors-in-possession
pursuant to sections 1107 and 1108 of the Bankruptcy Code. On June 23, 1995, a
single unsecured creditors' committee (the "Creditors' Committee") was appointed
by the U.S. Trustee for the District of Delaware pursuant to Section 1102 of the
Bankruptcy Code. The Creditors' Committee has the right to review and object to
certain business transactions and is expected to participate in the negotiation
of the Company's plan of reorganization. See Note 3, "Bankruptcy".
Unless the context otherwise requires, all references herein to the
Company are not intended to imply exact corporate relationships and include
SpectraVision, Inc. and its subsidiaries, including SPI Newco, Inc., its direct
subsidiary, and Spectradyne, Inc., the direct subsidiary of SPI Newco, Inc., as
well as, Spectradyne's foreign operating subsidiaries.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Business and consolidation. The Company owns and operates pay-per-view
movie systems and provides satellite delivered free-to-guest sports, news and
entertainment to the hotel industry. The Company has operating subsidiaries in
the United States, Canada, Mexico, Hong Kong, Singapore, Thailand and Australia.
The consolidated financial statements include the accounts of SpectraVision and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform with the current year presentation.
Cash Flows. For purposes of the Statements of Cash Flows, the Company
considers all certificates of deposit and debt instruments with original
maturities of three months or less to be cash equivalents.
Video systems, building and equipment. Video systems, building and
equipment are stated at cost. Capital leases are recorded at the inception of
the lease at the lower of the discounted present value of future minimum lease
payments or the fair value of the property. Installed video systems include
$44.0 million and $28.2 million of equipment, primarily televisions, under
capital leases at December 31, 1995 and 1994, respectively. Accumulated
amortization of such leased equipment was $12.6 million and $4.5 million
(ranging from 4 to 5 years) at December 31, 1995 and 1994, respectively.
Depreciation and amortization, which includes the amortization of assets
recorded under capital leases, is computed by the straight-line method over the
lesser of the estimated useful lives of the assets or the initial terms of the
leases. Depreciation and amortization expense related to video systems, building
and equipment, was $32.3 million for 1995, $36.0 million for 1994 and $31.2
million for 1993. Prior to installation, in-process video systems are stated at
cost, and depreciation of video systems begins when the system is
F-29
<PAGE> 134
installed and activated. The Company capitalized interest related to the
installation of video systems and related equipment of $3.0 million and $2.9
million for the years ended December 31, 1995 and 1994, respectively.
Intangible assets. In connection with the 1989 Acquisition, hotel
contracts were recorded at fair value and amortized on a straight-line basis
over 25 years. Accumulated amortization related to the hotel contracts was $2.6
million and zero at December 31, 1995 and 1994, respectively. As of December 31,
1995, the Company has separately classified certain contract costs related
primarily to the purchase of televisions as deferred contract concession costs.
Such costs are amortized on a straight-line basis over the anticipated period of
benefit, which is generally five to seven years. As of December 31, 1994, such
contract costs were included in Video Systems and have been reclassified to
conform to the current year presentation. Accumulated amortization related to
deferred contract concession costs was $2.6 million and $1.2 million at December
31, 1995 and 1994, respectively. Amortization expense related to hotel contracts
and deferred contract concession costs was $7.1 million for 1995, $13.7 million
for 1994 and $12.5 million for 1993. The Company routinely assesses the
propriety of the carrying amount of hotel contracts and deferred contract
concession costs through a future cash flows method as well as the amortization
periods to determine whether circumstances warrant adjustments to the carrying
amounts or estimated useful lives. At December 31, 1994 the carrying amount of
hotel contracts was decreased. See Note 18, "Intangible Assets." The assessment
of the recoverability of intangible assets will be adversely impacted if
estimated future operating cash flows are not achieved.
Maintenance and repairs. Maintenance and repairs are charged to expense
as incurred. Renewals and betterments are capitalized. When assets are sold,
retired or otherwise disposed of, the applicable costs and accumulated
depreciation are removed from the accounts, and the resulting gains or losses
are included in results of operations.
Income taxes. Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Foreign currency translation. For translation of its international
currencies, the Company has determined that the local currencies of its
international subsidiaries are the functional currencies. Assets and liabilities
of the international subsidiaries are translated at the rate of exchange in
effect at period end. Results of operations are translated at the approximate
rate of exchange in effect during the period. The translation adjustment is
shown as a separate component of stockholders' deficit. The US dollar
denominated balances of the international subsidiaries are restated at the rate
of exchange at year end and any resulting gains or losses, other than
gains/losses on intercompany balances, are included in the results of
operations.
Fair value of financial instruments. The following table presents the
carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994. Cash and cash equivalents, accounts
receivable and accounts payable (post-petition) have been excluded since the
carrying amounts reported in the accompanying consolidated statements of
financial position approximate fair values.
F-30
<PAGE> 135
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Financial liabilities:
Revolving Credit Facility (Note 7)............................ $ -- $ -- $ 12,500 $ 12,500
Canadian Bank Credit Facility (Note 7)........................ -- -- 7,350 7,350
Senior Discount Notes (Note 7)................................ 180,904 N/A 172,295 75,800
Senior Subordinated Reset Notes (Note 7)...................... 313,262 N/A 294,768 29,500
Contingent Value Rights (Note 10)............................. 20,000 N/A 20,000 800
Foothill Revolving Credit Facility (Note 7)................... 26,703 26,703 -- --
</TABLE>
The fair value of the Foothill Revolving Credit Facility at December
31, 1995 approximated the carrying amount as the facility bears interest at a
current market rate. Due to the extenuating circumstances involving the Senior
Discount Notes, Senior Subordinated Reset Notes, the Contingent Value Rights,
other pre-petition liabilities as a result of the Chapter 11 filings and the
anticipated reorganization, it is not practicable to estimate the fair value of
these debts as of December 31, 1995.
The fair value of the Revolving Credit Facility and the Canadian Credit
Facility at December 31, 1994 approximated the carrying amount because the
facilities bore interest at current market rates. The fair value of the Senior
Discount Notes and Reset Notes at December 31, 1994 was estimated using market
transaction information. The fair value of the Contingent Value Rights at
December 31, 1994 was based upon quoted market prices.
New Accounting Standards. The Financial Accounting Standards Board
(FASB) has issued SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which will become effective
for fiscal years beginning in 1996. The effect of this Statement, if implemented
currently, would not be material to the Company's financial statements.
Use of Estimates. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
NOTE 3 - BANKRUPTCY
In early 1995, the Company determined that a financial restructuring
would be required to ensure the Company's long-term survival. The Company
conducted restructuring negotiations with representatives of its secured and
unsecured creditors during April and May 1995, working toward the development of
an overall restructuring plan. In June 1995, the Company concluded that the
Chapter 11 filing should be made in order to preserve the value of its assets
and to ensure that the business had sufficient cash resources to continue
operations while it completed the financial restructuring process.
On the Petition Date, SpectraVision, Inc., together with SPI Newco,
Inc., Spectradyne, Inc., Spectradyne International, Inc., and Kalevision
Systems, Inc.--USA, filed voluntary petitions for reorganization under Chapter
11 in the Bankruptcy Court and are currently operating their respective
businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the
Bankruptcy Code. On June
F-31
<PAGE> 136
23, 1995, the Creditors' Committee was appointed by the U.S. Trustee for the
District of Delaware pursuant to Section 1102 of the Bankruptcy Code. The
Creditors' Committee has the right to review and object to certain business
transactions and is expected to participate in the negotiation of the Company's
plan of reorganization.
As of the Petition Date, actions to collect pre-petition indebtedness
have been automatically stayed pursuant to Section 362 of the Bankruptcy Code
(subject to order of the Bankruptcy Court) and, in certain circumstances, other
pre-petition contractual obligations may not be enforced against the Company. In
addition, the Company may reject pre-petition executory contracts and lease
obligations, and parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. Substantially
all liabilities as of the Petition Date are subject to being paid or compromised
under a plan of reorganization to be voted upon by all impaired classes of
creditors and equity security holders and approved by the Bankruptcy Court.
In March 1996, the Company employed Salomon Brothers Inc. as investment
bankers and financial advisors. The agreement with Salomon Brothers Inc. calls
for a monthly advisory fee and an additional fee ("Transaction Fee") upon the
consummation of a transaction resulting in the sale of the Company. The
Transaction Fee will be a percentage of the total purchase price.
The Company has been actively pursuing several avenues of restructuring
its financial position to achieve the maximum return for all parties involved.
In January 1996 the Company solicited bids from third parties for financial
restructuring proposals which would allow the Company to emerge from bankruptcy.
The Company received five bids and intends to select one or more such proposals
and, with the Bankruptcy Court's approval, emerge from bankruptcy in 1996.
However, there can be no assurance that any agreement for a business combination
will be reached or that any agreement will be approved by the creditors or the
Bankruptcy Court.
The accompanying consolidated financial statements have been prepared
on a going concern basis, which assumes continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 filings and circumstances relating to
these events, such realization of assets and liquidation of liabilities is
subject to significant uncertainty. In addition, the Company's independent
public accountants included in their report on the Company's consolidated
financial statements, an explanatory paragraph that describes the uncertainty
about the Company's ability to continue as a going concern.
As a Chapter 11 debtor, the Company may sell (subject, in certain
circumstances, to Bankruptcy Court approval) or otherwise dispose of assets, and
liquidate or settle liabilities for amounts other than those reflected in the
consolidated financial statements. The amounts reported in the consolidated
financial statements do not give effect to any adjustments to the carrying value
of assets or amounts of liabilities that might result as a consequence of
actions taken pursuant to a plan of reorganization. If the Company is unable to
obtain confirmation of a plan of reorganization, its creditors, equity security
holders or the United States Trustee may seek a liquidation of the Company by
conversion to a Chapter 7 bankruptcy proceeding. In that event, it is likely
that additional liabilities and claims would be asserted which are not presently
reflected in the consolidated financial statements. In the event of a
liquidation, the amounts reflected in the consolidated financial statements
would be subject to adverse adjustments in amounts which, while not presently
determinable, could be material.
F-32
<PAGE> 137
Financial accounting and reporting during a Chapter 11 proceeding is
prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly, certain
pre-petition obligations, which may be impaired, have been classified as
obligations subject to Chapter 11 reorganization proceedings and include the
following estimated amounts at December 31, 1995 (dollars in thousands):
<TABLE>
<S> <C>
Debt instruments:
11.5% Senior Discount Notes Due 2000....................................$ 180,904
11.65% Senior Subordinated Reset Notes due 2001......................... 313,262
-----------
Total debt insturments................................................ 494,166
Accrued expenses:
Interest................................................................ 2,411
Liabilities............................................................. 4,549
Compensation............................................................ 885
-----------
Subtotal.............................................................. 7,845
Capital lease obligations................................................. 22,587
Accounts payable.......................................................... 10,918
EDS and EDS affiliates (Note 4)........................................... 45,071
-----------
Total liabilities subject to settlement under reorganization............$ 579,587
===========
Contingent value rights subject to settlement under reorganization........$ 20,000
===========
</TABLE>
Pursuant to SOP 90-7, the Company has discontinued, effective June 8,
1995, the accrual of interest on pre-petition debt that is unsecured or
estimated to be undersecured.
In September 1995, in connection with the Company's bankruptcy,
management approved a company restructuring that it believes is required to
maintain the viability of the business. This restructure will result in, among
other things, discontinuing service to a number of unprofitable hotels with
monthly revenues of approximately $256,000 and $289,000 for 1995 and 1994,
respectively, and will further result in the elimination of certain positions
within the Company. It is currently anticipated such actions will be completed
in 1996. As a result, the Company recorded a restructure charge of $6.0 million
in 1995. Of this total, $.9 million relates to the cost of de-installing certain
hotels and $1.7 million was recorded for estimated losses on the disposal of
de-installed equipment. The Company also recorded $.1 million in employee
severance costs which will be incurred in the restructure process. The Company
recorded an additional charge of $2.3 million which represents the write-off or
abandonment of other fixed assets and $1.0 million for other costs associated
with the restructure process.
Total bankruptcy reorganization items of $7.6 million for the twelve
months ended December 31, 1995 include normal bankruptcy, professional and
miscellaneous charges of $1.6 million and the restructure charges discussed
above.
In addition, as a result of a review during the third quarter of 1995,
the Company recorded several adjustments to reflect the impact of certain
changes in estimates that are not related to operations in 1995. These changes
in estimates totalled $2.6 million. Such adjustments related primarily to
revisions in the Company's prior estimates of amounts due Electronic Data
Systems Corporation ("EDS") and chargebacks to EDS under the EDS Services and
Technology Agreement of $1.7 million and a $.9 million reduction for ASCAP fees.
The $1.7 million included additional provisions for doubtful accounts of $.2
million, a reserve of $.8 million of obsolete inventory held by a third party
and an increase related to certain liabilities of $.7 million. The $.7 million
in increased liabilities included $.4 million for prior years' employee related
sick pay liability and other miscellaneous adjustments of $.3 million.
F-33
<PAGE> 138
The total effect of the bankruptcy reorganization items and changes in
estimates was to increase net loss for the twelve months ended December 31, 1995
by approximately $10.2 million or $.43 per common share.
NOTE 4 - EDS SERVICE AND TECHNOLOGY AGREEMENT
On July 28, 1993, the Company entered into a ten year exclusive
agreement with EDS to install the first digital video system in the hotel PPV
industry. Under this agreement, EDS and the Company began installing a
Compressed Digital Video ("CDV") satellite movie transmission system, STARPATH,
throughout most of the Company's current and future U.S. hotel sites. STARPATH
replaces the Company's existing analog technology, which relies exclusively on
videotape players located at each hotel or studio location and which technology
has been used since the Company's inception in 1971. EDS and the Company have
also installed a new digital video on-demand movie system utilizing video file
servers, "Digital Guest Choice" in select hotels. Also, included in the STARPATH
technology is the Company's development of a UNIX based integrated computer
system ("SPEXIS") which is installed in conjunction with the Company's PPV
systems and will enable the Company to provide enhanced interactive services. In
connection with the installation of the STARPATH system, EDS and the Company
entered into a contract for EDS to perform all of the field service functions
beginning in April 1994. The transition of the Company's field service to EDS
involved numerous difficulties for field service personnel in maintaining the
normal level of repairs and maintenance of existing PPV rooms concurrent with
rapid installation of the CDV sites.
The Company pays EDS (i) a fixed fee for network services which
includes satellite uplink, customer assistance service and management
information services; (ii) a fixed fee (which fee increases and decreases as the
number of the Company's hotels served increases and decreases) for field
services and maintenance of the Company's hotel systems; and (iii) a fixed
monthly fee for transponder access, time and related services for transmission
of movies. On February 1, 1996, the Bankruptcy Court approved a modification to
the EDS Service and Technology Agreement whereby the field service and the MIS
services operations would transition back to the Company. In addition, this
modification continues certain other lease agreements and allows for the
deferral of certain payments to EDS. Assuming a fixed number of hotels served of
1,750 sites, the contracted service fees for the modified service agreement
would be approximately $22.0 million, $17.6 million, and $9.9 million for the
years ended December 31, 1996, 1997, 1998, respectively, and $39.2 million
thereafter through September 30, 2003. The Company also has committed to
purchase certain system components, such as personal computers, integrated
receiver/decoders ("IRDs") and antennae from EDS or its affiliate in connection
with deployment of the CDV Satellite Network and digital file servers in
connection with Digital Guest Choice. The Company has purchased components of
this type from EDS, in the amount of approximately $3.4 million, $22.6 million,
and $2.5 million for the years ended 1995, 1994 and 1993, respectively.
At December 31, 1994 the Company had amounts payable to EDS for
equipment purchased during 1994 in connection with the technology change,
primarily IRDs, antenna and Digital Guest Choice file servers in the amount of
$16.0 million. On January 1, 1995 the Company entered into a special provisions
agreement (the "Special Provisions Agreement") with regards to $16 million of
outstanding payables for purchases of components ("EDS Equipment Lease") and
$24.6 million due for services rendered under the EDS Service and Technology
Agreement ("EDS Services Note"). The EDS Services Note accrued interest at 11.5%
per annum with payment due in full on or before August 31, 1995. Additionally,
the Company was required to make minimum payments of $500,000 for each of
January, February and March 1995 for current (1995) service fees. To the extent
these current fees exceeded the payments made during this period, the excess was
due and payable on August 31, 1995. Notwithstanding
F-34
<PAGE> 139
the above, 10% of the proceeds from the sale of any of the Company's significant
assets, as defined, must be applied to the EDS Services Note. As a result of the
Company's Chapter 11 filing, payment of the EDS Services Notes has been stayed
and such amount has been classified as a pre-petition liability. As a result of
the EDS Equipment Lease, $16.0 million of system components classified in video
systems at December 31, 1994, have been accounted for as an operating lease
effective January 1, 1995.
As a result of the changes in technology and field service operations,
the Company accrued charges in the amount of $6.8 million in its results of
operations for the year ended December 31, 1993 for the write-off of obsolete
equipment (primarily videotape players and obsolete microprocessing equipment),
and personnel related costs associated with the transition of the Company's
field service operations. Approximately $3.9 million were non-cash charges
attributable to the write-down of obsolete equipment and $2.9 million was due to
costs of severance and incentives to field operation personnel and costs related
to the closing of field service offices. Upon execution of the EDS Service and
Technology Agreement, the Company's management determined the impact on
operations including obsolete equipment and personnel reductions and accordingly
recorded the estimation of these costs in the results of operations for 1993.
The cash charges were paid during 1994.
NOTE 5 - STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Cash interest paid..........................................$ 3,513 $ 3,643 $ 43,854
State and foreign income taxes paid......................... 126 612 2,191
Non-cash investing and financing activities:
Capital lease obligation incurred on lease of equipment... 6,757 13,484 12,915
EDS equipment lease (Note 4).............................. 16,000 16,000 --
</TABLE>
NOTE 6 - LOSS PER COMMON SHARE
The loss per common share is calculated on the weighted average number
of common shares outstanding for the period. Common stock warrants and stock
options are not included in the computation as their effect is anti-dilutive.
See Note 11, Part II, Item 8, "Stockholders' Deficit". The weighted average
number of common shares outstanding for each period are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR AVERAGE SHARES
------------------------- --------------------
<S> <C>
1995..................... 23,983,905
1994..................... 23,983,905
1993..................... 18,178,289
</TABLE>
NOTE 7 - DEBT
Foothill Revolving Facility: On June 9, 1995, Spectradyne entered into
a loan and security agreement with Foothill Capital Corporation to provide
debtor-in-possession financing (the "Foothill
F-35
<PAGE> 140
Loan"). The Foothill Loan allows for revolving advances up to a maximum amount
of $40 million and bears interest payable monthly at prime plus 1.75% with a
floor of 8.5%. Proceeds from initial advances under the Foothill Loan were used
to repay outstanding balances and accrued interest under the Company's revolving
credit facility and the Canadian Bank Credit Facility (referred to herein as the
"Old Credit Facilities"). The Foothill Loan matures June 15, 1997. At December
31, 1995 there was $26.7 million outstanding under the Foothill Loan.
The Foothill Loan is secured by all of the assets of Spectradyne and
certain subsidiaries, all of the outstanding stock of the Company's subsidiaries
and the guarantees of SpectraVision and certain subsidiaries. The Foothill Loan
contains various and customary financial and operating covenants including
limitations on additional indebtedness and limitations on capital expenditures.
At December 31, 1995 the Company was not in compliance with the financial
covenants relating to its operating cash flow and its fixed charges to cash flow
ratio requirements. On March 22, 1996, the Company obtained a waiver from
Foothill Capital Corporation for the December 31, 1995 covenant violations.
However, the Company does not expect that it will be in compliance with the
financial covenants relating to its operating cash flow and its fixed charges to
cash flow ratios in 1996. Accordingly, in April 1996, Foothill Capital
Corporation could elect to terminate the revolving line of credit, demand
immediate payment of all outstanding balances and foreclose on the Company's
assets securing the revolving line of credit if payment is not made. In this
event, if the Company cannot obtain alternative financing, it may be forced to
liquidate in a Chapter 7 bankruptcy proceeding.
Revolving Credit Facility: Concurrent with the 1993 Offerings, the
Company obtained a revolving credit facility with borrowing availability of $20
million with two financial institutions (the "Revolving Credit Facility"). The
Revolving Credit Facility includes a letter of credit sub-facility of up to $10
million including a letter of credit in the amount of $7.5 million (the "Standby
Letter of Credit") supporting the Canadian Bank Credit Facility, described
below. The Revolving Credit Facility matured on October 5, 1997. All outstanding
loans bore interest at the Company's option at either (i) the highest of prime
rate plus 1.25%, CD rate plus 2.25% and federal funds rate plus 1.75% or (ii)
Eurodollar rate plus 3.75%. Interest on loans bearing interest at the rate set
forth in clause (i) above were payable quarterly in arrears and interest on
Eurodollar loans were payable at the earliest of either three months or the end
of the applicable interest period. At December 31, 1994 there was $12.5 million
outstanding under the Revolving Credit Facility at 10.75%.
The Revolving Credit Facility was secured by a pledge of the
outstanding stock of Spectradyne and SPI Newco and assets of the Company and all
of its direct and indirect subsidiaries. The Revolving Credit Facility was
senior to the Reset Notes and CVRs and pari passu in right of payment with the
Senior Notes.
The Revolving Credit Facility contained various customary covenants
including the maintenance of certain financial ratios, limitation on capital
expenditures and capital leases, limitations on dividends or distributions on
equity and other junior securities of the Company and prohibited the Company
from making any cash payments with respect to the CVRs.
Outstanding borrowings under the Revolving Credit Facility were repaid
in June 1995 with initial proceeds from the Foothill Loan.
Canadian Bank Credit Facility. The Canadian Bank Credit Facility
provided borrowings up to US$7.35 million. The loan allowed for Eurodollar Rate
loans, as selected by the Company, in denominations of not less than $1 million
for a period of not less than one month and not more than five years. The loans
bore interest at the Eurodollar rate plus .75%, payable as the Eurodollar loans
matured
F-36
<PAGE> 141
or quarterly, whichever occurred earlier. At December 31, 1994, the Company had
$7.35 million in Eurodollar loans at 6.75%. The loan was secured by the $7.5
million Standby Letter of Credit provided by the Revolving Credit Facility. In
May 1995, the outstanding balance and accrued interest were repaid.
Senior Discount Notes. At October 5, 1993 the Senior Notes were issued
at a substantial discount from their $209.5 million principal amount generating
gross proceeds to the Company of $150.0 million. The Senior Notes mature October
1, 2001 and accrue interest at 11.5% commencing on October 1, 1996 and are
payable semi-annually on April 1 and October 1, beginning April 1, 1997.
On or after October 1, 1997, the Company, at its option, may redeem the
Senior Notes in whole or in part at the following redemption prices (expressed
as a percentage of principal amount) together with accrued and unpaid interest
to the redemption date, if redeemed during the twelve-month period beginning
October 1 of the years indicated below:
<TABLE>
REDEMPTION
YEAR PRICE
------------------ --------------
<S> <C>
1997.............. 104.929%
1998.............. 103.286%
1999.............. 101.643%
2000.............. 100.000%
</TABLE>
The Senior Notes contain certain covenants which, among other things,
(a) limit the payment of dividends and certain other restricted payments by both
the Company and its subsidiaries, (b) require the purchase by the Company of the
Senior Notes at the option of the holder upon a change of control, as defined,
(c) limit additional indebtedness and (d) limit transactions with certain
affiliates. The Senior Notes are guaranteed by SPI Newco and Spectradyne and are
secured on a subordinated basis to the Revolving Credit Facility by a pledge of
all of the outstanding stock of SPI Newco and Spectradyne and certain other
assets.
The Senior Notes are senior to the Reset Notes and CVRs and pari passu
in right of payment to the Revolving Credit Facility.
In accordance with SOP 90-7, the accruing of interest on the Senior
Notes was suspended on June 8, 1995 when the Company filed for protection under
Chapter 11 of the Federal Bankruptcy Act. The unrecorded accrued interest since
June 8, 1995 is $12.2 million.
Other Debt. Other debt consists of a series of collateralized bank
loans and other installment debt with fixed and variable interest rates to be
repaid in monthly installments of principal and interest over a period ending
September 1997.
Senior Subordinated Reset Notes. The Reset Notes, issued in November
1992, initially carried an interest rate of 11.50% per annum payable
semi-annually in cash on June 1 and December 1. On November 23, 1993 (the "Reset
Date"), the interest rate was reset, in accordance with the Reset Note
indenture, to an interest rate determined to cause the market value of the Reset
Notes to equal 101.7% of the principal amount. On the Reset Date, the interest
rate was reset to 11.65% per annum.
In accordance with the Reset Note indenture, the Company elected to pay
interest on the Reset Notes on June 1, 1994, December 1, 1994 and June 1, 1995
through the issuance of additional Reset Notes in the amount of $34.0 million in
1994 and $18.5 million in 1995 (the "PIK Option"). The annual
F-37
<PAGE> 142
interest rate on the Reset Notes for the interest period for which such option
was exercised was increased to 12.65%. On December 1, 1995 and each interest
payment thereafter, the Reset Note indenture requires interest to be paid in
cash.
In accordance with SOP 90-7, the accruing of interest on the Reset
Notes was suspended on June 8, 1995 when the Company filed for protection under
Chapter 11 of the Federal Bankruptcy Act. The unrecorded accrued interest since
June 8, 1995 is $21.3 million.
The Reset Notes are redeemable at the following redemption prices
(expressed as percentages of principal amount) plus accrued interest to the
redemption date, if redeemed during the 12-month period beginning December 1 of
the years indicated below:
<TABLE>
REDEMPTION
YEAR PRICE
------------------ --------------
<S> <C>
1997.............. 105.00%
1998.............. 103.75%
1999.............. 102.50%
2000.............. 101.00%
2001.............. 100.00%
</TABLE>
The Reset Notes contain certain covenants which, among other things,
(a) limit the payment of dividends and certain other restricted payments by both
the Company and its subsidiaries, (b) require the purchase by the Company of the
Reset Notes at the option of the holder upon a change of control, (c) limit
additional indebtedness and (d) limit transactions with certain affiliates. The
Reset Notes are senior in right of payment to the CVRs and junior in right of
payment to the Revolving Credit Facility, the Canadian Bank Credit Facility and
the Senior Notes. The Reset Notes are secured on a subordinated basis, by a
pledge of the capital stock of both Spectradyne and SPI Newco and subordinated
guarantees of Spectradyne and SPI Newco.
Interest Rate Protection Agreement. The Company entered into an
interest rate protection agreement with Wells Fargo Bank on June 30, 1993, the
lender under the Bank Credit Facility, for a period of one year on a principal
amount up to the lesser of $75 million or 50% of the outstanding balance under
the Bank Credit Facility. Under the terms of the agreement, the Company would
have received compensation when the 90 day LIBOR (London Interbank Offered Rate)
exceeded 6.00% (ceiling) and the Company paid compensation when LIBOR is less
than 3.31% (floor). Compensation paid or received was recognized as interest
rates deviate beyond the stated rates. The Interest Rate Protection Agreement
expired June 30, 1994. For the twelve months ended December 31, 1994 and 1993,
additional interest expense under this agreement and a previous similar
agreement was $23,000, and $1.7 million, respectively. The Company currently has
no financial derivatives.
In connection with the Foothill Loan in 1995, a portion of the proceeds
was used to extinguish the Revolving Credit Facility originally due in 1997. The
unamortized debt issuance cost of $.9 million was expensed resulting in an
extraordinary loss on extinguishment of debt. In connection with the 1993
Offerings, a portion of the proceeds was used to extinguish the Bank Credit
Facility and Supplemental Credit Facility originally due in 1998. The
unamortized debt issuance cost of $2.7 million was expensed resulting in an
extraordinary loss on extinguishment of debt.
F-38
<PAGE> 143
The following table indicates future maturities of all debt, excluding
liabilities subject to settlement under reorganization and minimum annual
rentals under capital lease obligations:
<TABLE>
<S> <C>
1996................... $ --
1997................... 26,703
1998................... --
1999................... --
2000................... --
After 2000............. --
-------------
$ 26,703
=============
</TABLE>
F-39
<PAGE> 144
NOTE 8 - INCOME TAXES
The income tax benefit attributable to continuing operations for the
years ended December 31, 1995, 1994 and 1993 consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
CURRENT:
U.S. Federal........... $ -- $ -- $ --
State and local........ 41 (812) 1,275
Foreign................ 85 364 464
---------- ----------- -----------
$ 126 $ (448) $ 1,739
========== =========== ===========
DEFERRED:
U.S. Federal........... (693) $ (18,519) $ (3,325)
State and local........ (273) (9,946) (1,044)
Foreign................ -- (7) (98)
---------- ----------- -----------
$ (966) $ (28,472) $ (4,467)
========== =========== ===========
</TABLE>
Income tax benefit for the years ended December 31, 1995, 1994, and
1993 differed from the amount computed by applying the U.S. Federal income tax
rate of 35 percent in 1995, 1994 and 1993 to the loss before income taxes and
extraordinary item as a result of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
------------- ----------- ----------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (26,070) $ (99,122) $ (16,025)
Change in income tax benefit resulting from:
State income taxes..................................... (341) (6,993) 150
Current year loss for which no benefit is recognized... 25,737 76,963 10,112
Other, net............................................. (166) 232 3,035
------------- ----------- ----------
Total................................................ $ 840 $ (28,920) $ (2,728)
============== =========== ==========
</TABLE>
F-40
<PAGE> 145
At December 31, 1995 and 1994 the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred
tax liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
------------ ---
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 114,836 $ 99,764
Tax benefit of deferred state taxes........................... 865 1,063
Original issue discount....................................... 33,485 25,034
Other......................................................... 9,454 9,226
------------ -----------
Total gross deferred tax assets............................... 158,640 135,087
Less valuation allowance.................................... (139,432) (113,375)
------------ -----------
Net deferred tax assets..................................... 19,208 21,712
Deferred tax liabilities:
Intangible assets, principally due to differences in basis.... 18,961 20,000
Video systems and fixed assets, principally due 3,222 6,569
to differences in depreciation..............................
Other......................................................... 2,492 1,900
------------ -----------
Total gross deferred tax liabilities.......................... 24,675 28,469
------------ -----------
Net deferred tax liability.................................... $ 5,467 $ 6,757
============ ===========
</TABLE>
At January 1, 1995 the valuation allowance for deferred tax assets was
$113.4 million. The net change in the total valuation allowance for the years
ended December 31, 1995 and 1994 were increases of $26.1 million and $75.1
million, respectively. The Company has recognized deferred tax assets to the
extent such assets can be realized through future reversals of existing taxable
temporary differences. At December 31, 1995, subsequently recognized tax
benefits relating to the valuation allowance for deferred tax assets will be
reported in the consolidated statement of operations.
At December 31, 1995, SpectraVision had an unused net operating loss
("NOL") carryforward for federal income tax purposes of $328 million which will
expire in years 2002 through 2010. However, because the consummation of the 1992
Restructuring triggered an ownership change of the Company on November 23, 1992
(the "Effective Date"), the Company's pre-ownership change NOL carryforwards are
subject to certain limitations under Section 382 of the Internal Revenue Code of
1986, as amended (the "Code"). The Company has applied Section 382(l)(6) of the
Code which will limit the Company's use of its pre-ownership change NOLs
(approximately $220 million) in each taxable year following the 1992
Restructuring. The Company has calculated the annual limitation by taking the
product of (i) the long-term tax-exempt rate prevailing on the Effective Date
and (ii) the value of the Company's stock immediately after the Effective Date.
The Company also has available any NOLs not utilized from post-ownership change
taxable years. The Company currently estimates the annual amount available under
this limitation to be approximately $14 million.
NOTE 9 - STOCK OPTIONS
F-41
<PAGE> 146
The 1994 Management Incentive Equity Plan (the "1994 Option Plan") was
approved by stockholders on May 25, 1994. The 1994 Option Plan provides that
officers and key employees may be granted either nonqualified stock options or
incentive stock options for the purchase of the Company's Class B Common Stock,
and also authorized the issuance of stock appreciation rights, either coupled
with or independent of outstanding or concurrently granted stock options. Up to
1,800,000 shares of the Company's common stock may be issued upon exercise of
options and rights granted under this plan. The compensation committee of the
board of directors administers the plan.
Stock options vest at the rate of 25 percent per year commencing on the
first anniversary of the date of grant, except for the initial options granted,
and expire ten years from the date of grant. On February 2, 1994, subject to
stockholder approval of the 1994 Option Plan, options with respect to 359,756
shares were granted (the "Initial Options"). The Initial Options vested on the
date of stockholder approval and 25 percent per year on each subsequent
anniversary date of grant. In connection with certain employment contracts,
options with respect to 460,000 shares were granted during 1994.
All outstanding options for 3,060 shares under the 1988 stock option
plan became fully vested upon the change of control of the Company as a result
of the 1989 Acquisition on April 12, 1989. Pursuant to the terms of the purchase
agreement dated April 12, 1989, DP purchased options with respect to 3,010
shares from several employees of the Company in 1989, for a price of $402.70 per
option. Options were granted at an exercise price of $37.30 (restated for the
effects of the 1-for-20 reverse stock splits on September 13, 1991 and June 30,
1992), which was the fair market value of the Company's common stock on the date
of grant. The options for 3,010 shares of Class B Common Stock held by DP were
transferred to Rainbow on December 20, 1990, and are outstanding and unexercised
at December 31, 1995.
The following table summarizes transactions under the Company's 1988
and 1994 stock option plans:
<TABLE>
<CAPTION>
SHARES UNDER EXERCISE PRICE
OPTION PER OPTION
------------ --------------
<S> <C> <C>
Outstanding at December 31, 1992....................................... 3,010 $ 37.30
Granted.............................................................. -- --
Exercised............................................................ -- --
Canceled............................................................. -- --
Outstanding at December 31, 1993....................................... 3,010 $ 37.30
Granted.............................................................. 819,756 $7.875 - $0.375
Exercised............................................................ -- --
Canceled............................................................. (151,100) $ 7.875
--------
Outstanding at December 31, 1994....................................... 671,666 $37.30 - $0.375
Granted.............................................................. -- --
Exercised............................................................ -- --
Canceled............................................................. -- --
--------
Outstanding at December 31, 1995....................................... 671,666 $37.60 - $0.375
--------
Exercisable at December 31, 1995....................................... 671,666 $37.50 - $0.375
========
</TABLE>
F-42
<PAGE> 147
NOTE 10 - CONTINGENT VALUE RIGHTS
In November 1992, the Company issued 3,269,544 CVRs. Holders of the
CVRs were entitled to a payment (the "Mandatory Redemption Payment") on November
23, 1995 (the "Mandatory Redemption Date"). For each CVR, the holder was to have
received a payment equal to the lesser of $6.12 (the "Ceiling Price") or the
amount, if any, by which $30.59 (the "Target Price") exceeded the current market
value per share of Class B Common Stock, subject to certain adjustments. The
Mandatory Redemption Payment was to be made in cash, except where agreements
under senior obligation of the Company prohibited cash payments. The Company has
recorded the maximum obligations as temporary equity. These payments have been
stayed as a result of the Chapter 11 filings.
NOTE 11 - STOCKHOLDERS' DEFICIT
Class A and Class B Common Stock. The Company has authorized 6,000,000
shares of Class A Common Stock and 144,000,000 shares of Class B Common Stock.
Holders of Class A Common Stock are entitled to ten votes for each share and
holders of Class B Common Stock are entitled to one vote for each share. Holders
of Class A Common Stock have the right to elect nine members of the Company's
Board of Directors and holders of Class B Common Stock have the right to elect
five members of the Company's Board of Directors. Except as described above, the
Class A Common Stock and the Class B Common Stock have equal rights and
privileges and rank equally, share ratably, and are identical in all respects as
to all matters.
Each share of Class A Common Stock is convertible into one fully paid
and nonassessable share of Class B Common Stock at the option of the holder
thereof. Upon transfer by the holder of Class A Common Stock, other than to a
permitted transferee (as defined), each share of Class A Common Stock shall
automatically be converted into one share of Class B Common Stock. In the event
of a stock split, reverse stock split or stock dividend, the holders of Class A
Common Stock will receive in exchange thereof the number of shares of Class B
Common Stock which such holder would have been entitled to receive had the
conversion occurred prior to such subdivision, combination or distribution.
The indentures governing the Reset Notes, the Senior Notes and the
Foothill Loan limit payment of cash dividends on both Class A and Class B Common
Stock.
The following table shows capital stock transactions in share amounts
during 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Class A Common Stock:
Beginning of the year................................... 4,593,526 4,745,526 5,145,526
Converted to Class B Common Stock....................... -- (152,000) (400,000)
-------------- ------------- -------------
End of year............................................. 4,593,526 4,593,526 4,745,526
============== ============= =============
Class B Common Stock:
Beginning of the year................................... 19,390,379 19,238,379 11,188,379
Issued in 1993 Offering................................. -- -- 7,650,000
Converted to Class B Common Stock....................... -- 152,000 400,000
-------------- ------------- -------------
End of year............................................. 19,390,379 19,390,379 19,238,379
============== ============= =============
</TABLE>
F-43
<PAGE> 148
Warrants. A total of 4,322,260 warrants were issued to former holders
of Spectradyne Common Stock who affirmatively elected to receive such warrants
in lieu of cash at the 1987 Acquisition. The warrants became exercisable on
October 8, 1992 and expire on October 8, 1997. Due to the 1-for-20 reverse stock
splits on September 13, 1991 and June 30, 1992, the tender of 400 warrants at a
stated exercise price of $0.13 per warrant or an aggregate exercise price of
$52.00 are required to purchase one share of Class B Common Stock. At December
31, 1995 there were 4,322,260 warrants outstanding.
NOTE 12 - COMMITMENTS
Capital and Operating Leases: SpectraVision leases certain office space
and equipment used in operations under operating lease agreements. The Company
finances certain equipment used in its PPV systems, primarily televisions and
video racks, under capital leases. Rental expense for operating leases totaled
$7.0 million, $5.1 million, and $4.0 million in 1995, 1994 and 1993,
respectively. Future minimum annual rentals under lease arrangements are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR CAPITAL LEASES OPERATING LEASES
- -------------- --------------- ----------------
<C> <C> <C>
1996.......... $ 9,148 $ 7,557
1997.......... 7,190 7,083
1998.......... 7,383 828
1999.......... 4,455 270
2000.......... 911 133
Thereafter.... -- 366
--------------- ----------------
$ 29,087 $ 16,237
================
Less imputed interest... (4,536)
---------------
Total...............$ 24,551
===============
</TABLE>
In connection with the EDS Service and Technology Agreement, certain
operating lease payments are reimbursable to the Company by EDS. As a result of
the modification of this agreement on February 1, 1996, the reimbursed rents
portion of the agreement will be terminated. The amount of reimbursed rents
included in Operating Leases above will be $1,565 for the year ended December
31, 1996. See Note 4, "EDS Service and Technology Agreement" for additional
description of other commitments.
NOTE 13 - CONTINGENCIES
On October 20, 1994, a purported class action complaint was filed in
the United States District Court alleging misrepresentations and omissions
concurrent and following the 1993 Offerings. The plaintiffs seek unspecified
damages, prejudgment interest, and fees and costs of the plaintiffs. While the
Company believes that it has meritorious defenses to the claims and intends to
vigorously defend itself, an unfavorable resolution could have a material
adverse effect on the Company. In addition, the Company is presently unable to
estimate the amount, if any, of such loss. Proceedings in this lawsuit with
respect to the Company have been stayed as a result of the Chapter 11 filings.
F-44
<PAGE> 149
The Company and its subsidiaries and related companies are potential
and named defendants in several other lawsuits and claims arising in the
ordinary course of business. While the outcome of such claims, lawsuits or other
proceedings against the Company cannot be predicted with certainty, management
expects that such liability, to the extent not provided for through insurance or
otherwise, will not have a material adverse effect on the operating results or
financial condition of the Company. Proceedings in connection with any lawsuit
against the Company have been stayed as a result of the Chapter 11 filings.
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for 1995 and 1994 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1995(a)
Revenues........................................ $ 33,135 $ 32,073 $ 30,599 $ 28,179
Operating loss.................................. (5,365) (6,871) (14,786) (12,231)
Income taxes (benefit).......................... (241) (223) (141) (235)
Net loss........................................ (19,954) (19,690) (22,455) (12,461)
Loss per common share
before extraordinary item..................... $ (0.83) $ (0.82) $ (0.94) $ (0.52)
1994(b)
Revenues........................................ $ 37,100 $ 37,700 $ 34,602 $ 32,982
Operating loss.................................. (3,392) (2,163) (7,873) (215,958)
Income taxes (benefit).......................... (1,821) (1,782) 61 (25,378)
Net loss........................................ (15,218) (14,094) (22,631) (202,341)
Loss per common share
before extraordinary item..................... $ (0.63) $ (0.59) $ (0.95) $ (8.43)
</TABLE>
(a) The second quarter of 1995 includes an extraordinary item for the
write-off of unamortized debt issuance costs in the amount of $915,000.
(b) The fourth quarter of 1994 includes the revaluation of hotel contracts
and write-off of patent costs in the amount of $196.3 million.
F-45
<PAGE> 150
NOTE 15 - OPERATIONS BY GEOGRAPHIC AREA
The following table presents the Company's revenues and operating loss
before income taxes for the years ended December 31, 1995, 1994 and 1993 and
identifiable assets net of accumulated depreciation and amortization as of
December 31, 1995, 1994 and 1993 by geographic area. The United States includes
branch operations in Puerto Rico and the U.S. Virgin Islands and Other includes
operations in Hong Kong, Australia, Thailand, Singapore and Mexico (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------------ ---------- ----------
<S> <C> <C> <C>
Revenues:
United States.......................................$ 100,667 $ 119,869 $ 140,457
Canada.............................................. 12,115 12,879 12,867
Other............................................... 11,204 9,636 9,669
------------ ---------- ----------
Total Revenues....................................$ 123,986 $ 142,384 $ 162,993
============ ========== ==========
Operating Income (Loss) Before Corporate
Expense:
United States.......................................$ (39,015) $ (22,870) $ 13,562
Canada.............................................. 4,107 2,035 1,518
Other............................................... 4,255 2,944 3,113
------------ ---------- ----------
(30,653) (17,891) 18,193
Less corporate expenses and non-operating (income):
Parent company expenses............................. 1,606 1,993 2,105
Amortization of corporate intangibles............... 6,994 13,246 12,883
Write-down of hotel contracts....................... -- 196,256 --
Non-operating income................................ (508) (1,163) --
Interest expense.................................... 28,177 54,981 48,990
Reorganization items................................ 7,563 -- --
------------ ---------- ----------
Loss Before Income Taxes and
Extraordinary item..................................$ (74,485) $ (283,204) $ (45,785)
============ ========== ==========
Identifiable assets, net:
United States.......................................$ 129,719 $ 166,782 $ 137,151
Canada.............................................. 11,749 9,276 10,958
Other............................................... 10,710 9,819 7,650
Total identifiable assets, net.................... 152,178 185,877 155,759
Hotel Contracts, net.................................. 47,403 50,000 253,508
Corporate Assets...................................... 6,041 6,945 211
------------ ---------- ----------
Total Assets, net...................................$ 205,622 $ 242,822 $ 409,478
============ ========== ==========
PPV Rooms: (unaudited)
United States....................................... 441,672 527,608 584,354
Canada.............................................. 71,600 73,987 74,777
Other............................................... 37,134 33,783 25,468
------------ ---------- ----------
550,406 635,378 684,599
============ ========== ==========
</TABLE>
F-46
<PAGE> 151
NOTE 16 - RELATED PARTIES
The Company entered into a new management agreement (the "Management
Agreement") effective November 23, 1992 with Rainbow to provide continuation of
the services provided in the Old Management Agreement as well as the
continuation of Mr. Davis's guarantee of the Company's then outstanding
supplemental credit facility. In consideration for these services, the Company
paid Rainbow a monthly fee equal to 1.2% of the maximum available commitment
under the supplemental credit facility. Fees paid under this agreement were
$182,189 in 1993. Upon closing of the 1993 Offerings and Revolving Credit
Facility, the Management Agreement was terminated.
In connection with the 1993 Offerings and Revolving Credit Facility,
the Board of Directors approved payment of an advisory fee of $1.0 million to
Davis Capital Advisors, an entity controlled by Mr. Marvin Davis. Additionally,
the Company reimbursed Rainbow for out-of-pocket expenses in connection with
advisory services provided in 1993 of $56,000. The Company believes the Advisory
Fee and the fees under the Management Agreement are at least as favorable as
could be obtained from an unrelated third party.
NOTE 17 - SAVINGS FOR RETIREMENT PLAN
The Company provides a Savings for Retirement Plan under Section
401(k) of the Internal Revenue Code. The plan allows participation by all
employees of Spectradyne and United States based employees of Spectradyne
International, Inc., who are not covered by a collective bargaining agreement,
after three months of employment. Eligible employees are allowed to contribute
up to 15% of their compensation, subject to other limitations of the plan and
the Internal Revenue Code; the Company's discretionary matching contribution is
limited to 100% of the first 3% of a participant's 401(k) contribution and 50%
of the next 2% of a participant's contribution. Employee contributions in excess
of 5% of their annual compensation are not matched by the Company. In March
1995, the Company suspended its matching contribution. The Company contributions
vest to the employee ratably to 100% after the third year of service. The
Company's matching contribution to the 401(k) plan was $47,000, $425,000, and
$564,000 for 1995, 1994, and 1993, respectively.
NOTE 18 - INTANGIBLE ASSETS
The hotel contracts were recorded at fair value as a result of the
1989 Acquisition and amortized on a straight-line basis over 25 years. Fair
value of hotel contracts was calculated utilizing the future cash flows to be
produced by the Company's existing hotel contracts discounted at the then
prevailing interest rate and further discounted at the historical contract
renewal rate.
During 1994, the Company experienced a significant reduction of cash
flows from existing hotel contracts, an increase in capital expenditures in
support of contract renewals and significant capital expenditures for the
deployment of the new STARPATH technology without any immediate cash flow
improvement. The Company continually assesses the carrying amount of hotel
contracts by determining whether its balance can be recovered over its remaining
life. The Company's analysis of undiscounted future cash flows indicated that a
substantial portion of the carrying amount of hotel contracts would not be
recoverable. Accordingly, based on the Company's estimate of discounted future
cash flows from existing hotel contracts, the Company wrote off $191.0 million
of the carrying amount of hotel contracts at December 31, 1994 which resulted in
a remaining balance of hotel contracts of $50.0 million as of
F-47
<PAGE> 152
December 31, 1994. Additionally, the Company wrote-off $5.2 million in patent
costs at December 31, 1994.
As of December 31, 1995, the Company has separately classified
certain contract costs related primarily to the purchase of televisions as
Deferred Contract Concession Costs. Such costs were previously included in Video
Systems as of December 31, 1994 and have been reclassified to conform to the
current year presentation.
NOTE 19 - GUARANTOR SUBSIDIARIES
The Company's obligations under the Reset Notes and Senior Notes are
guaranteed on a subordinated basis by the Company's direct subsidiary, SPI Newco
and by SPI Newco's direct subsidiary, Spectradyne (the "Subordinated
Guarantees"). Such guarantee is full, unconditional and joint and several.
The following supplemental combining financial information presents:
(1) Statements of Financial Position as of December 31, 1995 and 1994
and Statements of Operations and Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 of (a) SpectraVision, the parent, (b) SPI Newco
and Spectradyne, the Guarantors, (c) combined nonguarantor subsidiaries and (d)
the consolidated Company.
(2) Elimination entries required to consolidate SpectraVision, SPI
Newco and Spectradyne and the combined nonguarantor subsidiaries.
F-48
<PAGE> 153
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL COMBINING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1995
(in thousands)
Guarantor Subsidiaries
<TABLE>
<CAPTION>
Parent NONGUARANTOR SPECTRAVISION
Company NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ----- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents .......... $ -- $ 2 $ 2 $ 3,434 $ -- $ 3,438
Accounts receivable, less .........
allowance for doubtful accounts .. -- -- 13,050 3,378 -- 16,428
Prepaids and other assets ......... 5,604 -- 7,318 1,030 -- 13,952
Intercompany receivables .......... 188,105 37,332 20,660 782 (346,879) --
Intercompany note receivable ...... 350,000 -- -- -- (350,000) --
Intercompany investments .......... (476,381) 477,150 3,072 2 (3,843) --
Video systems ..................... -- -- 220,198 39,118 -- 259,316
Less accumulated depreciation .....
and amortization ................ -- -- (130,921) (24,683) -- (155,604)
--------- --------- --------- --------- --------- ---------
Total video systems ............. -- -- 89,277 14,435 -- 103,712
Land, building and equipment ...... -- -- 13,449 1,412 -- 14,861
Less accumulated depreciation ..... -- -- (4,720) (1,201) -- (5,921)
--------- --------- --------- --------- --------- ---------
Total land, building and
equipment ..................... -- -- 8,729 211 -- 8,940
Hotel contracts (net).............. -- -- 47,403 -- -- 47,403
Deferred contract concession
costs (net) ..................... -- -- 11,749 -- -- 11,749
--------- --------- --------- --------- --------- ---------
Total assets .................... $ 67,328 $ 614,484 $ 201,260 $ 23,272 $(700,722) $ 205,622
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Liabilities
Accounts payable ................ $ -- $ -- $ 7,691 $ 437 $ -- $ 8,128
Other accrued liabilities ....... 61 1 10,689 447 -- 11,198
Income taxes .................... -- -- 5,583 67 -- 11,198
Intercompany payables ........... -- 177,553 138,142 31,184 (346,879) --
Intercompany note payable ....... -- 350,000 -- -- (350,000) --
Debt
Foothill Revolving Credit
Facility ...................... -- -- 26,703 -- -- 26,703
Capitalized lease obligations ... -- -- 1,618 346 -- 1,964
--------- --------- --------- --------- --------- ---------
Total debt ........................ -- -- 28,321 346 -- 28,667
Liabilities subject to settlement
under reorganization............. 494,875 -- 84,712 -- -- 579,587
Contingent value rights subject to
settlement under reorganization . 20,000 -- -- -- -- 20,000
Stockholders' equity (deficit)
Class A common stock ............ 5 -- -- -- -- 5
Class B common stock ............ 19 -- -- -- -- 19
Common stock--subsidiaries ...... -- -- -- 420 (420) --
Additional paid-in capital ...... 392,185 127,150 477,149 2,655 (606,954) 392,185
Retained deficit ................ (840,289) (40,220) (551,027) (14,511) 605,758) (840,289)
Foreign currency translation ....
adjustment .................... 472 -- -- 2,227 (2,227) 472
--------- --------- --------- --------- --------- ---------
Total stockholders' equity
(deficit) ................... (447,608) 86,930 (73,878) (9,209) (3,843) (447,608)
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) ................... $ 67,328 $ 614,484 $ 201,260 $ 23,272 $(700,772) $ 205,622
========= ========= ========= ========= ========= =========
</TABLE>
F-49
<PAGE> 154
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL COMBINING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1994
(in thousands)
GUARANTOR SUBSIDIARIES
<TABLE>
<CAPTION>
Parent NONGUARANTOR SPECTRAVISION
Company NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ----- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................... $ 2 $ -- $ 260 $ 1,055 $ -- $ 1,317
Accounts receivable, less allowance
for doubtful accounts..................... -- -- 16,646 3,771 -- 20,417
Prepaids and other assets................... 6,942 1 6,674 1,288 -- 14,905
Intercompany receivables.................... 163,604 160,096 16,547 100 (340,347) --
Intercompany note receivable................ 350,000 -- -- -- (350,000) --
Intercompany investments.................... (390,484) 477,150 3,072 -- (89,738) --
Video systems............................... -- -- 245,510 34,637 -- 280,147
Less accumulated depreciation
and amortization.......................... -- -- 127,391 (20,899) -- 148,290
--------- -------- --------- -------- ---------- ---------
Total video systems......................... -- -- 118,119 13,738 -- 131,857
Land, building and equipment................ -- -- 12,536 1,204 -- 13,740
Less accumulated depreciation............... -- -- (3,911) (1,054) -- (4,965)
--------- -------- --------- -------- ---------- ---------
Total land, building and equipment........ -- -- 8,625 150 -- 8,775
Hotel contracts, net........................ -- -- 50,000 -- -- 50,000
Deferred contract concession costs (net).... -- -- 15,551 -- -- 15,551
--------- -------- --------- -------- ---------- ---------
Total assets.............................. $ 130,064 $637,247 $ 235,494 $ 20,102 $(780,085) $ 242,822
========= ======== ========= ======== ========== =========
Liabilities and stockholders' equity (deficit)
Liabilities
Accounts payable.......................... $ -- $ -- $ 48,404 $ 403 $ -- $ 48,807
Other accrued liabilities................. 3,526 -- 25,406 498 -- 29,430
Income taxes.............................. -- -- 6,563 484 -- 7,047
Intercompany payables..................... -- 160,448 160,196 19,703 (340,347) --
Intercompany note payable................. -- 350,000 -- -- (350,000) --
Debt
Revolving Credit Facility................. 12,500 -- -- -- -- 12,500
Canadian Bank Credit Facility............. -- -- -- 7,350 -- 7,350
11.5% Senior Discount Notes............... 172,295 -- -- -- -- 172,295
11.65% Senior Reset Notes................. 294,768 -- -- -- -- 294,768
Capitalized lease obligations............. -- -- 23,036 456 -- 23,492
Other debt................................ -- -- 150 8 -- 158
--------- -------- --------- -------- ---------- ---------
Total debt................................ 479,563 -- 23,186 7,814 -- 510,563
Contingent value rights subject to -- -- -- -- 20,000
settlement under reorganization........... 20,000
Stockholders' equity (deficit)
Class A common stock...................... 5 -- -- -- -- 5
Class B common stock...................... 19 -- -- -- -- 19
Common stock--subsidiaries................. -- -- -- 420 (420) --
Additional paid-in capital................ 392,185 127,150 477,150 2,652 (606,952) 392,185
Retained deficit.......................... (765,729) (351) (505,411) (13,540) 519,302 (765,729)
Foreign currency translation adjustment... 495 -- -- 1,668 (1,668) 495
--------- -------- --------- -------- ---------- ---------
Total stockholders' equity (deficit)........ (373,025) 126,799 (28,261) (8,800) (89,738) (373,025)
--------- -------- --------- -------- ---------- ---------
TOTAL LIABILITIES AND STOCK HOLDERS' EQUITY
(DEFICIT)................................... $ 130,064 $637,247 $ 235,494 $ 20,102 $(780,085) $ 242,822
========= ======== ========= ======== ========== =========
</TABLE>
F-50
<PAGE> 155
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------
PARENT SPECTRAVISION
COMPANY NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ----- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................... $ -- $ -- $ 102,436 $25,731 $ (4,181) $ 123,986
Costs and Expenses:
Direct Costs............................. -- -- 44,007 8,806 -- 52,813
Depreciation and amortization............ -- -- 34,272 5,092 -- 39,364
Operating expenses....................... -- -- 12,771 4,792 -- 17,563
Contracted service costs................. -- -- 28,921 359 -- 29,280
Selling and marketing expenses........... -- -- 4,321 562 -- 4,883
General and administrative expenses...... 1,606 3 13,796 1,915 -- 17,320
Research and development (net)........... -- -- 1,769 -- -- 1,769
Exchange loss............................ -- -- (18) 846 (581) 247
Intercompany charges..................... -- 3 -- 4,181 (4,181) --
--------- --------- --------- ------- --------- ---------
Total costs and expenses................. 1,606 (3) 139,839 26,553 (4,762) 163,239
--------- --------- --------- ------- --------- ---------
Operating Income (Loss).................... (1,606) -- (37,403) (822) 581 (39,253)
Non-operating income....................... -- -- (458) (50) -- (508)
Equity in losses of subsidiaries........... 85,874 -- -- -- (85,874) --
Interest expense (net)..................... 26,030 -- 1,859 288 -- 28,177
Intercompany interest expense (39,865) 39,865 -- -- -- --
(income).................................
Reorganization items....................... -- 1 7,561 1 -- 7,563
--------- --------- --------- ------- --------- ---------
Gain (Loss) Before Income Taxes and
Extraordinary Item....................... (73,645) (39,869) (46,365) (1,061) 86,455 (74,485)
Income Taxes:
State and foreign provision.............. -- -- 1 125 -- 126
Deferred benefit......................... -- -- (966) -- -- (966)
--------- --------- --------- ------- --------- ---------
Total Income Tax Benefit................... -- -- (965) 125 -- (840)
--------- --------- --------- ------- --------- ---------
Gain (Loss) before extraordinary item...... (73,645) (39,869) (45,400) (1,186) 86,455 (73,645)
Extraordinary item
Loss on debt extinguishment.............. 915 -- -- -- -- 915
--------- --------- --------- ------- --------- ---------
Net Income (Loss)........................ $(74,560) $(39,869) $(45,400) $(1,186) $ 85,455 $(74,560)
========= ========= ========= ======= ========= =========
</TABLE>
F-51
<PAGE> 156
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
PARENT NONGUARANTOR SPECTRAVISION
COMPANY NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ----- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................... $ -- $ -- $ 122,138 $24,659 $ (4,413) $ 142,384
Costs and Expenses:
Direct Costs............................. -- -- 50,576 7,439 -- 58,015
Depreciation and amortization............ 20 -- 45,353 5,161 -- 50,534
Write-down of hotel contracts............ -- -- 196,256 -- -- 196,256
Operating expenses....................... -- -- 9,802 3,403 -- 13,205
Contracted service costs................. -- -- 19,563 1,466 -- 21,029
Selling and marketing expenses........... -- -- 8,467 274 -- 8,741
General and administrative expenses...... 1,990 3 16,277 1,325 -- 19,595
Research and development (net)........... -- -- 3,649 165 -- 3,814
Exchange loss............................ -- -- -- 1,754 (1,173) 581
Intercompany charges..................... -- -- -- 4,413 (4,413) --
--------- --------- --------- ------- --------- ---------
Total costs and expenses............... 2,010 3 349,943 25,400 (5,586) 371,770
--------- --------- --------- ------- -------- ---------
Operating Income (Loss).................... (2,010) (3) (277,805) (741) 1,173 (229,386)
Non-operating expense (income):............ -- -- (1,163) -- -- (1,163)
Equity in losses of subsidiaries......... 239,991 -- -- -- (239,991) --
Interest expense (net)................... 54,628 -- (239) 592 -- 54,981
Intercompany interest expense (42,345) 42,345 -- -- -- --
(income)...............................
Intercompany dividend expense -- (42,345) 42,345 -- -- --
--------- --------- --------- ------- --------- ---------
(income)...............................
Income (Loss) Before Income Taxes........ (254,284) (3) (268,748) (1,333) 241,164 (283,204)
Income Taxes:
State and foreign provision (benefit).... -- -- (812) 364 -- (448)
Deferred benefit......................... -- -- (28,465) (7) -- (28,472)
--------- --------- --------- ------- --------- ---------
Total Income Tax (Benefit)................. -- -- (29,277) 357 -- 28,920
--------- --------- --------- ------- --------- ---------
Net Income (Loss).......................... $(254,284) $ (3) $(239,471) $(1,690) $ 241,164 $(254,284)
========= ========= ========= ======= ========= =========
</TABLE>
F-52
<PAGE> 157
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands)
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------
PARENT NONGUARANTOR
COMPANY NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ----- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ 143,493 $ 23,576 $ (4,079) $ 162,993
Costs and expenses
Direct Costs -- -- 52,108 6,726 -- 58,834
Depreciation and amortization 34 45 38,427 5,597 -- 44,103
Technology and field service
charges -- -- 6,703 297 -- 7,000
Loss on sale of manufacturing
assets and inventory -- -- 649 -- -- 649
Operating expenses -- -- 21,103 3,480 -- 24,583
Contracted service costs -- -- 1,716 -- -- 1,716
Selling and marketing expenses -- -- 4,887 167 -- 5,054
General and administrative
expenses 2,102 3 11,539 1,787 -- 15,431
Research and development (net) -- -- 1,426 159 -- 1,585
Exchange loss -- -- 9 824 -- 833
Intercompany charges -- -- -- 4,079 (4,079) --
--------- --------- --------- --------- --------- ---------
Total costs and expenses 2,136 48 138,567 23,116 (4,079) 159,788
--------- --------- --------- --------- --------- ---------
Operating Income (Loss) (2,136) (48) 4,926 463 -- 3,205
Non-operating expense (income):
Equity in losses of subsidiaries . 50,691 -- -- -- (50,691) --
Interest expense (net) 47,762 -- 696 532 -- 48,990
Intercompany interest expense
(income) (57,532) 57,532 -- -- -- --
Intercompany dividend expense
(income) -- (57,532) 57,532 -- -- --
--------- --------- --------- --------- --------- ---------
Income (Loss) Before Income
Taxes and Extraordinary Item (43,057) (48) (53,302) (69) 50,691 (45,785)
Income Taxes:
State and foreign provision -- -- 1,275 464 -- 1,739
Deferred benefit -- -- (4,369) (98) -- (4,467)
--------- --------- --------- --------- --------- ---------
Total Income Tax Provision (Benefit) -- -- (3,094) 366 -- (2,728)
--------- --------- --------- --------- --------- ---------
Income (loss) before 43,057 (48) (50,208) (435) 50,691 (43,057)
extraordinary item
Extraordinary item loss from
debt extinguishment (2,699) -- -- -- -- (2,699)
--------- --------- --------- --------- --------- ---------
Net Income (Loss) $ (45,576) $ (48) $ (50,208) $ (435) $ 50,691 $ (45,756)
========= ========= ========= ========= ========= =========
</TABLE>
F-53
<PAGE> 158
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------
PARENT NONGUARANTOR SPECTRAVISION
COMPANY NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ----- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided by (used in) operating
activities $ 13,436 $ 2 $(10,432) $ 15,137 $ 561 $ 18,704
-------- -------- -------- -------- -------- --------
Investing activities:
Cost of in-process systems and capital
expenditures -- -- (10,379) (5,752) -- (16,131)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities -- -- (10,379) (5,752) -- (16,131)
-------- -------- -------- -------- -------- --------
Financing activities:
Borrowings under Revolving Credit Facility 7,396 -- -- -- -- 7,396
Repayment of Revolving Credit Facility (20,811) -- -- -- -- (20,811)
Borrowings under Foothill Revolving Facility -- -- 88,618 -- -- 88,618
Repayment of Foothill Revolving Facility -- -- (61,915) -- -- (61,915)
Repayment of other debt and capitalized lease
obligations -- -- (6,150) (7,566) -- (13,716)
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing (13,415) -- 20,553 (7,566) -- (428)
activities -------- -------- -------- -------- -------- --------
Effect of exchange rate changes on cash flow (23) -- -- 560 (561) (24)
Net increase (decrease) in cash and cash equivalents (2) 2 (258) 2,379 -- 2,121
Cash and cash equivalents at beginning of period 2 -- 260 1,055 -- 1,317
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ 2 $ 2 $ 3,434 $ -- $ 3,438
======== ======== ======== ======== ======== ========
</TABLE>
F-54
<PAGE> 159
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------
PARENT NONGUARANTOR SPECTRAVISION
COMPANY NEWCO SPECTRADYNE SUBSIDIARIES CONSOLIDATED
------- ----- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided by (used in) operating
activities $(12,504) $ (1) $ 43,314 $ 5,356 $ 36,165
-------- -------- -------- -------- --------
Investing activities:
Cost of in-process systems and capital
expenditures $ -- $ -- $(52,350) $ (5,012) $(57,362)
-------- -------- -------- -------- --------
Net cash used in investing activities $ -- $ -- $(52,350) $ (5,012) $(57,362)
-------- -------- -------- -------- --------
Financing activities:
Borrowings under Revolving Credit Facility $ 12,500 $ -- $ -- $ -- $12,500
Repayment of other debt and capitalized lease
obligations -- -- (3,897) (290) (4,187)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities $ 12,500 $ -- $ (3,897) $ (290) $ 8,313
Effect of exchange rate changes on cash flow -- -- -- (84) (84)
-------- -------- -------- -------- --------
Net decrease in cash and cash equivalents (4) (1) (12,933) (30) (12,968)
Cash and cash equivalents at beginning of period 6 1 13,193 1,085 14,285
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 2 $ -- $ 260 $ 1,055 $ 1,317
======== ======== ======== ======== ========
</TABLE>
F-55
<PAGE> 160
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands)
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------
PARENT NONGUARANTOR SPECTRAVISION
COMPANY NEWCO SPECTRADYNE SUBSIDIARIES CONSOLIDATED
------- ----- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided by (used in) operating
activities $ (31,102) $ (4) $ 31,138 $ 6,228 $ 6,260
Investing activities:
Proceeds from sale of manufacturing
assets and inventory $ -- $ -- $ 5,201 $ -- $ 5,201
Increase in raw materials -- -- (313) -- (313)
Cost of in-process systems and capital
expenditures -- -- (30,941) (5,156) (36,097)
--------- --------- --------- --------- ---------
Net cash used in investing activities $ -- $ -- $ (26,053) $ (5,156) $ (31,209)
--------- --------- --------- --------- ---------
Financing activities:
Borrowings under Supplemental -- $ 23,000
Bank Credit Facility 23,000 -- --
Repayment of Supplemental
Bank Credit Facility (31,000) -- -- -- (31,000)
Repayment of Bank Credit Facility (180,120) -- -- -- (180,120)
Repayment of other debt and capitalized lease
obligations -- -- (1,043) (389) (1,432)
Issuance of class B common stock 84,150 -- -- -- 84,150
Stock issuance costs (6,501) -- -- -- (6,501)
Issuance of senior discount notes 149,981 -- -- -- 149,981
Payment of debt issue costs (8,417) -- -- -- (8,417)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities $ 31,093 $ -- $ (1,043) $ (389) $ 29,661
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash flow -- -- (9) (11) (20)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (9) (4) 4,033 672 4,692
Cash and cash equivalents at beginning of period 15 5 9,160 413 9,593
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 6 $ 1 $ 13,193 $ 1,085 $ 14,285
========= ========= ========= ========= =========
</TABLE>
F-56
<PAGE> 161
NOTE 20 - FINANCIAL STATEMENTS OF ENTITIES UNDER CHAPTER 11
The condensed balance sheet as of December 31, 1995 of SpectraVision
and all entities included in the Chapter 11 filings is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents ....................................... $ 84
Accounts receivable ............................................ 13,346
Debt issuance costs ............................................ 5,827
Prepaids and other assets ...................................... 7,304
Video systems .................................................. 222,802
Less accumulated depreciation
and amortization ............................................. 132,332
---------
Total video systems .......................................... 90,470
Building and equipment ......................................... 4,300
Furniture, fixtures and other equipment ........................ 6,649
Less accumulated depreciation .................................. (4,769)
---------
Total building and equipment ................................. 6,180
Land ........................................................... 2,559
Hotel contracts ................................................ 47,403
Deferred contract concession costs (net) ....................... 11,749
Investment in and advances to subsidiaries, at cost ............ 33,202
---------
TOTAL ASSETS ................................................. $ 218,124
=========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable ............................................. $ 7,723
Other accrued liabilities .................................... 10,881
Deferred income taxes ........................................ 5,467
Foothill Revolving Facility .................................. 26,703
Capital lease obligations .................................... 1,617
---------
52,391
---------
Liabilities subject to settlement under reorganization ....... 579,587
Intercompany payable ......................................... 4,947
Total liabilities .......................................... 636,925
Contingent value rights subject to settlement under reorganization 20,000
Stockholders' deficit:
Common stock ................................................. 24
Paid-in capital .............................................. 393,092
Retained deficit ............................................. (831,917)
---------
Total stockholders' deficit ................................ (438,801)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' .............................. $ 218,124
=========
EQUITY (DEFICIT) ...............................................
</TABLE>
F-57
<PAGE> 162
The condensed statement of operations for the year ended December 31,
1995 of SpectraVision and all entities included in the Chapter 11 filings is as
follows (dollars in thousands):
<TABLE>
<S> <C>
Revenues ........................................ $ 104,063
Costs and expenses:
Direct costs ................................... 44,779
Depreciation and amortization .................. 34,676
Operating expenses ............................. 12,771
Contracted service costs ....................... 29,686
Selling and marketing expenses ................. 4,294
General and administrative expenses ............ 15,646
Research and development (net) ................. 1,769
Exchange loss .................................. 1,051
---------
Total costs and expenses ..................... 144,672
---------
Operating income (loss) .......................... (40,609)
Non-operating income ............................. (508)
Interest expense (contractual interest expense of
$67,596 in 1995)(net) .......................... 27,873
---------
Loss before reorganization items, income taxes
and extraordinary item ......................... (67,974)
................................................. ---------
Reorganization items ............................. 7,593
---------
Loss before income taxes and extraordinary items.. (75,567)
Income taxes:
State and foreign provision (benefit) .......... 1
Deferred benefit ............................... (966)
---------
Total income tax benefit ..................... (965)
Loss before extraordinary item ................... (74,602)
Extraordinary item ............................... 915
---------
Net loss ......................................... $ (75,517)
=========
</TABLE>
F-58
<PAGE> 163
SPECTRAVISION, INC
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1996 1995
-------- -------------
ASSETS (unaudited)
<S> <C> <C>
Cash and Cash Equivalents ................................................ $ 4,918 $ 3,438
Accounts Receivable (net) ................................................ 13,763 16,428
Debt Issuance Costs (net) ................................................ 5,662 5,827
Prepaids and Other Assets ................................................ 6,323 8,125
Video Systems: ...........................................................
In Process Video Systems ............................................... 10,823 11,329
Installed Video Systems ................................................ 258,573 247,987
--------- ---------
Subtotal ............................................................. 269,396 259,316
Less Accumulated Depreciation and Amortization ........................... (170,815) (155,604)
--------- ---------
Total Video Systems ...................................................... 98,581 103,712
Building and Equipment Building .......................................... 4,300 4,300
Furniture, Fixtures and Other Equipment .................................. 8,882 8,002
--------- ---------
Subtotal ............................................................... 13,182 12,302
Less Accumulated Depreciation ............................................ (6,881) (5,921)
--------- ---------
Total Building and Equipment ............................................. 6,301 6,381
Land ..................................................................... 2,559 2,559
Hotel Contracts (net) .................................................... 46,104 47,403
Deferred Contract Concession Costs (net) ................................. 10,426 11,749
--------- ---------
TOTAL ASSETS ........................................................... $ 194,637 $ 205,622
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT ......................................
Liabilities ................................................................
Accounts Payable ......................................................... $ 12,289 $ 8,128
Accrued Liabilities ......................................................
Interest ............................................................... 328 --
Compensation ........................................................... 3,914 2,112
Other .................................................................. 7,655 9,086
Income Taxes ........................................................... 358 183
Deferred Income Taxes .................................................. 4,920 5,467
Debt .....................................................................
Foothill Revolving Credit Facility ..................................... 37,919 26,703
Capitalized Lease Obligations .......................................... 3,379 1,964
--------- ---------
Total Debt ............................................................... 41,298 28,667
Liabilities Subject to Settlement Under Reorganization ................... 576,040 579,587
--------- ---------
Total Liabilities .......................................................... 646,802 633,230
Contingent Value Right Subject to Settlement Under Reorganization .......... 20,000 20,000
Stockholders' Deficit: .....................................................
Class A Common Stock--$0.001 par value, authorized 6,000,000 shares,
issued and outstanding, 4,593,526 shares in 1996 and 1995 ............. 5 5
Class B Common Stock--$0.001 par value, authorized 144,000,000 shares,
issued and outstanding, 19,390,379 shares in 1996 and 1995 ............. 19 19
Additional Paid in Capital ............................................... 392,185 392,185
Retained Deficit ......................................................... (863,075) (840,289)
Foreign Currency Translation Adjustment .................................. (1,299) 472
--------- ---------
Total Stockholders' Deficit ................................................ (472,165) (447,608)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................................ $ 194,637 $ 205,622
========= =========
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
F-59
<PAGE> 164
SPECTRAVISION, INC
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Pay-Per-View..................................................................................... $ 50,382 $ 55,110
Free-To-Guest.................................................................................... 5,489 6,876
Other............................................................................................ 2,141 3,222
----------- -----------
Total Revenues................................................................................. 58,012 65,208
Direct Costs:
Pay-Per-View..................................................................................... 20,174 19,156
Free-To-Guest.................................................................................... 5,882 5,673
Other............................................................................................ 1,032 1,055
----------- -----------
Total Direct Costs............................................................................. 27,088 25,884
Depreciation and Amortization...................................................................... 20,519 18,920
Operating Expenses................................................................................. 20,016 20,992
Selling, General and Administrative Expense........................................................ 7,190 10,211
Research and Development (net)..................................................................... 988 1,183
Exchange Gain (Loss)............................................................................... (4) 254
----------- -----------
Total Costs and Expenses........................................................................... 75,797 77,444
----------- -----------
Operating Loss..................................................................................... (17,785) (12,236)
----------- -----------
Non-Operating Loss (Income)........................................................................ 234 (139)
Interest Expense, net (Contractual interest expense of $34,975 and $30,576 for the
six months ended June 30, 1996 and 1995, respectively)........................................... 3,062 26,919
----------- -----------
Loss Before Reorganization Items and Income Taxes.................................................. (21,081) (39,016)
Reorganization Items............................................................................... 1,827 177
----------- -----------
Loss Before Income Taxes and Extraordinary Item.................................................... (22,908) (39,193)
Income Taxes:
State and Foreign Provision...................................................................... 495 20
Deferred Benefit................................................................................. (617) (484)
----------- -----------
Total Income Tax Benefit....................................................................... (122) (464)
----------- -----------
Loss Before Extraordinary Item..................................................................... (22,786) (38,729)
Extraordinary Item (Loss from Debt Extinguishment)................................................. -- (915)
----------- -----------
Net Loss........................................................................................... $ (22,786) $ (39,644)
=========== ===========
Loss Per Common Share.............................................................................. $ (0.95) $ (1.65)
=========== ===========
Average Common Shares Outstanding.................................................................. 23,983,905 23,983,905
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
F-60
<PAGE> 165
SPECTRAVISION, INC
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
--------- ---------
<S> <C> <C>
Operating Activities:
Net Loss $(22,786) $(39,644)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 20,519 18,920
Other non-cash items:
Conversion of non-cash interest to secondary notes -- 18,494
Deferred income tax benefit (617) (484)
Increase in pre-petition liabilities (899) --
Extraordinary loss from debt extinguishment -- 915
Write-off of assets 373 --
Loss on sale of fixed assets 270 --
Accretion of discount on senior notes -- 8,609
Amortization of debt issuance cost 165 553
Exchange loss (4) 254
Other items, net (469) (651)
Increase (decrease) in:
Accounts Payable 4,161 13,639
Accrued interest 328 (993)
Other accrued liabilities 371 1,239
Income taxes payable 175 10
Decrease (increase) in:
Accounts receivable 2,665 (623)
Prepaids and other assets 1,570 335
Income tax receivable 232 --
-------- --------
Net cash provided by operating activities 6,054 20,573
Investing Activities:
Cost of in-process systems and capital expenditures (10,368) (12,216)
Financing Activities:
Borrowing under Foothill revolving facility 67,696 25,052
Repayment of Foothill revolving facility (56,480) (9,644)
Repayment of revolving facility -- (19,896)
Repayment of Canadian bank credit facility -- (7,350)
Borrowing under revolving credit facility -- 7,396
Repayment of other debt and capitalized leases (3,651) (3,225)
-------- --------
Net cash provided by (used in) financing activities 7,565 (7,667)
Effect of exchange rate changes on cash (1,771) (55)
-------- --------
Net Increase in cash and cash equivalents 1,480 635
Cash and cash equivalents at beginning of period 3,438 1,317
-------- --------
Cash and cash equivalents at end of period $ 4,918 $ 1,952
======== ========
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
F-61
<PAGE> 166
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. General
These condensed consolidated financial statements should be read in
the context of the financial statements and notes thereto filed with the
Securities and Exchange Commission in the 1995 Annual Report on Form 10-K of
SpectraVision, Inc. ("SpectraVision" or the "Company"). The accompanying
unaudited condensed consolidated financial statements include SpectraVision and
all of its subsidiaries. Intercompany transactions have been eliminated. Certain
prior period amounts have been reclassified to conform with the current period
presentation. In the opinion of management, these financial statements include
all adjustments, consisting only of normal recurring adjustments, except as
described in note 3, necessary to present fairly the Company's financial
position and results of its operations for the periods presented. The results of
operations for such interim periods are not necessarily indicative of results of
operations for the entire year.
2. Organization and Basis of Presentation
The Company is a leading provider of in-room entertainment services
to the lodging industry. Founded in 1971, the Company originally developed and
patented a system known as "SpectraVision", which provides in-room television
viewing of recently released major and other motion pictures on a pay-per-view
("PPV") basis.
Unless the context otherwise requires, all references herein to the
Company are not intended to imply exact corporate relationships and include
SpectraVision, SPI Newco, Inc. ("Newco") its direct subsidiary, Spectradyne,
Inc. ("Spectradyne") the direct subsidiary of Newco, and the foreign
subsidiaries.
3. Bankruptcy
On June 8, 1995 (the "Petition Date"), SpectraVision, together with
Newco, Spectradyne, Spectradyne International, Inc., and Kalevision Systems,
Inc. - USA, filed voluntary petitions for reorganization under Chapter 11
("Chapter 11") of the United States Bankruptcy Code ("the Bankruptcy Code") in
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court") and are currently operating their respective businesses as
debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
The Canadian and Far East Subsidiaries are not a part of the Bankruptcy
Proceedings. On June 23, 1995, a single unsecured creditors' committee was
appointed by the U.S. Trustee for the District of Delaware pursuant to Section
1102 of the Bankruptcy Code (the "Creditors' Committee"). The Creditors'
Committee has the right to review and object to certain business transactions
and is expected to participate in the negotiation of the Company's plan of
reorganization.
As of the Petition Date, actions to collect pre-petition indebtedness
have been automatically stayed pursuant to Section 362 of the Bankruptcy Code
(subject to order of the Bankruptcy Court) and, in certain circumstances, other
pre-petition contractual obligations may not be enforced against the Company. In
addition, the Company may reject pre-petition executory contracts and lease
obligations, and parties
F-62
<PAGE> 167
affected by these rejections may file claims with the Bankruptcy Court in
accordance with the reorganization process. Substantially all liabilities as of
the Petition Date are subject to being paid or compromised under a plan of
reorganization to be voted upon by all impaired classes of creditors and equity
security holders and approved by the Bankruptcy Court.
As of December 1995, the Company employed Salomon Brothers Inc. as
investment bankers and financial advisors. The agreement with Salomon Brothers
Inc. calls for a monthly advisory fee and an additional fee ("Transaction Fee")
upon the consummation of a transaction resulting in the sale of the Company. The
Transaction Fee will be a percentage of the total purchase price.
In January 1996 the Company solicited bids from third parties for
financial restructuring proposals which would allow the Company to emerge from
bankruptcy. On April 19, 1996, the Company announced the signing of an agreement
with Ascent Entertainment Group, Inc. ("Ascent") in which Ascent would acquire
the assets and certain of the liabilities of the Company. Ascent intends to
combine its 85 percent-owned subsidiary, On Command Video Corporation, ("OCV")
with the Company's assets and certain of its liabilities to form a new company
("Newco") which will be 72.5 percent-owned by Ascent and the current minority
stockholders of OCV. The Company's bankruptcy estate will receive 27.5 percent
of Newco's stock, which will be distributed through a bankruptcy plan to the
Company's creditors to resolve claims of approximately $600 million. Newco will
also issue warrants to be distributed to OCV stockholders and certain other
persons to purchase 13 percent of Newco's common stock and warrants to the
Company's estate to purchase another 7 percent of the stock.
The transaction is subject to Bankruptcy Court approval and certain
other conditions. If the transaction is consummated, shares of Newco are
expected to be publicly traded upon completion of the transaction, which is
expected to be completed by the end of the third quarter of 1996.
The Company filed with the United States Department of Justice under
the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") in early May,
1996. No comments were received from any agency of the United States having
jurisdiction under the HSR Act during the time limits set out in the HSR Act.
On June 21, 1996, the Company filed its proposed Plan of
Reorganization and Disclosure Statement with the Bankruptcy Court. The Plan
provides for the implementation of the transaction with Ascent and the
distribution of the Newco stock and Newco warrants to the Company's creditors.
The Plan does not provide for any distribution to the Company's equity security
holders. The Court must still conduct a hearing of the adequacy of the
Disclosure Statement at which time the Plan of Reorganization and Disclosure
Statement and certain other supporting materials will be distributed to
creditors and certain other parties in interest. Thereafter certain of the
creditors will be allowed an opportunity to vote to accept or reject the Plan.
After the balloting process is completed, the Court will conduct a hearing to
determine whether the Plan should be confirmed. No hearing has been set for the
Court to consider confirmation of the Plan, but the Company believes the closing
on the transaction with Ascent can occur by the end of the third quarter of
1996.
The Company's cash on hand and cash flow from operations in 1996 will
not be sufficient to satisfy its current demands for cash. There can be no
assurance that the amount the Company can borrow under its revolving line of
credit will be sufficient to meet its cash requirements for 1996. If the Company
cannot borrow or otherwise obtain the cash necessary to operate throughout 1996
or the Company is unable to obtain confirmation of a plan of reorganization, its
creditors, equity security holders or the United States Trustee may seek a
liquidation of the Company by conversion to a Chapter 7 bankruptcy proceeding.
F-63
<PAGE> 168
The accompanying condensed consolidated financial statements have
been prepared on a going concern basis, which assumes continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 filings and circumstances
relating to these events, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. In addition, the Company's
independent public accountants included in their report on the Company's
consolidated financial statements as of December 31, 1995, an explanatory
paragraph that describes the uncertainty about the Company's ability to continue
as a going concern.
As a Chapter 11 debtor, the Company may sell (subject, in certain
circumstances, to Bankruptcy Court approval) or otherwise dispose of assets, and
liquidate or settle liabilities for amounts other than those reflected in the
condensed consolidated financial statements. The amounts reported in the
condensed consolidated financial statements do not give effect to any
adjustments to the carrying value of assets or amounts of liabilities that might
result as a consequence of actions taken pursuant to a plan of reorganization.
If the Company is unable to obtain confirmation of a plan of reorganization, its
creditors, equity security holders or the United States Trustee may seek a
liquidation of the Company by conversion to a Chapter 7 bankruptcy proceeding.
In that event, it is likely that additional liabilities and claims would be
asserted which are not presently reflected in the condensed consolidated
financial statements. In the event of a liquidation, the amounts reflected in
the condensed consolidated financial statements would be subject to adverse
adjustments in amounts which, while not presently determinable, could be
material.
Financial accounting and reporting during a Chapter 11 proceeding is
prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly, certain
pre-petition obligations, which may be impaired, have been classified as
obligations subject to Chapter 11 reorganization proceedings and include the
following estimated amounts at June 30, 1996 (dollars in thousands):
<TABLE>
<S> <C>
Debt Instruments:
11.5% Senior Discount Notes due 2000 ........................... $180,904
11.65% Senior Subordinated Reset Notes due 2001 ................ 313,262
--------
Total debt instruments 494,166
Accrued Expenses:
Interest ....................................................... 2,411
Liabilities .................................................... 3,662
Compensation ................................................... 885
--------
Subtotal ..................................................... 6,958
Capital lease obligations ........................................ 20,437
Accounts payable ................................................. 11,952
EDS and EDS affiliated ........................................... 42,527
--------
Total liabilities subject to settlement under reorganization ... $576,040
========
Contingent value rights subject to settlement under reorganization $ 20,000
========
</TABLE>
The total effect of the bankruptcy reorganization items was to
increase the net loss for the six months ended June 30, 1996 and 1995 by
approximately $1.8 million or $0.08 per common share and $.2 million or $0.01
per common share, respectively. The bankruptcy reorganization items consist of
normal bankruptcy, professional and miscellaneous charges.
F-64
<PAGE> 169
4. Debt
Foothill Revolving Facility: On June 9, 1995, Spectradyne entered
into a loan and security agreement with Foothill Capital Corporation to provide
debtor-in-possession financing (the "Foothill Loan"). The Foothill Loan allows
for revolving advances up to a maximum amount of $40 million and bears interest
payable monthly at prime plus 1.75% with a floor of 8.5%. Due to collateral
restrictions, the Company was only allowed to borrow up to $38.1 million at June
30, 1996. The Foothill Loan matures June 15, 1997.
The Foothill Loan is secured by all of the assets of Spectradyne and
certain subsidiaries, all of the outstanding stock of the Company's subsidiaries
and the guarantees of SpectraVision and certain subsidiaries. The Foothill Loan
contains various and customary financial and operating covenants including
limitations on additional indebtedness and limitations on capital expenditures.
At June 30, 1996 the Company was not in compliance with the financial covenants
relating to its operating cash flow and its fixed charges to cash flow ratio
requirements. On July 24, 1996 the Company obtained a waiver from Foothill
Capital Corporation for these covenant violations. However, the Company does not
expect that it will be in compliance with the financial covenants relating to
its operating cash flow and its fixed charges to cash flow ratios for the
remainder of 1996. Accordingly, in October, Foothill Capital Corporation could
elect to terminate the revolving line of credit for noncompliance with the
Financial Covenants. Foothill Capital Corporation could then demand immediate
payment of all outstanding balances and foreclose on the Company's assets
securing the revolving line of credit if payment is not made. In this event, if
the Company cannot obtain alternative financing, it may be forced to liquidate
in a Chapter 7 bankruptcy proceeding.
Pursuant to SOP 90-7, the Company has discontinued, effective June 8,
1995, the accrual of interest on pre-petition debt that is unsecured or
estimated to be undersecured.
5. Contingencies
On October 20, 1994, a purported class action complaint was filed in
the United States District Court alleging misrepresentations and omissions
concurrent with and following the Company's 1993 offerings of Class B Common
Stock and Senior Discount Notes. The plaintiff seeks unspecified damages,
prejudgment interest, and fees and costs of the plaintiff. The Company believes
that it has meritorious defenses to the claims and it intends to vigorously
defend itself. Proceedings in this lawsuit with respect to the Company have been
stayed as a result of the Chapter 11 filings.
The Company and its subsidiaries and related companies are potential
and named defendants in several other lawsuits and claims arising in the
ordinary course of business. While the outcome of such claims, lawsuits or other
proceedings against the Company cannot be predicted with certainty, management
expects that such liability, to the extent not provided for through insurance or
otherwise, will not have a material adverse effect on the operating results or
financial condition of the Company. Proceedings in connection with any lawsuit
against the Company have been stayed as a result of the Chapter 11 filings.
F-65
<PAGE> 170
6. Balance Sheet of Entities under Chapter 11
The condensed balance sheet of SpectraVision and all entities
included in the Chapter 11 filings is as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
ASSETS (unaudited)
<S> <C>
Cash and Cash Equivalents ................................................. $ 46
Accounts Receivable (net) ................................................. 10,858
Debt Issuance Costs (net) ................................................. 5,662
Prepaids and Other Assets ................................................. 5,344
Video Systems .............................................................
In Process Video Systems ................................................ 8,099
Installed Video Systems ................................................. 223,469
---------
Subtotal .............................................................. 231,568
Less Accumulated Depreciation and Amortization ............................ (146,314)
---------
Total Video Systems ....................................................... 85,254
Building and Equipment Building ........................................... 4,300
Furniture, Fixtures and Other Equipment ................................... 7,480
Subtotal ................................................................ 11,780
Less Accumulated Depreciation ............................................. (5,649)
---------
Total Building and Equipment .............................................. 6,131
Land ...................................................................... 2,559
Hotel Contracts (net) ..................................................... 46,104
Deferred Contract Concession Costs (net) .................................. 10,427
Investment In and Advances to Subsidiaries ................................ 35,191
---------
TOTAL ASSETS $ 207,576
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT: ......................................
Liabilities .................................................................
Accounts Payable .......................................................... $ 12,052
Accrued Liabilities ....................................................... 9,669
Deferred Income Taxes ..................................................... 4,850
Debt ......................................................................
Foothill Revolving Credit Facility ...................................... 37,919
Capitalized Lease Obligations ........................................... 3,002
---------
Total Debt ................................................................ 40,921
Liabilities Subject to Settlement Under Reorganization .................... 576,040
Intercompany Payables ..................................................... 5,183
---------
Total Liabilities ........................................................... 648,715
Contingent Value Right Subject to Settlement Under Reorganization ........... 20,000
Stockholders' Deficit .......................................................
Class A Common Stock ......................................................
Class B Common Stock ......................................................
Additional Paid in Capital ................................................ 392,185
Retained Deficit .......................................................... (852,633)
Foreign Currency Translation Adjustment ................................... (715)
---------
Total Stockholders' Deficit ............................................. (461,139)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................................. $ 207,576
=========
</TABLE>
F-66
<PAGE> 171
ON COMMAND CORPORATION
AND
ON COMMAND VIDEO CORPORATION
Annexes to the Information
Statement/Prospectus
I. Agreement and Plan of Merger*
II. Acquisition Agreement*
III. Warrant Agreement*
IV. Registration Rights Agreement*
V. Opinion of Allen & Company*
VI. Section 262 of the Delaware General
Corporation Law*
----------
* Previously filed as an exhibit to the Registration Statement of
which this Information Statement is a part.
<PAGE> 172
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation of On Command Corporation
provides for the indemnification by On Command Corporation of each director and
officer of On Command Corporation to the fullest extent permitted by the
Delaware General Corporation Law, as the same exists or may hereafter be
amended. Section 145 of the Delaware General Corporation Law provides in
relevant part that a corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such a
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper. Delaware law further provides that nothing in the above-described
provisions shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may be entitled under any bylaw,
agreement, vote of stockholders or disinterested director or otherwise.
Article Tenth of the Certificate of Incorporation of On
Command Corporation provides that a Director of On Command Corporation shall not
be personally liable to On Command Corporation or its stockholders for monetary
damages for any breach of fiduciary duty as a Director. Article Eighth of the
Bylaws provides that a director, officer, employee, or other agent of the
corporation shall be indemnified against actions by reason of the fact that the
person is or was an agent of the corporation. Section 102(b)(7) of the Delaware
General Corporation Law provides that a provision so limiting the personal
liability of a director shall not eliminate or limit the liability of a
director, for, among other things: breach of the duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; unlawful payment of dividends; and transactions from which
the director derived an improper personal benefit.
II-1
<PAGE> 173
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
2.1 Agreement and Plan of Merger, dated as of August 13, 1996, by
and among On Command Corporation, On Command Merger
Corporation, and On Command Video Corporation*
2.2 Acquisition Agreement, dated as of August 13, 1996, by and
among On Command Corporation, Ascent Entertainment Group,
Inc., the Official Creditors' Committee for SpectraVision,
Inc. and certain of its subsidiaries, SpectraVision, Inc.,
Spectradyne, Inc. and the other Debtors named therein*
3.1 Certificate of Amended and Restated Certificate of
Incorporation of On Command Corporation*
3.2 Form of Certificate of Merger of On Command Merger
Corporation with and into On Command Video Corporation*
3.3 Bylaws of On Command Corporation*
4.1 Registration Rights Agreement by and among On Command
Corporation and the other parties named therein*
4.2 Warrant Agreement by and among On Command Corporation and the
other parties named therein*
5.1 Opinion of Latham & Watkins regarding the legality of the
securities being issued
8.1 Opinion of Latham & Watkins relating to certain tax matters
10.1 Master Services Agreement, dated as of August 3, 1993, by and
between Marriott International, Inc., Marriott Hotel Services,
Inc. and On Command Video Corporation (confidential treatment
requested) (Incorporated by reference to Exhibit 10.6 of the
Registration Statement on Form S-1 (File No. 33-98502) of
Ascent Entertainment Group, Inc.)
10.2 Amended and Restated SpectraVision and Interactive Services
National Agreement, dated August 31, 1993, by and between
Hyatt Corporation and Spectradyne, Inc. (confidential
treatment requested)
10.3 Amended and Restated SpectraMax National Agreement, dated
August 31, 1993, by and between Hyatt Corporation and
Spectradyne Inc. (confidential treatment requested)
10.4 Hilton Hotels Corporation-ON COMMAND VIDEO Agreement, dated
April 27, 1993, by and between Hilton Hotels Corporation and
On Command Video Corporation (confidential treatment
requested)
10.5 EDS Agreement, dated August 5, 1996, among Electronic Data
Systems Corporation, EDS Technical Products Corporation,
Ascent Entertainment Group, Inc. and On Command Video
Corporation*
10.6 Form of Employment Agreement between On Command Corporation
and Robert Kavner*
10.7(a) Purchase and Option Agreement, dated as of July 7, 1993,
between On Command Video Corporation and Hilton Hotels
Corporation*
10.7(b) Letter Agreement, dated as of December 8, 1995, among Ascent
Entertainment Group, Inc., COMSAT Video Enterprises, Inc., On
Command Video Corporation, COMSAT Corporation and Hilton
Hotels Corporation*
10.7(c) Letter Agreement, dated as of August , 1996, among
Ascent Entertainment Group, Inc., Ascent Network Services,
Inc. (formerly COMSAT Video Enterprises, Inc.), On Command
Video Corporation, COMSAT Corporation and Hilton Hotels
Corporation
10.8 Form of Employment Agreement between On Command Corporation
and Brian A.C. Steel
10.9 Employment and Consulting Agreement of Robert Snyder, dated
November 20, 1991, between Robert Snyder and On Command Video
Corporation
11.1 Statement regarding computation of per share earnings*
21.1 Subsidiaries of On Command Corporation*
23.1 Consent of Latham & Watkins (included in their opinion filed
as Exhibit 5.1)
23.2 Deloitte & Touche LLP Consent and Report on Schedule
23.3 Consent of Ernst & Young LLP, Independent Auditors
23.4 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney*
99.1 Opinion of Allen & Company (included as Annex V to the
Information Statement/Prospectus included herein)*
99.2 Section 262 of the Delaware General Corporation Law (included
as Annex VI) to the Information Statement/Prospectus included
herein)*
99.3 Notice of Consent of Stockholders in Lieu of Meeting
(included immediately following the cover page of this
Registration Statement)*
</TABLE>
- ------------------------------------
* Previously filed.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts (OCV)*
Schedule II--Valuation and Qualifying Accounts
(SpectraVision)*
II-2
<PAGE> 174
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement: (i) to include any prospectus required
by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
(2) that, for the purpose of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof;
and
(3) to remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes as follows:
that prior to any public reoffering of the securities registered hereunder
through the use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by any other items of the applicable form.
(c) The registrant undertakes that every prospectus: (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Denver,
State of Colorado, on October 4, 1996.
ON COMMAND CORPORATION
By: /s/ Arthur M. Aaron
---------------------------
Name: Arthur M. Aaron
Title: Vice President, Acting
General Counsel and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ *
- -------------------------------------- Chief Executive Officer October 4, 1996
Robert M. Kavener (Principal Executive Officer)
/s/ Brian A.C. Steel
- -------------------------------------- Executive Vice President, Chief October 4, 1996
Brian A.C. Steel Financial Officer and Chief Operating
Officer (Principal Financial Officer)
/s/ *
- -------------------------------------- Director October 4, 1996
James A. Cronin, III
/s/ *
- -------------------------------------- Director October 4, 1996
Charles Lyons
/s/ * Director October 4, 1996
- --------------------------------------
Robert M. Kavner
/s/ Edward B. Newmann
- -------------------------------------- Vice President--Finance October 4, 1996
Edward B. Newmann (Principal Accounting Officer)
</TABLE>
* By /s/ Arthur M. Aaron
---------------------
Arthur M. Aaron
Attorney-in-Fact
II-4
<PAGE> 176
SPECTRAVISION, INC. SCHEDULE II
SPECTRAVISION, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND CHARGED TO AT END
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
- --------------------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
From January 1, 1995 to
December 31, 1995
Deferred tax asset
valuation allowance... $113,375,000 $26,057,000 $ -- $ -- $139,432,000
Bad debt allowance....... 1,072,268 739,732 -- -- 1,812,000
From January 1, 1994 to
December 31, 1994
Deferred tax asset
valuation allowance... $ 38,240,000 $ 75,135 $ -- $ -- $113,375,000
Bad debt allowance....... 967,000 285,197 -- 179,929 1,072,268
From January 1, 1993 to
December 31, 1993
Deferred tax asset
valuation allowance... $ 14,584,000 $23,656,000 $ -- $ -- $38,240,000
Bad debt allowance....... 524,000 900,000 -- 457,000 967,000
</TABLE>
S-1
<PAGE> 177
OCV SCHEDULE II
ON COMMAND VIDEO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND CHARGED TO AT END
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
- ------------------------------------------ ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
From January 1, 1995 to December 31, 1995
Bad debt allowance...................... $100,000 $ -- $ -- $ -- $ 100,000
From January 1, 1994 to December 31, 1994
Bad debt allowance...................... $ 50,000 $ 50,000 $ -- $ -- $ 100,000
From January 1, 1993 to December 31, 1993
Bad debt allowance...................... $ 25,000 $ 25,000 $ -- $ -- $ 50,000
</TABLE>
S-2
<PAGE> 1
EXHIBIT 5.1
[L&W NY LETTERHEAD]
October 4, 1996
On Command Corporation
3301 Olcott Street
Santa Clara, California 95054
Re: On Command Corporation
Registration Statement on Form S-4 (File No. 333-10407)
31,425,000 Shares of Common Stock and
1,425,000 Warrants to Purchase Common Stock
Ladies and Gentlemen:
In connection with the registration by On Command Corporation, a
Delaware corporation (the "Company), of 31,425,000 shares (the "Shares") of
common stock, par value $0.01 per share (the "Common Stock"), and 1,425,000
warrants to purchase Common Stock (the "Warrants") under the Securities Act of
1933, as amended (the "Act"), on Form S-4, filed with the Securities and
Exchange Commission (the "Commission") on August 16, 1996 (File No. 33-10407),
as amended by Amendment No. 1 filed with the Commission on September 4, 1996,
Amendment No. 2 filed with the Commission on September 26, 1996 and Amendment
No. 3 filed with the Commission on October 4, 1996 (the "Registration
Statement"), you have requested our opinion with respect to the matters set
forth below.
In our capacity as your counsel in connection with such
registration, we are familiar with the proceedings taken by the Company in
connection with the authorization and issuance of the Shares and the Warrants.
In addition, we have made such legal and factual examinations and inquiries,
including an examination of originals or copies certified or otherwise
identified to our satisfaction of such documents, corporate records and
instruments, as we have deemed necessary or appropriate for purposes of this
opinion.
In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity to authentic original documents of all documents submitted to us
as copies.
We are opining herein as to the effect on the subject transaction
only of the General Corporation Law of the State of Delaware, and we express no
opinion with respect to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction or, in the case of Delaware, any other laws, or
as to any matters of municipal law or the laws of any other local agencies
within the state.
<PAGE> 2
On Command Corporation
October 4, 1996
Page 2
Subject to the foregoing, it is our opinion that the Shares and the
Warrants have been duly authorized, and, upon issuance and delivery therefor in
the manner contemplated by the Registration Statement, will be validly issued,
fully paid and nonassessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."
Very truly yours,
<PAGE> 1
EXHIBIT 8.1
[LATHAM & WATKINS LETTERHEAD]
October 4, 1996
On Command Video Corporation
3301 Olcott Street
Santa Clara, California 95054
Re: Merger of On Command Video Corporation
and On Command Merger Corporation
Ladies and Gentlemen:
You have requested our opinion with respect to certain United States
federal income tax consequences of the proposed merger pursuant to the Agreement
and Plan of Merger (the "Agreement") dated as of August 13, 1996 by and among On
Command Video Corporation, a Delaware corporation ("OCV"), On Command Merger
Corporation, a Delaware corporation ("Merger Subsidiary"), and On Command
Corporation, a Delaware corporation ("Buyer"), and the transactions contemplated
in connection therewith described in the Registration Statement of Buyer
(forming part of the Registration Statement on Form S-4 under the Securities Act
of 1933, as amended, as filed by Buyer with the Securities and Exchange
Commission) dated August 16, 1996, as amended (the "Registration Statement").
Transactions contemplated in connection with the proposed merger include the
merger of OCV with and into Merger Subsidiary (the "Merger") pursuant to the
terms of the Agreement.
Specifically, you have requested our opinion as to whether, for
United States federal income tax purposes, the Merger qualifies as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). We hereby
<PAGE> 2
On Command Corporation
October 4, 1996
Page 2
consent to the use of our name under the caption "Certain Tax Consequences -
Certain U.S. Federal Income Tax Consequences" and "Legal Matters" in the
Registration Statement.(1)
In rendering our opinion, we have examined and relied upon the
accuracy and completeness of the facts, information and representations
contained in the Agreement and the Registration Statement. In connection with
this opinion, OCV and Buyer have made representations with respect to certain
factual matters set forth in the Tax Representation Letter of OCV and Buyer,
dated October 4, 1996. The opinions expressed herein are conditioned on the
initial and continuing accuracy of the facts, information and representations
set forth in the documents referred to above. In our examination, we have
assumed the genuineness of all signatures, the conformity to original documents
of all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such documents.
In rendering our opinion, we have considered the applicable
provisions of the Code, the Treasury Regulations promulgated thereunder,
pertinent judicial authorities and published rulings and other pronouncements of
the Internal Revenue Service, all as of the date hereof.
Based solely on the foregoing and provided that the Merger is
consummated in the manner set forth in the Registration Statement, we are of the
opinion that, under present law, for United States federal income tax purposes,
(i) the Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code and (ii) OCV, Buyer and Merger Subsidiary will each be a
party to the reorganization within the meaning of Section 368(b) of the Code.
Except as set forth above, we express no other opinion as to the tax
consequences of the Merger and related transactions to any party under United
States federal, state, local or foreign laws. We are furnishing this opinion to
you solely in connection with the Merger, and this opinion is not to be relied
upon by any other person for any other purpose. Our opinion is not binding on
the Internal Revenue Service or the courts, and there is no assurance that the
Internal Revenue Service will not assert a contrary position. Furthermore, no
assurance can be given that future legislative, judicial or administrative
changes, on either a prospective or retroactive basis, would not adversely
affect the accuracy of the conclusions herein. If all the transactions described
in the Agreement are not consummated in accordance with the terms of such
Agreement or if all of the representations,
- --------
1 For purposes of this opinion, all capitalized terms, unless otherwise
specified, have the meanings assigned to them in the Registration Statement.
<PAGE> 3
On Command Corporation
October 4, 1996
Page 3
warranties, statements and assumptions upon which we relied are not true and
accurate at all relevant times, our opinion might be adversely affected and may
not be relied upon.
Very truly yours,
/s/ Latham & Watkins
<PAGE> 1
EXHIBIT 10.2
NOTE: THIS DOCUMENT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST PURSUANT
TO RULE 406 UNDER THE SECURITIES ACT OF 1933. PORTIONS OF THIS DOCUMENT FOR
WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN REDACTED AND ARE
MARKED HEREIN BY "***". SUCH REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE COMMISSION PURSUANT TO THE CONFIDENTIAL TREATMENT REQUEST.
AMENDED AND RESTATED
SPECTRAVISION AND INTERACTIVE SERVICES
NATIONAL AGREEMENT
THIS AMENDED AND RESTATED NATIONAL AGREEMENT (hereinafter referred to as the
"National Agreement"), made this 31st day of August, 1993, but effective as of
July 1, 1993, by and between Hyatt Corporation, a Delaware corporation, on its
own behalf and on behalf of its subsidiaries and affiliates (hereinafter
collectively called "Hyatt") and Spectradyne, Inc., a Texas corporation
(hereinafter called "Spectradyne").
W I T N E S S E T H:
WHEREAS, Hyatt, located at 200 West Madison Street, Chicago, Illinois 60606,
operates the Hyatt hotels set forth on Exhibit A attached hereto and made a part
hereof;
WHEREAS, Spectradyne, located at 1501 North Plano Road, P. 0. Box 830775,
Richardson, Texas 75083-0075, provides its Spectravision and Interactive
Services, as hereinafter described, to certain of Hyatt hotels pursuant to that
certain Spectravision and Interactive Services National Agreement dated July 26,
1989, but effective July 1, 1989 (the "Original National Agreement") and under
separate license agreements and interactive services riders (the "Original
Individual Agreements") made pursuant thereto (all such hotels and all other
Hyatt hotels who utilize Spectradyne in the future are hereinafter individually
called a "Hotel" and collectively called the "Hotels");
WHEREAS, the parties wish to amend and restate all of their rights and
obligations under the original National Agreement pursuant to this National
Agreement;
NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
accepted and acknowledged the parties hereto agree as follows:
1. National Agreement.
It is understood and agreed between the parties that the provisions of this
National Agreement shall be included in and considered a part of the Individual
License Agreements (as further defined in Section 5(a) of this National
Agreement) as if
<PAGE> 2
the provisions of this National Agreement were incorporated therein. In the
event any of the provisions of any Individual License Agreements are
inconsistent with any of the provisions of this National Agreement, the
provisions of this National Agreement shall prevail.
2. Term.
(a) This National Agreement shall be for a seven (7) year term commencing on
July 1, 1993 ("Commencement Date") and expiring on June 30, 2000 ("Expiration
Date") unless terminated earlier in accordance with the provisions of this
National Agreement.
(b) The provisions of this National Agreement notwithstanding, any Individual
License Agreement may be suspended, at Hyatt's option, upon thirty (30) days
prior written notice, in the event a Hotel or any material portion thereof is
closed for renovation. In the event Hyatt chooses to suspend the Individual
License Agreement, the applicable fees shall abate during such renovations and
shall resume on the date when such Hotel or sections thereof reopen to the
public.
(c) The provisions of this National Agreement notwithstanding, either party may
cancel any Individual License Agreement in the event Hyatt ceases to manage a
Hotel as of the date of such cessation. The cancelling party shall provide the
non-cancelling party with at least thirty (30) days prior written notice of such
cancellation.
(d) This National Agreement and the Individual License Agreements are subject to
early termination in accordance with the provisions of section 18 herein and
section 16 of the Individual License Agreements.
(e) Except for the reasons that constitute a force majeure as set forth in
Section 18 of this National Agreement, which would not be grounds for
termination hereunder, this National Agreement may be cancelled by Hyatt upon
the early termination of that certain Amended and Restated Spectramax National
Agreement of even date herewith, between the parties hereto (the "Spectramax
National Agreement").
3. Spectravision and Interactive Services.
(a) Spectravision is a registered trademark of Spectradyne. Spectravision
Services are the services of telecasting, in closed circuit, of pay-per-view
movies over the hotel master antenna television system ("MATV") to television
receivers located in Hotel guest rooms by means of transmission equipment
manufactured, acquired, installed and maintained by Spectradyne or on
Spectradyne's behalf. Interactive Services are software driven services which
interface with Hotel property management systems and shall include, at a
minimum, (i) interfaces with Hotel safes and bars, as applicable, and currently
provided to
<PAGE> 3
the Hotels by vendors of such safes and bars; and, (ii) the following services:
Video Check-out/Account Review, Video Messages, Video Breakfast Menu, Instant
Room Inventory, Bellman Assistance and Guest Comment Cards. Spectradyne shall
use its best efforts to make its Interactive Services compatibly interface with
safes and bars provided to the Hotels by any new vendors.
(b) Spectravision Services and Interactive Services shall be provided in the
manner described throughout this National Agreement and the Individual License
Agreements.
(c) On or before November 15, 1993, Spectradyne shall provide each Exhibit A
Hotel with those Interactive Services described in Section 3(a)(i) above and, in
English, those Interactive Services described in Section 3 (a) (ii) above as
well as the following Spectravision Services: (i) Spectradyne's Guest Choice
"A", on demand, in-room, guest pay movie and entertainment service ("Guest
Choice"), which shall provide a selection of up to two hundred (200) tapes or
movies available to guests for viewing on demand; and, (ii) pursuant to Phase
One of the New Technology as more fully described in Section 4 (a) below,
Spectradyne shall commence to equip the first Exhibit A Hotel and each Exhibit A
Hotel thereafter with a method by which a minimum of eight (8) different
television channels shall receive and deliver eight (8) regularly-scheduled
programs of guest pay movies and entertainment service ("Guest Choice")
including up to two hundred (200) movies and entertainment programs each day at
the Hotel and which shall be available to Hotel guests for viewing on demand at
any time in any one day. In connection with the Guest Choice service "on demand"
shall mean that the system is capable of meeting a guest's request to view a
particular selection within an average of three (3) minutes of initiation of
such request. On or before April 30, 1994, the Interactive Services described in
Section 3(ii) above shall be available to all of the Exhibit A Hotels in
Japanese, French, Spanish and German and each Hotel may select and Spectradyne
shall provide those of the foregoing languages such Hotel deems desirable.
Pursuant to Phase Two of the New Technology as more fully described in Section
4(b) below, on or before December 31, 1994, Spectravision Services shall include
and Spectradyne shall provide to ninety percent (90%) of all Exhibit A Hotels,
an advanced compressed digital means of providing on demand, in-room guest pay
movie and entertainment services (as further described in Section 4(b) hereof)
which shall replace the eight (8) regularly-scheduled movies or programs and
shall be provided in addition to the Guest Choice service, unless otherwise
determined by Hyatt in its sole discretion.
(d) It is understood and agreed that, except as otherwise provided below,
Spectradyne shall have absolute control and discretion in the selection of
movies to be projected at the hotels; provided, however, that Spectradyne shall
provide (1) a method whereby a guest must reconfirm his movie or entertainment
<PAGE> 4
selection electronically before actually viewing the selection, (2) a method
whereby a guest may select and preview up to three (3) movies or other
entertainment selections for up to five (5) minutes apiece without charge, and
(3) a method whereby a guest will be able to electronically restrict movies or
entertainment selections from being offered in his guest room by title,
category, on a day-to-day basis or for the length of the guest's stay.
Notwithstanding the foregoing, at no time shall Spectradyne offer movies or
entertainment which, in the versions as presented, have been rated "XI" by the
Motion Picture Association of America. At periodic intervals, Hyatt may review
the entertainment offered by Spectradyne. If, in the reasonable opinion of
Hyatt, following such review, Hyatt is of the opinion that the materials which
are available for viewing would offend the sensibilities of a substantial number
of Hyatt's guests in any Hotel, then Hyatt may notify Spectradyne in writing of
such determination and Spectradyne shall provide an alternative movie or
entertainment selection in that certain Hotel. In addition to the foregoing, the
President of Hyatt Corporation, Thomas J. Pritzker, (or his successor), reserves
the right, at any time from time to time, to veto the projection of any movie,
regardless of its rating. Spectradyne agrees to immediately cease the projection
of any and all such vetoed movies and provide an alternate movie which is
acceptable to Hyatt. In the event that Spectradyne can demonstrate that Thomas
J. Pritzker's veto of a movie leads to adverse material economic consequences to
Spectradyne, the parties agree to meet to discuss a mutually agreeable solution
to avoid such adverse economic results.
(e) All movies shall be free of distortion and of a first class video quality.
Any inferior tapes or other videos shall be replaced immediately.
(f) In supplying movies to any Hotel, Spectradyne will use its reasonable
efforts not to violate any censorship rules or prohibitions applicable to the
Hotel. To that end, Spectradyne shall inform Hyatt in writing of the movies
proposed to be projected not later than seventy two (72) hours in advance of the
scheduled projection. If any such movie is known by Hyatt to be in violation of
the censorship rules or otherwise prohibited by Hyatt, Hyatt will promptly
inform Spectradyne of such fact and Spectradyne shall provide a substitution
acceptable to Hyatt. Spectradyne understands and agrees that Hyatt may not be
familiar with the contents of each movie scheduled for projection at the hotels;
therefore, Hyatt reserves the right to reasonably veto any movie which violates
such censorship rules or prohibitions at any time prior to or during its
projection.
(g) Hotel guests may view Spectravision in their guest rooms at the per view
fee(s) set forth in the Individual License Agreements or otherwise agreed to
between the parties.
(h) Spectradyne shall furnish, install and maintain certain
monitoring equipment to monitor particular movies viewed in the
<PAGE> 5
guest rooms and to print out or interface such information for
use by the Hotel in its billing.
(i) Hyatt agrees that the movies and such other video programming provided by
Spectradyne under this Agreement remain the property of Spectradyne. Each Hotel
shall (i) ensure that the movies and such other video programming are stored
under the strictest reasonable security measures, and (ii) shall not allow
anyone other than in-room Hotel guests and invitees to view the movies or such
other video programming. Each Hotel shall not allow any copying under any
circumstances of the movies or such other video programming and shall not allow
the movies or such other video programming to be taken from the Premises.
4. New Technology Rollout.
Spectradyne shall provide certain New Technology, as described below, to at
least ninety percent (90%) of Exhibit A Hotels pursuant to a timetable and
schedule for delivery as agreed upon in writing by Hyatt and Spectradyne for
Exhibit A Hotels, but in no event later than the time frames specified below.
(a) Phase One (1). On or before November 15, 1993, Spectradyne shall commence to
deploy and install, at its sole cost and expense, a new method and system of
movie and entertainment delivery in the first Exhibit A Hotel and each Exhibit A
Hotel thereafter. The new method will provide at least eight television channels
for compressed digital television, video decoders, and integrated receiver
decoders, and an appropriate microwave satellite dish antenna or earth station
in order for Spectradyne to receive and to deliver eight (8) regularly-scheduled
programs of movies or entertainment at each such hotel per day. Phase One (I)
shall be completed by Spectradyne no later than March 31, 1994.
(b) Phase Two (II). Commencing on or before September 1, 1994, and ending no
later than December 31, 1994, Spectradyne shall deploy and install, at its sole
cost and expense, appropriate video store-and-forward equipment and the
computer-drive equipment necessary to provide (i) on demand movie or
entertainment programming in each Exhibit A Hotel already equipped with Phase I
equipment, and (ii) a system whereby, per module, no fewer than thirty-two (32)
users or separate Hotelroom guests can access a single title or entertainment
program at the same time. Spectradyne shall add additional modules to each site,
as necessary, to meet one hundred percent (100%) of guest demand, and allow
simultaneous viewing by all who wish to view the same selection. All such
programming in Phase II shall be available on demand to Hotel guests. For
purposes of this paragraph "on demand" shall mean that the system is capable of
meeting a guest's request to view a particular selection virtually
instantaneously.
(c) Spectradyne hereby covenants that such New Technology will
<PAGE> 6
be user-friendly and will meet those specifications and performance
characteristics set forth on Exhibit C attached hereto and incorporated herein
by reference.
5. Individual Hyatt Spectravision Agreements.
(a) A number of Hotels have entered into Individual License Agreements and/or
Interactive Services Riders with Spectradyne to provide Spectravision and
Interactive Services at such Hotels. These original Individual Agreements along
with all individual license agreements to be executed pursuant to Section 5 (b)
hereof shall be the "Individual License Agreements" referenced hereunder and
shall be subject to and governed by the terms of this National Agreement.
(b) Each Hyatt Hotel which is not already a party to an Original Individual
Agreement desiring to retain Spectradyne to provide its Spectravision Services
shall enter into an Individual License Agreement substantially in the form set
forth as Exhibit B attached hereto and made part hereof.
(c) The term of each Individual License Agreement shall be coterminous with the
term of this National Agreement.
(d) Under no circumstances shall the term of any Individual
License Agreement automatically renew.
(e) Spectradyne agrees that any Hyatt Hotel set forth on Exhibit A is eligible
for Spectravision and Interactive Services and the other benefits hereunder.
Hyatt may, from time to time, add or delete Hyatt Hotels from Exhibit A. Any
Hyatt hotel desiring to hire Spectradyne to provide Spectravision must enter
into an Individual License Agreement which shall expire on the Expiration Date
regardless of its commencement date. Hyatt shall use all commercially reasonable
efforts to ensure that Hyatt hotels enter into Individual License Agreements.
6. Additional Spectradyne-provided Equipment and TV Sets.
(a) In addition to the transmission, monitoring and related equipment and
software heretofore furnished and/or installed at the Hotels, Spectradyne shall
provide equipment necessary to deliver Spectradyne's Guest Choice service, and
any equipment or software necessary to be installed in connection with providing
Interactive Services or Spectravision Services using the New Technology. All of
the foregoing equipment and software to be furnished and/or installed pursuant
to this paragraph (a) shall hereafter be collectively referred to as the
"Equipment" and shall be subject to the terms and conditions applicable to
Equipment under this National Agreement and the Individual License Agreements.
(b) Except as otherwise provided for below, Spectradyne shall
provide and install, free of charge, a number of new television
<PAGE> 7
sets and remote controls meeting the specifications described on Exhibit D
attached hereto (the "TV Sets") equal to the number of television sets currently
installed in all of the guest rooms at Exhibit A Hotels. In addition,
Spectradyne shall deliver to each Hotel a number of spare TV sets equal to four
percent (4%) of the number of television sets at such Hotel. Each Exhibit A
Hotel will also receive at least one (1) character generator, free of charge. On
a Hotel by Hotel basis, as the TV Sets are installed, each Hotel shall surrender
to Spectradyne for trade-in the televisions sets currently in use at such
property free and clear of all liens and encumbrances, provided the Hotel has or
is able to easily procure title to such trade-in television sets. In the event
the television sets currently in use at any Hotel are leased or financed by such
Hotel and the Hotel is therefore unable to surrender them to Spectradyne free
and clear of all liens and encumbrances, then the provisions of this Section
6(b) which references surrender of such trade-in television sets shall not apply
to either Spectradyne or such Hotel until such time as Hotel is able to
surrender same to Spectradyne at the expiration date of such lease or financing
arrangement, free and clear of all liens and encumbrances.
(c) Such TV Sets and character generators shall be provided by Spectradyne at
such Hotels and delivered to each Hotel in a sequence in accordance with the
make and model number of each TV Set and character generator and in a quantity
pursuant to a written plan of installation, which is agreed upon by Spectradyne
and Hyatt; provided, however, all such TV Sets (except the spares) shall be
fully installed on or before November 14, 1994. Upon delivery to each Hotel,
Spectradyne shall convey to such Hotel good title to and ownership of the TV
Sets (including all remote controls thereto) and the character generator for
such Hotel, free and clear of any lien, claim or encumbrance. The TV Sets shall
become the sole property of the Hotels and neither Spectradyne nor any third
party shall have any right, title or interest in or claim to such TV Sets.
(d) In the event any Exhibit A Hotel is equipped already with "Smart Plug"
television sets, Spectradyne may instead provide such Hotels with a *** trade
credit per "Smart Plug" television set against future amounts due Spectradyne
under such Hotels' Individual License Agreements, including refits, as
necessary, to SpectraMate room units and Spectradyne remote control units
containing the features set forth on Exhibit D.
(e) In the event Spectradyne submits to a plan of reorganization pursuant to the
Bankruptcy laws of the United States, or enters into a plan for the benefit of
creditors, Spectradyne shall cause Wells Fargo Bank to ratify that certain
letter agreement between Wells Fargo Bank and Hyatt dated July 25, 1989, which
pertains to certain Spectradyne equipment installed in Hyatt Hotels.
(f) The Hotels, at their sole cost and expense, shall provide and maintain one
(1) dedicated direct dial up voice quality
<PAGE> 8
circuit for use by Spectradyne for its monitoring system provided
herein.
(g) During the term of this National Agreement, title to the Equipment is and
shall remain with Spectradyne and title to all installed or delivered TV Sets is
and shall remain with the respective Hotel.
(h) Upon the expiration or early termination of this National Agreement or any
Individual License Agreement (other than pursuant to a default by Hyatt under
Section 19 hereof), Hyatt may give notice no later than (30) days following such
termination, at Hyatt's option to either:
(i) have the Hotels purchase and/or obtain Spectradyne's interest in or
right to use all or any portion of the existing Equipment, as determined solely
by Hyatt, for an amount mutually agreed to be the fair market value of such
Equipment and/or interest or right therein, except for any Equipment not owned
by Spectradyne or Equipment which Spectradyne cannot convey any interest in or
right to use. If, however, Hyatt and Spectradyne are unable to determine the
fair market value of such Equipment and/or interest or right therein, the
Equipment shall remain at the Hotel(s) as set forth in Section 6(h)(ii) below.
In the event Hyatt elects to have the Hotels purchase such Equipment and/or
interest or right therein, Spectradyne shall deliver to each respective Hotel
free and clear title to such Equipment, along with the Bill of Sale upon receipt
of payment of the agreed upon amount; or,
(ii) require Spectradyne to keep and maintain all Equipment provided to
the Hotels pursuant to the Spectramax National Agreement, including the license
for the use of the on-site software required to operate such Equipment or
provide the Interactive Services at the Hotels for a total rental,maintenance,
license and service fee chargeable to the Hotels in the amount of *** per guest
room per month for a term not to exceed thirty six (36) months; and,
(iii) the parties agree that in the event Hyatt exercises its option to
keep such Equipment in the Hotels pursuant to Section 6(h) (ii) above, Hyatt
agrees not to use such Equipment to show in room pay-per-view movies and such
other video programming.
(iv) However, Hyatt may elect to offer guest pay movies and such other
video programming through the rented Spectradyne Equipment provided that
Spectradyne shall be the exclusive provider of those guest pay movies and such
other video programming over the rented systems, and Spectradyne shall continue
to pay the Hotels the fees specified in Section 9 below.
If Hyatt fails to exercise the option set forth in this section 6(h)(iv) upon
termination of the rental period pursuant to
<PAGE> 9
Section 6 (h) (ii), Spectradyne may, following written notice, elect to remove
the Equipment.
(i) In the event Hyatt elects to have the Hotels either purchase all or any
portion of the Equipment and/or the interest and rights therein, or rent the
Equipment from Spectradyne as described in Section 6(h) above, Spectradyne
agrees to license to the Hotels for their use at no additional cost to Hyatt or
the Hotels, the on-site software and any and all upgrades thereto, which are
necessary to operate the Equipment or provide the Interactive Services for a
period not to exceed thirty-six (36) months. After the end of the initial
thirty-six (36) months, if the parties have not previously terminated this
Agreement, it shall automatically renew for continuous ninety (90) day terms,
until such time as one party provides the other party with ninety (90) days'
prior written notice of intent to terminate. Spectradyne warrants and represents
that it owns, free and clear, title to all such on-site software required to
provide Interactive Services and to operate the Equipment.
7. MATV.
(a) Each Hotel shall provide access to its MATV system to Spectradyne, which
Spectradyne shall upgrade, at its sole cost and expense, to the minimum
specifications set forth on Exhibit C attached hereto. The upgraded MATV System
shall be capable of transmitting off-the-air channels or network programming,
Interactive Services, and Spectravision Services compatible with the New
Technology and with the highest possible picture quality. Such upgrades shall be
performed on a schedule and timetables to be agreed upon in writing by Hyatt and
Spectradyne.
(b) From time to time, Spectradyne has made and will make repairs to and
replacement of Hotel's MATV. It is understood and agreed that before and after
the completion date of the upgrade described in (a) above, all equipment which
encompasses the MATV system is hereby considered property of the Hotel where
such MATV is located.
8. Maintenance.
(a) Equipment, MATV Systems and TV Sets.
Spectradyne, at its sole cost and expense, shall service, repair, replace and
maintain the Equipment, the MATV systems of the Hotels and the TV Sets
(including the remote controls thereto) in good working condition. Spectradyne
agrees to replace all lost remote control units and/or those TV Sets and remote
control units broken beyond repair. All costs associated with such service,
repairs, replacements and maintenance shall be borne by Spectradyne, except for
repairs required due to the willful misconduct or gross negligence of Hyatt and
its agents. Such repairs shall be made by Spectradyne at its cost and reimbursed
by Hyatt.
<PAGE> 10
(b) Service.
In addition to providing Hyatt automated diagnostic and repair services,
Spectradyne shall at all times during the term hereof maintain or cause to be
maintained a sufficient staff of trained technicians meeting the requirements of
Section 12 below who shall be available to perform such service, repairs,
replacements and maintenance on the Equipment, the MATV, and the TV Sets
(including the remote controls thereto). Spectradyne shall continue to maintain
a "live" person service desk reachable twenty-four (24) hours a day, seven (7)
days a week by phone and shall provide a guaranteed response of four (4) hours
on any service calls.
9. Fee.
(a) The Hotels shall, at no cost to Spectradyne, bill Hotel guests for viewing
movies and such other video programming projected through Spectravision at the
rate(s) agreed upon between Hyatt and Spectradyne as set forth in the Hotels'
respective Individual License Agreements or as otherwise agreed to in writing.
Billing shall be made on a daily basis in the same manner as other Hotel charges
are billed to guests.
(b) In consideration of the rights and privileges granted to Spectradyne
hereunder and under the Individual License Agreements, with respect to each
month during the term hereof, Spectradyne shall pay each respective Hotel in
accordance with the following formula: (i) in the event Gross Viewing Receipts
generated by such Hotel for any month do not exceed *** per room, an amount
equal to *** of the monthly Gross Viewing Receipts generated by each such Hotel
(the "Commission Fee") and an amount equal to *** of the monthly Gross Viewing
Receipts generated by such Hotel as an advertising allowance (the "Advertising
Allowance"), and (ii) in the event Gross Viewing Receipts generated by such
Hotel for any month exceed *** per room, an additional amount equal to *** of
the monthly Gross Viewing Receipts generated by such Hotel in excess of *** per
room (the "Revenue Share"). As used herein, "Gross Viewing Receipts" for any
period shall mean the aggregate gross amount billed by Hyatt to Hotel guests
during such period less (i) the amount of taxes, if any, chargeable to Hotel
guests in connection with any viewing of movies, and (ii) any uncollectible
charges theretofore billed to Hotel guests for viewing movies through the
Spectravision System which were previously reported to Spectradyne to the extent
such charges are written off on any Hotel's books during such period. All
Advertising Allowances may be used by the Hotels for any advertising purposes
they deem appropriate in their sole discretion and shall tn no way obligate the
Hotels to use the funds to recognize or promote Spectradyne, any of its
services, or their relationship with Spectradyne.
(c) The Commission Fee, Advertising Allowance and Revenue Share
shall be payable monthly in accordance with the provisions of
<PAGE> 11
Section 10 of the Individual License Agreements.
(d) All Interactive Services shall be provided by Spectradyne to the Hotels at
no cost to Hyatt or such Hotels.
(e) Spectradyne warrants and represents that the value provided to Hyatt Hotels
hereunder is the best or better value provided by Spectradyne to any comparable
hotel company's hotels and in particular is the best or better value provided by
Spectradyne to hotels operated by Marriott Corporation and Hilton Hotels
Corporation. Comparable hotels are defined as those hotels with like Spectradyne
equipment and substantially similar movie or such other video programming, room
counts, and guest occupancy rates. In the event that at any time during the term
of this Agreement, Spectradyne shall offer a better combined value to any
comparable hotel than that value provided to Hyatt, the value provided to Hyatt
Hotels under this Agreement shall be automatically increased to the same level.
In no event shall Marriott or Hilton hotels be considered non-comparable hotels.
For purposes of this paragraph "value,, shall mean the value of (i) all fees,
allowances and revenues, (ii) all Equipment including television sets and remote
control units, (iii) all software, software licenses and/or other intellectual
property rights, (iv) all services including installation, maintenance, repair
and replacement, and (v) all cost savings or other benefits provided to the
hotels, their parent companies or affiliates.
(f) On behalf of Spectradyne, each Hotel shall collect applicable taxes from
Hotel guests and remit same to Spectradyne for payment by Spectradyne to the
applicable government or governmental agencies. It is the responsibility of
Spectradyne to provide Hyatt with notification as to the applicability of which
taxes are to be collected by Hyatt on behalf of Spectradyne, including revisions
thereof. In the event Spectradyne fails to pay any taxes when due, Hyatt shall
have the right to remit such taxes to such agencies on behalf of Spectradyne and
Spectradyne shall immediately reimburse Hyatt for payment of such taxes.
10. Books and Records.
During the term of this National Agreement and the Individual License
Agreements, the Hotels shall maintain books and records, in the form as
determined by Hyatt, as such books and records are pertinent to the
determination of Gross Viewing Receipts. The Hotels shall maintain such books
and records for a period of not less than two (2) years following the expiration
of the term of this National Agreement. Spectradyne may, during normal business
hours, view such books and records at the respective Hotels upon seven (7) days'
prior written notice.
11. Marketing Funds.
<PAGE> 12
Spectradyne shall dedicate substantial marketing funds to the announcement of
the agreement with Hyatt and promoting the fact that Hyatt will be offering the
New Technology on a system wide basis.
12. Personnel.
Spectradyne shall provide or cause to be provided adequate personnel and any
subcontractors, as approved by Hyatt, to permit the timely completion of all
work. All such personnel shall be trained and supervised in accordance with
accepted industry practices and shall conform to the reasonable rules and
regulations of Hyatt established from time to time by Hyatt for the conduct of,
and in relation to, the employees of the contractors of the Hotels when such
employees are on Hotel premises. Spectradyne's employees, subcontractors or
agents shall be neat in appearance and shall wear badges identifying them as
employees or representatives of Spectradyne.
13. Equipment Material.
Spectradyne shall provide and maintain adequate equipment to permit timely
completion of all operations and shall use materials which are in conformance
with existing federal, state and local laws and ordinances.
14. Licenses or Permits.
If any governmental license or permit shall be required of Spectradyne for the
proper and lawful conduct of Spectradyne's business or other activity carried
on, in or at any Hotel, or if a failure to procure such a license or permit
might or would in any way affect the operations of any Hotel, then Spectradyne,
at its expense, shall duly procure and thereafter maintain such license or
permit and submit the same to inspection by Hyatt. Spectradyne, at its sole cost
and expense, shall at all times comply with the requirements of each such
license or permit.
Spectradyne shall, at its sole cost and expense, secure and maintain in full
force and effect during the term of this National Agreement and every Individual
License Agreement, all necessary patents, copyrights, distribution rights, music
rights, licenses, intellectual property rights, releases, waivers and all other
necessary consents of third parties required of Spectradyne to meet its
obligations as set forth in this National Agreement.
15. Compliance with Laws.
Spectradyne agrees, at its own expense, to comply promptly with all requirements
of any federal, state and local laws and ordinances.
16. Insurance.
<PAGE> 13
Spectradyne shall carry and maintain worker's compensation insurance in
statutory amounts, comprehensive general liability insurance endorsed to include
products and completed operations and contractual liability in a minimum amount
of $1,000,000 combined single limit, and automobile liability insurance in a
minimum amount of $1,000,000 combined single limit. All such policies (except
workers' compensation) or certificates of insurance shall specifically state:
"Hyatt Corporation, its affiliates and subsidiaries and the owners of Hyatt
hotels are named as additional insureds under the above policies; such insurance
shall be primary and not contributory with Hyatt's insurance." Each policy shall
provide that it may not be cancelled or changed without at least ten (10) days,
prior written notice to Hyatt.
Spectradyne shall furnish to Hyatt a certificate of insurance evidencing such
coverage prior to the commencement of services hereunder and shall continue to
provide Hyatt with subsequent certificates of insurance evidencing uninterrupted
compliance with the insurance requirement until the termination of this National
Agreement.
Spectradyne shall provide Hyatt with certified copies of the policies required
herein upon Hyatt's request.
17. Indemnification.
Spectradyne shall defend, indemnify and hold harmless Hyatt Corporation, its
affiliates and subsidiaries and the owners of Hyatt Hotels and each of their
respective officers, directors, agents and employees from and against any and
all actions, costs, claims, losses, expenses and/or damages, including
reasonable attorney's fees, arising out of or in any way relating to or
incidental to the performance of the services to be performed by Spectradyne
hereunder or the presence of Spectradyne at the Hotels. Spectradyne shall
further indemnify Hyatt Corporation, its affiliates and subsidiaries and the
owners of Hyatt Hotels and each of their respective officers, directors, agents
and employees from and against any and all actions, costs, claims, losses,
expenses and/or damages, including reasonable attorneys, fees, for or arising
out of bodily injuries to or the death of any Spectradyne's employees working at
any Hotel, however caused or occasioned, excepting the willful misconduct or
gross negligence of Hyatt.
Further, Spectradyne shall defend, indemnify and hold harmless Hyatt
Corporation, its subsidiaries, affiliates and the owners of Hyatt Hotels, and
each of their respective officers, directors, agents and employees from and
against any claims, demands, causes of action, loss, cost and expense (including
reasonable attorneys, fees) arising out of or in connection with or based upon a
real or alleged breach by Spectradyne of the provisions of this National
Agreement pertaining to Spectradyne's intellectual property rights, including,
but not limited to, those provisions
<PAGE> 14
set forth in Sections 6(h)(i) and 6(h)(ii) above, and any claims, demands,
causes of action, loss, cost, expense (including attorneys' fees) or fee based
upon an alleged or actual infringement of any patent or copyright or an alleged
unauthorized broadcast or use of any license as set forth in Section 14 above.
Hyatt shall promptly notify Spectradyne for any matter for which indemnity is
sought under this paragraph and, in any event, prior to the incurrence of any
expenditures under this section.
Spectradyne agrees that it is as fully responsible for the acts and omissions of
its subcontractors and of persons either directly or indirectly employed by them
as it is for the acts and omissions of persons directly employed by Spectradyne.
Spectradyne agrees to bind every subcontractor by the terms of this National
Agreement so far as is applicable to the subcontractor's work. However, nothing
contained in the provision of this National Agreement shall create
any-contractual relationship between Hyatt and any subcontractor.
18. Force Majeure.
Neither party shall have any liability for the failure to perform or a delay in
performing any of its obligations under this National Agreement if that failure
or delay is the result of any legal restriction, labor dispute, strike, boycott,
flood, fire, unavoidable mechanical failure, electricity interruption or any
other cause beyond the control of either party whether similar or dissimilar to
the causes enumerated herein except in any case any event which can be cured or
mitigated by the payment of money; provided, however, that the failure of
Spectradyne to deploy and install the New Technology on the schedule established
and as required pursuant to Section 4 of this National Agreement shall under no
circumstances be deemed a force majeure event.
19. Default. (a) In the event that (i) Spectradyne fails to begin Phase Two
installations of the New Technology by September 1, 1994, (ii) Spectradyne fails
to deliver all of the New Technology to at least ninety percent (90%) of the
Exhibit A Hotels on or before December 31, 1994, (iii) Spectradyne fails to
install the new TV Sets in, or provide the trade credit to, Exhibit A Hotels in
accordance with Section 6 above on or before November 14, 1994, or (iv) the New
Technology fails to meet the standards set forth on Exhibit C, then Hyatt may
terminate this National Agreement upon one hundred eighty (180) days prior
written notice. In the event of such termination, in addition to all other
remedies available to Hyatt at law or equity, each Hotel shall retain ownership
of all TV Sets installed in or delivered to such Hotel prior to the effective
date of such termination.
(b) In the event that Spectradyne fails, in any material way, to provide the
services described in Section 8 above, to Hyatt's sole satisfaction, Hyatt or
any Hotel, at its sole option, upon
<PAGE> 15
three (3) days' notice to Spectradyne and opportunity to cure, may elect to have
such service(s) performed by another vendor at the sole cost and expense of
Spectradyne. All amounts owed by Spectradyne under this paragraph shall be
deducted from amounts payable to Spectradyne by the applicable Hotel. Hyatt
shall provide Spectradyne, at Spectradyne's request, with copies of any such
amounts.
(c) Except (i) as otherwise provided in paragraph (a) and (b) above, and (ii)
for the reasons that constitute force majeure as set forth in Section 18
hereinabove, in the event that either Hyatt or Spectradyne fails to perform or
comply with any other material obligation under this National Agreement or the
Amended and Restated Spectramax National Agreement or any Individual License
Agreement or Hyatt Spectramax Agreement that failure shall constitute a default.
The non-defaulting party shall notify the defaulting party in writing of the
failure and default. In the event the default is not remedied to the
satisfaction of the party having given such notice within forty five (45) days
after receipt of notice, or if such default is of a nature that it cannot, with
due diligence and in good faith, be cured within forty five (45) days and such
defaulting party fails to proceed promptly and with due diligence and in good
faith to cure the same, then the non-defaulting party may declare this National
Agreement or the Amended and Restated Spectramax National Agreement or any or
all of the Individual License Agreements and Hyatt Spectramax Agreements, as
appropriate, terminated as of the one hundred and eightieth (180th) day
following delivery of the original notice. In the event that this National
Agreement is terminated pursuant to this Section 191 all the Individual License
Agreements shall automatically terminate on the same terms without further
action or notice of any kind by Hyatt.
20. Test sites.
Spectradyne understands and agrees that from time to time, during the term of
this National Agreement and the Individual License Agreements, Hyatt may use
certain of the Hotels as test sites side-by-side with existing and operating
Spectradyne equipment for the purpose of investigating and evaluating the
services offered by other companies which provide services which are the same as
or similar to the services provided by Spectradyne, so long as such testing
causes no damage to Spectradyne nor uses its Equipment. Any such test shall not
exceed a period of ninety (90) days. Hyatt shall not be deemed to be in default
of this National Agreement or the Individual License Agreements in the event any
testing is conducted at a Hotel serviced by Spectradyne.
21. Independent Contractor.
Spectradyne is an independent contractor and all persons employed
to furnish services hereunder are employees or agents of
<PAGE> 16
Spectradyne and not of Hyatt.
22. Notices.
All notices, requests, demands and other communications hereunder shall be in
writing and delivered or mailed with postage prepaid, to the party intended at
its address as hereinbefore set forth.
23. Binding.
This National Agreement shall inure to and bind the successors, assigns and
representatives of the parties; provided, however, this National Agreement may
not be assigned by Spectradyne without the prior written consent of Hyatt.
Spectradyne shall not have the right to subcontract its obligations as set forth
herein to third parties without the prior written approval of Hyatt.
24. Governing Law.
This National Agreement is subject to and governed by the internal laws of the
State of Illinois without regard to the external laws or federal laws pertaining
to conflicts of laws.
25. Entire Agreement
This National Agreement contains the entire agreement between the parties
hereto; no representations, inducements, promises or agreements, oral or other,
between the parties not embodied herein, shall be of any force or effect.
26. Amendment of Agreement.
This National Agreement may be amended only by a written instrument signed by
the parties hereto.
27. Legal Fees.
In the event any legal action is taken by either party against the other party
to enforce any of the terms and conditions of this National Agreement, it is
agreed that the unsuccessful party to such action shall pay to the prevailing
party therein all court costs, reasonable attorneys' fees or other professional
fees and expenses incurred by the prevailing party.
28. Heading
The headings used in this National Agreement are inserted only as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this National Agreement nor the intent of any provision thereof.
29. Hyatt-Agent.
<PAGE> 17
Spectradyne acknowledges that Hyatt acts as the agent of the owners of the
Hotels and any action or obligation to be performed or carried out by any Hotel
hereunder shall be performed by Hyatt solely in its capacity as agent for the
owner of such Hotel. Accordingly, Spectradyne acknowledges that Hyatt's
obligations in this Agreement in respect of matters relating to Hotels are
obligations of Hyatt as agent only.
IN WITNESS WHEREOF, the parties have executed this National Agreement as of the
day and year first above written.
HYATT CORPORATION, on its own
behalf and on behalf of its
subsidiaries and affiliates
BY: /s/ Peter D. Connolly
Printed Name: Peter D. Connolly
Title: Vice President Hyatt Corporation
SPECTRADYNE, INC.,
a Texas corporation
By: /s/ Albert D. Jerome
Printed Name: Albert D. Jerome
Title: President and Chief Executive Officer
LH:corp\specvis
<PAGE> 18
Spectravision Exhibits
Exhibits Description
A Amended and Restated List of Hyatt Hotels
B Form of License Agreement
C New Technology Features
D Television Features
<PAGE> 19
EXHIBIT A
AMENDED AND RESTATED LIST OF HYATT HOTELS
Hyatt Regency Albuquerque
330 Tijeras NW
Albuquerque, NM 87102
Hyatt Arlington
1325 Wilson Blvd.
Arlington, VA 22209
Hyatt Regency Atlanta
265 Peachtree St., NE
Atlanta, GA 30303
Hyatt Regency Austin
208 Barton Springs
Austin, TX 78704
Hyatt Regency Beaver Creek
136 East Thomas Place
Avon, CO 81620
Hyatt Regency Bethesda
One Bethesda Metro Center
Bethesda, MD 20814
Hyatt Regency Cambridge
575 Memorial Drive
Cambridge, MA 02139
Hyatt Regency Cerromar Beach
Dorado, Puerto Rico 00646
Hyatt Cherry Hill
2349 West Marlton Pike
Cherry Hill, NY 08002
Hyatt Regency Cincinnati
151 West 5th Street
Cincinnati, OH 45202
Hyatt Regency Coral Gables
50 Alhambra Plaza
Coral Gables, FL 33134
Hyatt Regency Alicante
100 Plaza Alicante
Harbor & Chapman Blvd.
Garden Grove, CA 92640
Hyatt Regency Aruba
<PAGE> 20
L.G. Smith Blvd. 85
Palm Beach, Aruba
Hyatt Regency Baltimore
300 Light Street
Baltimore, MD 21202
Hyatt Regency Bellevue
900 Bellevue Way, N. E.
Bellevue, WA 98004
Hyatt Regency Buffalo
Two Fountain Plaza
Buffalo, NY 14202
Hyatt on Capitol Square
75 East State Street
Columbus, OH 43215
Hyatt Charlotte
5501 Carnegie
Charlotte, NC 28209
Hyatt Regency Chicago
151 East Wacker Drive
Chicago, Illinois 60601
Hyatt Regency Crown Center
2345 McGee Street
Kansas City, MO 64108
Hyatt Regency Columbus
350 North High Street
Columbus, OH 43215
Hyatt Regency Crystal City
2799 Jefferson Davis Hwy.
Arlington, VA 22202
Hyatt Regency Dallas
300 Reunion Boulevard
Dallas, TX 75207
Hyatt Deerfield
1750 Lake Cook Road
Deerfield, IL 60015
Hyatt Dorado Beach
Dorado, P.R. 00646
Hyatt Fair Lakes
12777 Fair Lakes Circle
Fairfax, VA 22033
<PAGE> 21
Hyatt Regency Grand Cypress
One Grand Cypress Blvd.
Orlando, FL 32836
Hyatt Regency Greenwich
1800 East Putnam Avenue
Old Greenwich, CT 06870
Hyatt Regency Hill Country
Resort
9800 Resort Drive
San Antonio, TX 78251
Hyatt Regency Houston
1200 Louisiana Street
Houston, TX 77002
Hyatt Regency Irvine
17900 Jamboree Boulevard
Irvine, CA 92714
Hyatt Regency Kauai
1571 Poipu Road
Koloa, HI 96756
Hyatt Regency DFW Airport
International Pkway.
DFW Airport, TX 75261
Hyatt Regency Dearborn
Fairlane Town Center
Dearborn, MI 48126
Hyatt Regency Denver
1750 Welton Street
Denver, CO 80202
Hyatt Dulles
2300 Dulles Corner Blvd.
Herndon, VA 22070
Hyatt at Fisherman's Wharf
555 N. Point Street
San Francisco, CA 94133
Hyatt Grand Champions Resort
44-600 Indian Wells Ln.
Indian Wells, CA 92210
Hyatt Regency Greenville
220 North Main Street
Greenville, SC 29601
Harborside Hyatt Conference
<PAGE> 22
Center & Hotel
101 Harborside Drive
Boston, MA 92128
Hyatt Regency Hilton Head
at Palmetto Dunes
P.O. Box 6167
Hilton Head, SC 29938
Hyatt Regency Indianapolis
One South Capitol Avenue
Indianapolis, IN 46204
Hyatt Islandia
1441 Quivira Road
San Diego, CA 92109
Hyatt Key West
601 Front Street
Key West, FL 33040
Hyatt Regency Knoxville
500 Hill Avenue, SE
Knoxville, TN 37901
Hyatt Regency Lake Tahoe
Resort & Casino
111 Country Club Drive
Incline Village, NV 89450
Hyatt Lisle
1400 Corporetum Drive
Lisle, IL 60532
Hyatt Regency Long Beach
200 South Pine Avenue
Long Beach, CA 90802
Hyatt Regency Los Angeles
711 South Hope Street
Los Angeles, CA 90017
Hyatt Regency Maui
200 Nohea Kai Drive
Lahaina, Maui
Hawaii 96761-1990~
Hyatt Regency Milwaukee
333 West Kilbourn Avenue
Milwaukee, WI 53203
Hyatt Regency Monterey
One Old Golf Course Road
Monterey, CA 93940
<PAGE> 23
Hyatt Regency New Orleans
Poydras Plaza & Loyola Avenue
New Orleans, LA 70140
Hyatt Newporter
1107 Jamboree Road
Newport Beach, CA 92660
Hyatt Regency Oak Brook
1909 Spring Road
Oak Brook, IL 60521
Hyatt Regency LaJolla
3777 LaJolla Village Drive
San Diego, CA 92122
Hyatt Regency Lexington
400 West Vine Street
Lexington, KY 40507
The Lodge
Ronald Lane
Oak Brook, IL 60521
Hyatt at Los Angeles Airport
6225 West Century Boulevard
Los Angeles, CA 90045
Hyatt Regency Louisville
320 West Jefferson
Louisville, KY 40202
Hyatt Regency Miami
400 SE Second Avenue
Miami, FL 33131
Hyatt Regency Minneapolis
1300 Nicollet Mall
Minneapolis, MN 55403
Hyatt Regency New Brunswick
Two Albany Street
New Brunswick, NJ 08901
Grand Hyatt New York
Park Avenue at Grand Central
New York, NY 10017
Hyatt Regency O'Hare
9300 West Bryn Mawr
Rosemont, IL 60018
Hyatt Orlando
6375 West Irlo Bronson
<PAGE> 24
Memorial Highway
Kissimee, FL 32741
Hyatt Regency Orlando
International Airport
9300 Airport Boulevard
Orlando, FL 32827
Park Hyatt Chicago
800 North Michigan Avenue
Chicago, IL 60611
Hyatt Regency Phoenix
122 North Second Street
Phoenix, AX 85004
Hyatt Regency Pittsburgh
112 Washington Place
Pittsburgh, PA 15219
70130 Hyatt Regency Reston
1800 President Street
Reston, VA 22090
Hyatt Regency Rochester
125 East Main Street
Rochester, NY 14604
Hyatt Rickeys
4219 El Camino Real
Palo Alto, California 94306-4493
Hyatt Regency San Antonio
123 Losoya
San Antonio, TX 78205
Hyatt Regency San Francisco
Airport
San Diego, CA 92101
Burlingame, CA 94010
Hyatt Regency San Francisco
5 Embarcadero Center
San Francisco, CA 94111
Hyatt Regency Sarasota
1000 Boulevard of the Arts
Sarsota, FL 33577
Park Hyatt San Francisco
At Embarcadero Center
333 Battery Street
San Francisco, CA 94111
<PAGE> 25
Park Hyatt Washington
1201 24th Street NW
Washington, D.C. 20037
Hyatt on Printers Row
500 South Dearborn
Chicago, IL 60605
Hyatt Regency Princeton
102 Carnegie Center
Princeton, NJ 08540
Hyatt Richmond
6223 Broad Street
Richmond, VA 23230
Hyatt Regency Sacramento
1209 "L" Street
Sacramento, CA 95814
Hyatt Regency San Diego
One Market Place
San Diego, CA 92101
Grand Hyatt San Francisco
345 Stockton Street
San Francisco, CA 94108
Hyatt San Jose
1740 North First Street
San Jose, CA 95112
Hyatt Regency Savannah
Two West Bay Street
Savannah, GA 31401
Hyatt Regency Scottsdale
7500 East Doubletree
Ranch Road
Scottsdale, AZ 85258
Hyatt Regency St. Louis
at Union Square
One St. Louis Union Square
St. Louis, MO 63103
Hyatt Regency Suites Perimeter
Northwest
2999 Windy Hill Road
Marietta, GA 30067
Hyatt on Sunset
8401 Sunset Boulevard
West Hollywood, CA 90069
<PAGE> 26
Hyatt Regency Vancouver
655 Burrard Street
Vancouver, B.C.
Canada V6C 2R7
Grand Hyatt Washington
1000 H Street NW
Washington, DC 20001
Hyatt Westlake Plaza
880 South Westlake Boulevard
Westlake Village, CA 91361
Hyatt Regency St. John
P.O. Box 8310
Great Cruz Bay, St. John
US Virgin Islands 00830
Hyatt Regency Suites Palm Springs
285 North Palm Canyon Drive
Palm Springs, CA 92262
Hyatt Regency Tech Center
7800 E. Tufts Avenue
Denver, Colorado 80237
Hyatt Regency Tampa
Two Tampa City Center
Tampa, FL 33602
Hyatt Regency Waikiki
2424 Kalakaua Avenue
Honolulu, Oahu
HI, 96815
Hyatt Regency Washington
400 New Jersey Avenue, NW
Washington, D. C. 20001
Hyatt Regency Westshore
6200 Courtnery Campbell Cswy.
Tampa, FL 33607
Hyatt Regency Woodfield
1800 East Golf Road
Shaumburg, Illinois 60173
<PAGE> 27
EXHIBIT B
LICENSE AGREEMENT
BY THIS AGREEMENT made this _____ day of _________________ 199__, between HYATT
CORPORATION, as agent of with offices at 200 West Madison Street, Chicago,
Illinois 60606, (hereinafter "Hyatt"), and SPECTRADYNE, INC., a Texas
corporation, with offices at 1501 North Plano Road, Richardson, Texas 75083
(hereinafter "Spectradyne"), the parties hereby RECITE and AGREE as follows:
RECITALS
A. Spectradyne is engaged in the business of telecasting, in closed-circuit,
movies over hotel master antenna television systems to television receivers
located in hotel guest rooms-by means of equipment manufactured, supplied,
acquired, installed and maintained by Spectradyne or on behalf of Spectradyne
(sometimes referred to herein as "Spectravision") and providing certain
interactive services which interface with hotel property management systems
including (i) Hotel guest room safe and bar interfaces, as applicable, and (ii)
other services including Video Check-Out/Account Review, Video Messages, Video
Breakfast Menu, Instant Room Inventory, Bellman Assistance and Guest Comment
Cards (collectively referred to herein as "Interactive Services").
B. Hyatt is the operator of that certain hotel known as the ___________________
(the "Hotel") located at ___________________. The Hotel is equipped with a
master antenna television system (herein collectively called the "MATV"), which
is a network of cables, wall taps, antennas and specially designed radio
frequency signal processing components, which receive, process, amplify and
distribute video and audio TV and FM signals from a central location on to a
multiplicity of televisions within a building or group of buildings.
C. The parties desire to enter into an agreement whereby Spectradyne will
provide to the Hotel upon the terms herein provided, Spectravision and
Interactive Services.
AGREEMENT
In consideration of their respective covenants, the parties hereto mutually
agree as follows:
1. Amended and Restated National Agreement.
This Agreement is subject to and governed by the terms and conditions of that
certain Amended and Restated Spectravision and Interactive Services National
Agreement effective July 1, 1993, between Hyatt Corporation on its own behalf
and on behalf of its subsidiaries and affiliates and Spectradyne, Inc. (the
"National Agreement"). Capitalized terms which are contained in this
<PAGE> 28
Agreement shall have the same definition and meaning as provided for under the
National Agreement unless specifically defined differently herein. In the event
any of the provisions of this License Agreement conflict with the provisions of
the National Agreement, the provisions of the National Agreement shall prevail.
2. Installation of Equipment.
(a) Spectradyne shall, at its sole cost and expense, and at the time and in
the manner hereinafter provided, install in or furnish to the Hotel all of the
Equipment which shall consist of the following: (i) equipment for the
transmission of video programming over the MATV, and such other equipment as
shall be necessary, in the opinion of Spectradyne, as approved by Hyatt, for
telecasting movies and such other video programming in all guest rooms of the
Hotel (all such equipment being herein called "Transmission Equipment"); (ii)
equipment or software necessary, in the opinion of Spectradyne, as approved by
Hyatt, to provide the Interactive Services; (iii) equipment designed to monitor
the particular programs viewed in the guest rooms and to print out the
information--for billing purposes (all such equipment being herein referred to
as ("Monitoring Equipment"); and, (iv) all equipment or software necessary, in
the opinion of Spectradyne, as approved by Hyatt, in connection with provision
of the New Technology described in the National Agreement. All of the equipment
and software furnished and/or installed pursuant to this subparagraph (a) is
herein collectively referred to as the "Equipment".
(b) Spectradyne shall, as soon as practicable, commence installation in the
Hotel of the Equipment. Spectradyne shall furnish _____ Television Sets (number
is devised in accordance with the number of Hotel guest rooms) meeting the
specifications outlined in the National Agreement (the "TV Sets") plus _____
spare TV Sets in the Hotel and will use commercially reasonable efforts to
timely complete such installation of the Equipment and the TV Sets so that the
telecasting service to be provided hereunder by Spectradyne shall be available
for use by guests of the Hotel not later than sixty (60) days after the
Installation of Equipment commences. Upon installation of the Equipment at the
Hotel and pursuant to Section 6 of the National Agreement as it applies to the
TV Sets, Spectradyne shall either (i) convey to the Hotel good title to and
ownership by the Hotel of the TV Sets (including all remote controls thereto)
and the character generator for such Hotel, free and clear of any lien, claim or
encumbrance. The TV Sets shall become the sole property of the Hotel and neither
Spectradyne nor any third party shall have any right, title or interest in or
claim to such TV Sets; or, (ii) accept the Hotel's surrender to Spectradyne for
trade-in all television sets as soon as they are free and clear of all liens and
encumbrances and title to the TV Sets provided by Spectradyne shall pass to the
Hotel, along with the bill of sale. Spectradyne shall warrant that such TV Sets
are free and clear of
<PAGE> 29
all liens and encumbrances as stated in 2(b)(i) above; or, (iii) provide a trade
credit of *** per "Smart Plug" television set at the Hotel against future
amounts due Spectradyne under this Agreement, including refits, as necessary, to
SpectraMate room units and Spectradyne remote control units containing the
features set forth on Exhibit D of the National Agreement.
(c) As herein used, the term "installation of Equipment" shall include upgrading
the MATV as provided in the National Agreement, connecting the Equipment to the
MATV system and all other work required to provide the Spectravision and
Interactive Services, along with all necessary monitoring of guest viewing to
all Hotel guest rooms. In this connection all of the elements in the Hotel,
including the TV Sets, the Equipment and the MATV, functioning as a telecasting
service, are herein collectively referred to as the "System".
(d) Immediately upon execution of this License Agreement, Hyatt shall (i) make
available at no cost to Spectradyne a non-public area in the Hotel comprising
approximately twenty (20) square feet which is reasonably satisfactory to
Spectradyne to be used for the installation of the Transmission Equipment and
which is hereinafter referred to as the "Transmission Location." Hotel shall
provide at no cost to Spectradyne an appropriate area located near the cashier
and billing departments for the installation of the Monitoring Equipment and the
Hotel shall (ii) permit Spectradyne to conduct a technical inspection of the
MATV and related facilities to determine the adequacy thereof for providing the
telecasting services herein contemplated, and (iii) give Spectradyne access to
the MATV and to such areas of the Hotel (including the guest rooms) as may be
reasonably necessary for installing the Equipment, upgrading the MATV, and
making the necessary connections to the MATV so as to permit the telecasting of
movies from the Transmission Location over the MATV. In this connection,
Spectradyne is hereby authorized:
(1) with the prior approval of Hyatt and at Spectradyne's expense to make such
changes in the MATV as shall be required to provide Spectradyne's services,
consistent with the requirements of the National Agreement, and
(2) to connect the output cable from Spectradyne's systems to the MATV and the
TV Sets located in the Hotel guest rooms and, to the extent required, to install
wires, cables, conduits, risers and other similar devices throughout the Hotel;
provided, however, that such installations comply with all applicable laws or
regulations, are reasonably acceptable to Hyatt, and do not violate any
reasonable rules or regulations established by Hyatt or any Hotel from time to
time governing work to be performed on Hotel premises.
(e) In the event Hyatt installs services requiring signals on the MATV, such
signals shall not impair the operation or signal quality of Spectradyne's
services.
<PAGE> 30
3. Rights and Obligations of the Parties with Respect to the
Equipment.
(a) Notwithstanding the fact that parts thereof may be affixed to the Hotel, the
Equipment shall remain the property of spectradyne and/or its partners or
suppliers throughout the term hereof. However, Spectradyne hereby acknowledges
that the Hotel retains the rights in the television sets Spectradyne provided to
the Hotel, in conjunction with the provisions of Section 6 of the National
Agreement. Hyatt acknowledges that the Equipment and the manner of its operation
as part of the System are proprietary to Spectradyne and other third parties.
Accordingly, Hyatt will use all reasonable efforts to ensure that information
regarding and access to the System is not given to any person or persons other
than personnel authorized by Spectradyne. Such restrictions shall not apply
during emergency situations.
(b) At the expiration or earlier termination of this Agreement as herein
provided and subject to the terms of Section 6 of the National Agreement.
Spectradyne shall have the right, at its sole risk, cost and expense, to remove
the Equipment. Spectradyne shall effect such removal within thirty (30) days
from the expiration or termination of this Agreement in a neat and workmanlike
manner.
(c) Spectradyne shall, at its sole cost and expense, repair any damage to the
Hotel caused by the installation, removal, repair, servicing, maintenance or
replacement of the Equipment, or any part thereof, at its sole cost and expense,
and shall return the Hotel premises to its original condition at the time of
installation, normal wear and tear excepted.
(d) Spectradyne shall, diligently throughout the term hereof, maintain the
Equipment, the TV Sets (complete with remote control units) and the MATV in good
operational condition and make all necessary repairs thereto and service all
replacements thereof, at its sole cost and expense. In this connection,
Spectradyne agrees to:
(i) designate technical representatives to provide maintenance as needed (and
Hyatt will designate an engineer of the Hotel staff for the day-to-day control
of operations); and,
(ii) bear the responsibility for transmitting and maintaining a good quality
signal for distribution through the MATV consistent with the requirements of the
National Agreement. Spectradyne agrees to replace all lost remote control units
or those television sets and remote control units broken beyond repair. The
foregoing provisions notwithstanding, in the event of any damage to or loss of
the Equipment, the TV Sets, the MATV or any part thereof caused by the willful
misconduct or grossly negligent act of Hyatt or any of its employees, any
repairs or replacements necessitated by such damage shall be at the expense of
Hyatt, but in such event Spectradyne agrees to effect such
<PAGE> 31
repair or replacement at Spectradyne's actual cost.
4. Grant of Licenses: Term.
(a) The date when installation of the Equipment shall be completed and the
System shall be completely operational is herein referred to as the "Term
Commencement Date"; provided, however, such Term Commencement Date shall not be
prior to the opening date of the Hotel, as designated by the Hotel general
manager.
(b) Hyatt hereby grants to Spectradyne, for a term commencing on the Term
Commencement Date and terminating on June 30, 2000, without further action or
notice of any kind by either Hyatt or Spectradyne, an exclusive license (the
"License,,) which is contingent upon Spectradyne's continued ability to meet
it's obligations as set forth in this Agreement and the National Agreement to
supply to the Hotel the service of telecasting, in closed-circuit, pay per view
movies over the MATV to television receivers located in the guest rooms of the
Hotel and supply the Hotel with Interactive Services. Upon approval of Hyatt,
Spectradyne may telecast various other programs, such as local travelogue films,
conventions and trade shows at a mutually satisfactory fee arrangement.
(c) In the event that during the term hereof, Hyatt and Spectradyne shall agree
to replace the Transmission Equipment as provided in Section 2 hereof with new
Transmission Equipment, then such replacement shall be completed in a timely
manner on a schedule as agreed upon between Hyatt and Spectradyne.
(d) Spectradyne shall have the exclusive right to provide Spectravision and
Interactive Services in the Hotel during the term hereof subject to the Default
provisions of the of this Agreement and the National Agreement. The Interactive
Services to be provided hereunder shall interface with all Hotel guest room
safes and bars, unless such safes or bars are provided by vendors other than
those used by Hyatt Hotels as of August 27, 1993. In such event, Spectradyne
shall use its best efforts to make its Interactive Services compatibly interface
with the Hotel's safes and bars. Further, the other Interactive Services shall
be available to the Hotel in the following languages: English, ________,
________, ________, ________, (to be determined by the Hotel). Spectradyne and
Hyatt shall agree to cooperate to ensure that such telecasting services do not
interfere with the operation, of either Party's Transmission Equipment or such
other services, as the case may be; provided, however, Hyatt may, at Hyatt's
sole cost, desire that certain similar or other services (including, but not
limited to, other interactive services) be available at the Hotel, such as but
not limited to, video cassette players to deliver programming that does not
compete with the Spectravision Service (video recorders being specifically
prohibited). Spectradyne is hereby granted the non-exclusive right to bid to
provide such desired services.
<PAGE> 32
(e) Upon the early termination of this Agreement (other than pursuant to a
default by Hyatt under Section 16 hereof), Hyatt may give notice no later than
thirty (30) days following such termination, at Hyatt's option to either,
(i) purchase and/or obtain Spectradyne's interest in or right to use
all or any portion of the existing Equipment, as determined solely by Hyatt, for
an amount mutually agreed to be the fair market value of such equipment and/or
interest or right therein, except for any Equipment not owned by Spectradyne or
Equipment which Spectradyne cannot convey any interest in or right to use. If,
however, Hyatt and Spectradyne are unable to determine the fair market value of
such Equipment and/or interest or right therein, such Equipment shall remain at
the Hotel as set forth Section 4(e)(ii) below. In the event Hyatt elects to
purchase such Equipment and/or interest or right therein, Spectradyne shall
deliver to Hyatt free and clear title to such Equipment along with the Bill of
Sale upon receipt of payment of the agreed upon amount; or,
(ii) require Spectradyne to keep and maintain all Equipment provided to
the Hotel pursuant to a Hyatt Spectramax Agreement including the license for the
use of the on-site software required to operate the Equipment or provide the
Interactive Services at the Hotel for a total rental, maintenance, license and
service fee in the amount of *** per guest room per month for a term not to
exceed thirty-six (36) months; and,
(iii) the parties agree that in the event Hyatt exercises its option to
keep the Equipment in the Hotel pursuant to Section 4(e)(ii) above, Hyatt'
agrees not to use the Equipment to show in room pay-per-view movies and such
other video programming.
(iv) However, Hyatt may elect to offer guest pay movies and such other
video programming through the rented Spectradyne Equipment and Spectradyne shall
be the exclusive provider of those guest pay movies over the rented systems, and
Spectradyne shall continue to pay Hyatt the fee specified in Section 10 below.
If Hyatt fails to exercise the option set forth in this section 4(e)(iv) upon
termination of the rental period pursuant to Section 4(e)(ii), Spectradyne may,
following written notice, elect to remove the Equipment.
(f) In the event Hyatt elects to either purchase all or any portion of the
Equipment and/or the interest, or rights therein, or rent the Equipment from
Spectradyne as described in Section 4(e) above, Spectradyne agrees to license to
Hyatt, for Hyatt's use, at no additional cost to Hyatt, the on-site software and
any and all upgrades thereto, which are necessary to operate the Equipment or
provide the Interactive Services for a period not to exceed thirty-six (36)
months. After the end of the initial thirty-six (36) months, if the parties have
not previously
<PAGE> 33
terminated the Agreement, it shall automatically renew for continuous ninety
(90) day terms, until such time as one party provides the other party with
ninety (90) days, prior written notice of intent to terminate. Spectradyne
warrants and represents that it owns free and clear title to all such on-site
software required to provide Interactive Services and to operate the Equipment.
(g) This Agreement shall automatically terminate upon the expiration or earlier
termination of the National Agreement.
(h) In the event that Hyatt shall for any reason cease to be manager or operator
of the Hotel, either party shall have the right to terminate this Agreement as
of the date of such cessation of management or operations. The cancelling party
shall provide the non-cancelling party with at least thirty (30) days prior
written notice of such termination.
(i) This Agreement may be suspended, at Hyatt's option, upon thirty (30) days
prior written notice in the event the Hotel or any portion thereof is closed for
renovation. In the event Hyatt chooses to suspend this Agreement, all applicable
fees shall abate during such renovations and shall resume on the date when the
Hotel or sections thereof reopen to the public.
5. Ownership of Equipment, MATV and TV Sets.
(a) Title to the Equipment shall remain with Spectradyne and/or its partners or
suppliers except as provided for otherwise below.
(b) Title to the MATV and the TV Sets is and shall remain with the Hotel. It is
agreed that all items which. encompass the MATV before and after the date of the
completion of the upgrades thereto pursuant to the National Agreement are hereby
deemed property of the Hotel.
6. standard for Selection of Movies.
(a) Spectradyne shall supply, for projection through the System, Spectradyne's
Guest Choice "A", on demand, in-room guest pay movie and entertainment service
("Guest Choice"), which shall provide a selection of up to two hundred (200)
tapes or movies available to guests for viewing on demand. In addition, pursuant
to the requirements described in the National Agreement, Spectradyne shall
provide an advanced compressed digital means of providing on demand, in room
guest pay movies and entertainment (the "New Technology"). For purposes of this
Agreement, in connection with Guest Choice service, "on demand" shall mean that
the system is capable of meeting a guest's request to view a particular
selection within an average of three (3) minutes of initiation of such request.
In connection with the New Technology service "on demand" shall mean that the
system is capable of meeting a guest's request to view a particular selection
virtually instantaneously. It is the intent of the
<PAGE> 34
parties hereto that, except as otherwise provided below, Spectradyne shall have
absolute control and discretion in the selection of movies to be exhibited at
the hotels; provided, however, that Spectradyne shall provide (i) a method
whereby a guest must reconfirm his movie or entertainment selection
electronically before actually viewing the selection, (ii) a method whereby a
guest may select and preview up to three (3) movies or other entertainment
selections for up to five (5) minutes apiece without charge, and (iii) a method
whereby a guest will be able to electronically restrict movies from being
offered in his guest room by title, category, on a day-to-day basis or for the
length of the guest's stay.
(b) Notwithstanding the foregoing, at no time shall Spectradyne offer movies or
entertainment which, in the versions as presented, have been rated "XI' by the
Motion Picture Association of America. At periodic intervals, Hyatt may review
the entertainment offered by Spectradyne. If, in the reasonable opinion of
Hyatt, following such review, Hyatt is of the opinion that the materials which
are available for viewing would offend the sensibilities of a substantial number
of Hyatt's guests in a certain hotel, then the provisions of the National
Agreement shall apply.
(c) All movies shall be free of distortion and of a first class video quality.
Any inferior video tapes or other videos shall be replaced immediately.
(d) In supplying movies to the Hotel, Spectradyne will use its reasonable
efforts not to violate any censorship rules or prohibitions applicable to the
Hotel. To that end, Spectradyne shall inform Hyatt in writing of the movies
proposed to be shown not later than seventy two (72) hours in advance of the
scheduled projection. If any such movie is known by Hyatt to be in violation of
the Hotel's censorship rules or otherwise prohibited by the Hotel, Hyatt will
promptly inform Spectradyne of such fact and Spectradyne shall provide a
substitution acceptable to Hyatt. Spectradyne understands and agrees that Hyatt
may not be familiar with the contents of each movie scheduled for projection at
the hotels; therefore, Hyatt reserves the right to reasonably veto any movie
which violates such censorship rules or prohibitions at any time prior to or
during its projection.
(e) The Hotel agrees that the movies provided under this Agreement remain the
property of Spectradyne. The Hotel shall (i) ensure that the movies are stored
under the strictest reasonable security measures, and (ii) shall not allow
anyone other than in-room guests and invitees to view the movies. The Hotel
shall not allow any copying under any circumstances of the movies and shall not
allow the movies to be taken from the premises.
7. Operation of System.
<PAGE> 35
(a) Subject to applicable regulations of governmental authorities having
jurisdiction, Hyatt shall at all times during the term hereof, make available
appropriate MATV channels and the television receivers located in the Hotel
guest rooms for the transmission of the movies.
(b) Spectradyne shall (i) initially inspect and, if necessary, repair the MATV
system to proper working condition to receive and broadcast the movies and such
other video programming. Thereafter Spectradyne shall maintain the MATV in good
operating condition in accordance with the requirements of the National
Agreement, (ii) ensure that all guest room TV Sets are and remain connected to
the MATV during the term hereof, (iii) supply in all guest rooms TV Sets capable
of properly receiving and displaying in color the movies to be provided by
Spectradyne and maintain such TV Sets (including all remote control units
thereto) in good operating condition, and (iv) maintain proper tuning of such TV
Sets for clear reception of the normal television programs.
(c) Hotel shall, at no cost to Spectradyne, provide the electrical power
necessary to operate the Equipment. The personnel of the Hotel, as agents of
Spectradyne, shall be responsible for turning the System on and off daily,
changing of video cassettes as required, placing program cards in the guest
rooms and readjusting such TV Sets whenever guests have altered their clear
reception.
(d) Hyatt will grant to the representative of Spectradyne access to all such
areas of the Hotel at such times as Spectradyne shall reasonably require in
order to perform its obligations hereunder; provided, however, that Spectradyne
in the exercise of its access rights and in performance of its obligations
hereunder shall not unreasonably inconvenience the guests of the Hotel or
unreasonably interfere with the operation of the Hotel.
(e) In the event Spectradyne shall notify Hyatt that Spectradyne desires to use
a microwave system for the transmission of movies in the Hotel, Hyatt shall, at
no cost to Spectradyne, use reasonable effort to provide suitable space on the
roof of the Hotel for the location of a microwave receiver and related
equipment, provided, however, that all consents required to locate such receiver
and equipment are obtained by Spectradyne.
8. Advertising and Promotion.
Spectradyne shall supply to Hyatt, at no cost to Hyatt, suitable advertising and
promotional material with respect to the movies available through the System,
including placards and display cards describing the movies for the benefit of
the Hotel guests. Hyatt shall display such advertising and promotional material
at suitable locations in the Hotel, provided that Hyatt shall have the right, in
its sole discretion, to refuse to display any items the contents or format of
which is deemed offensive or not in the best interests of the Hotel.
<PAGE> 36
9. Training of Hotel Personnel.
Spectradyne shall, at no cost to Hyatt, provide proper training for the Hotel
personnel during their respective working hours in the promotion of the use of
the System by Hotel guests, the daily operation thereof and routine surveillance
of Equipment.
10. Remuneration.
(a) Hyatt shall, at no cost to Spectradyne, bill Hotel guests for viewing movies
projected through the System at the rate(s) hereinafter provided. Billing shall
be made on a daily basis in the same manner a's other Hotel charges are billed
to guests.
The "Gross Viewing Receipts" for any period shall mean the aggregate gross
amount billed by Hyatt to Hotel guests during such period less (i) the amount of
taxes, if any, chargeable to Hotel guests in connection with any viewing of
movies, and (ii) any uncollectible charges theretofore billed to Hotel guests
for viewing movies through the System which were previously reported to
Spectradyne to the extent such charges are written off on Hyatt's books during
such period.
(b) Initially, the charge for each viewing of a movie shall be _______________
dollars ($_____) and the charge for each viewing of _______________ (such as
exercise videos) shall be _______________ dollars ($_____). Such charge shall be
subject to adjustment from time to time by written agreement between the parties
hereto. In the event that either party shall desire to increase the charge for a
viewing, such party shall give to the other party hereto notice (the "Adjustment
Notice") specifying the proposed new charge and the proposed effective date
thereof (and the date when such Adjustment Notice shall be given is herein
referred to as the "Notice Date"). In the event that the parties shall fail,
within sixty (60) days from the Notice Date, to execute an agreement setting
forth the new charge and its effective date, this Agreement shall terminate upon
the expiration of ninety (90) days from the Notice Date unless the parties
hereto shall theretofore have executed an agreement in writing in which they
agree to submit the matter to arbitration.
(c) In consideration of all rights and privileges granted to Spectradyne
hereunder, Spectradyne shall pay to Hyatt with respect to each month during the
term hereof, the following formula: (i) in the event Gross Viewing Receipts for
any month do not exceed *** per room, an amount equal to *** of the monthly
Gross Viewing Receipts generated by the Hotel for such period (the "Commission
Feel") and an amount equal to *** of the monthly Gross Viewing Receipts
generated by the Hotel for such period as an advertising allowance (the
"Advertising Allowance"), and (ii) in the event Gross Viewing Receipts for any
month exceed *** per room, an additional amount equal to *** of the monthly
Gross Viewing Receipts generated by the Hotel for such period in excess of ***
per room, (the "Revenue Share"). The Advertising
<PAGE> 37
Allowance may be used by Hyatt for any advertising purpose(s) Hyatt deems
appropriate in its sole discretion and in no way obligates Hyatt to use the
funds to recognize or promote Spectradyne, any of its services or Hyatt's
relationship with Spectradyne.
(d) on or before the tenth (10) day of each calendar month during the term
hereof, Hyatt shall remit to Spectradyne a sum equal to the Gross Viewing
Receipts plus applicable taxes collected from guests, on behalf of Spectradyne,
for the preceding calendar month less Hyatt's Commission Fee, Advertising
Allowance and Revenue Share for such month determined in accordance with
subsection (c) of this Section 10, together with a statement showing the Gross
Viewing Receipts plus applicable taxes collected from guests for such preceding
calendar month.
(e) All Interactive Services shall be provided by Spectradyne to
the Hotel at no fee to Hyatt or the Hotel.
(f) on behalf of Spectradyne, Hyatt shall collect applicable taxes from Hotel
guests and remit same to Spectradyne for payment by Spectradyne to the
applicable government or governmental agencies. It is the responsibility of
Spectradyne to provide the Hotel with notification as to the applicability of
which taxes are to be collected by the Hotel on behalf of Spectradyne, including
any revisions thereof. In the event Spectradyne fails to pay any taxes when due,
the Hotel shall have the right to remit such taxes to such agencies on behalf of
Spectradyne and Spectradyne shall immediately reimburse the Hotel for payment of
such taxes.
(g) The books and records of the Hotel to the extent and only to the extent that
they are pertinent to the Gross Viewing Receipts for any period included in the
term hereof shall, during normal business hours and upon seven (7) days prior
written notice to the Hotel, be open to inspection and audit by an authorized
representative of Spectradyne. It is expressly understood that, with respect to
the Gross Viewing Receipts during any calendar year, Spectradyne's rights to
inspect and audit the books and records of the Hotel pertaining thereto shall
not extend beyond two (2) years following the expiration of such calendar year.
11. Indemnification and Compliance with Laws.
(a) Spectradyne shall, in addition to the following,
indemnification requirements as set forth in the National
Agreement.
(b) Spectradyne shall timely secure, and continuously maintain in full force and
effect during the term hereof, (i) all licenses, permits and approvals required
by any governmental authority having jurisdiction in respect of the services to
be performed by Spectradyne hereunder, and (ii) all necessary patents,
copyrights, intellectual property rights, distribution
<PAGE> 38
rights, music rights, licenses, releases, waivers, and all other necessary
consents required of Spectradyne. Spectradyne hereby agrees to indemnify and
hold harmless Hyatt and the owner of the Hotel and, at Spectradyne's expense, to
defend Hyatt and the owner of the Hotel and each of their respective officers,
directors, agents, and employees from and against any claims, demands, causes of
action, loss, cost, and expense (including reasonable attorneys, fees) arising
from or in connection with or based upon a real or alleged breach by Spectradyne
of the foregoing provisions of this subsection, including without limiting the
generality of the foregoing, any claims, demands, causes of action, loss, cost,
and expense (including attorneys' fees) or fee based upon an alleged or actual
infringement of any patent or copyright or an alleged unauthorized broadcast or
use of any license. Hyatt shall promptly notify Spectradyne for any matter for
which indemnity is sought under this paragraph and, in any event, prior to the
incurrence of any expenditures under this Section.
(c) Spectradyne hereby waives any and all claims against Hyatt and the owner of
the Hotel and each of their respective officers, directors, agents and employees
for any loss of or damage to the Equipment or any property of Spectradyne
located in the Hotel except such as may be caused by the willful misconduct or
gross negligence of Hyatt, its agents, its employees, or the employees of its
agents (and in case of such willful act or negligence, Hyatt's liability shall
be limited to the actual cost of the portion of the Equipment or other property
lost, damaged, or destroyed). Spectradyne acknowledges that, except in the case
of Hyatt's willful misconduct or negligence or that of its employees, the risk
of loss with respect to the Equipment or any other property of Spectradyne in
the Hotel is exclusively that of Spectradyne, and Spectradyne shall, at its
expense, carry hazard insurance against such risk of loss.
(d) The telecasting of the movies and the installation and maintenance of the
Equipment by Spectradyne shall be in accordance with proper safety procedures
and in conformity with all laws, rules, orders, regulations, and ordinances of
the U.S. government and other governmental authorities having jurisdiction, and
with the regulations of the Board of Fire Underwriters (or other similar body)
applicable to the Hotel.
(e) Spectradyne agrees that it is as fully responsible for the acts and
omissions of its subcontractors and of persons either directly or indirectly
employed by them as it is for the acts and omissions of persons directly
employed by Spectradyne. Spectradyne agrees to bind every subcontractor by the
terms of the this Agreement so far as is applicable to the subcontractor's work.
However, nothing contained in the provision of this Agreement shall create any
contractual relationship between Hyatt and any subcontractor.
12. Taxes.
<PAGE> 39
Hyatt agrees to pay on behalf of Spectradyne any and all sales, use, ad valorem,
admission, property tax, or amusement taxes, or other similar taxes, tariffs, or
governmental levy of any form whatsoever in connection with the installation of
the Spectravision Equipment. On the offering of the services that Spectradyne
provides to the Hotel for Hotel's guests pursuant to this Agreement, nothing
contained herein shall create a liability for the Hotel to collect any taxes
assessed on the basis of such services provided by Spectradyne, except for those
taxes that Hyatt collects on behalf of Spectradyne as set forth in this
Agreement.
13. Insurance.
(a) Spectradyne shall meet its insurance requirements as set
forth in the National Agreement.
(b) Spectradyne shall maintain at all times during the term hereof, at its sole
cost and expense, adequate comprehensive general liability insurance in amounts
to be agreed upon from time to time between Hyatt and Spectradyne against any
liability (including attorney's fees) on account of or arising out of injuries
to or the death of any person or damage to property occasioned by or in any way
connected with the installation, maintenance, removal or replacement of the
Equipment or the operation of the System. Such insurance shall name Hyatt and
the owner of the Hotel and any other party reasonably requested by Hyatt as an
additional insured and Spectradyne shall furnish Hyatt, from time to time,
certificates of insurance evidencing compliance with the provisions of this
subparagraph.
14. Force Majeure.
Neither party hereto shall have any liability for the failure to perform or a
delay in performing any of its obligations hereunder if such failure or delay is
the result of any legal restriction, labor dispute, strike, boycott, flood,
fire, public emergency, revolution, insurrection, riot, war, unavoidable
mechanical failure, interruption in the supply of electrical power, or any cause
beyond the control of such party whether similar or dissimilar to the causes
hereinbefore enumerated except in any case an event which can be cured or
mitigated by the payment of money; provided, however, that the failure of
Spectradyne to deploy and install the New Technology on the schedule established
and as required pursuant to Section 4 of the National Agreement shall under no
circumstances be deemed a force majeure event.
15. Assignment.
This Agreement may be assigned by Hyatt to any successor operator of the Hotel
only upon the execution of a written agreement by that successor assuming the
obligations of Hyatt under this Agreement. An assignment without such assumption
of obligations will operate as a default under this Agreement.
<PAGE> 40
This Agreement may not be assigned in whole or in part by Spectradyne without
the prior written approval of Hyatt.
16. Corporate Room Rates.
Whenever Hyatt's hotel facilities and services are used by directors, officers,
employees, and guests of Spectradyne in furtherance of Hyatt's related business,
such personnel shall not be required to pay more than Hyatt's corporate rates
for their use of such hotel facilities and services.
17. Default.
(a) In the event that Spectradyne fails, in any material way, to provide the
services described in Section 3(d) above to Hyatt's sole satisfaction, at its
sole option, upon three (3) days, notice and opportunity to cure, Hyatt may
elect to have such service(s) performed by another vendor at the sole cost and
expense of Spectradyne. All amounts owed by Spectradyne under this paragraph
shall be deducted from amounts payable to Spectradyne by the applicable Hotel.
Hyatt will provide Spectradyne, at Spectradyne's request, with copies of such
amounts.
(b) Subject to the terms of Section 19 of the National Agreement and except (i)
as otherwise provided in (a) above, and (ii) for the reasons that constitute a
force majeure as set forth herein, in the event that either party (the
"defaulting party") shall fail to perform or comply with any material obligation
under this Agreement, the failure shall constitute a default. The non-defaulting
party shall notify the defaulting party in writing of the failure and default.
In the event the default is not remedied to the satisfaction of the party having
given such notice within forty five (45) days after receipt of notice, or if
such default is of a nature that it cannot, with due diligence and in good faith
be cured within forty five (45) days and such defaulting party fails to proceed
promptly and with due diligence and in good faith to cure the same, the
non-defaulting party may declare this Agreement terminated as of the one hundred
and eightieth (180th) day following the delivery of the original notice.
18. General Provisions.
(a) Notices. All notices to be given hereunder shall be given in writing and
shall be deemed given when deposited in the U.S. Mail with postage prepaid.
Notices intended for Hyatt shall be addressed to the Hotel at its above-stated
address to the attention of the General Manager, with a copy to Hyatt at its
above-stated address, attention: General Counsel. Either party hereto may change
its address for notices by giving notice of change to the other party.
(b) Applicable Law. This Agreement shall be governed in all
<PAGE> 41
respects by the internal laws of the State of Illinois without regard to the
external laws or federal laws pertaining to conflicts of laws.
(c) Modification. This Agreement shall not be modified or amended except by an
instrument in writing executed by the parties hereto. Both parties agree to
execute any other documents reasonably necessary to accomplish the purposes of
this Agreement.
(d) Successors and Assigns. This Agreement shall apply to, and be binding upon,
the parties hereto and their respective successors and permitted assigns.
(e) No Joint Venture or Agency Created. Nothing in this Agreement shall be
construed to create any joint venture or principal-agent relationship between
Hyatt and Spectradyne. Neither party shall hold itself out in any manner which
would indicate such a relationship with the other party.
(f) Severability of Provisions. If any part or subpart of this Agreement is
found or held to be invalid, that invalidity shall not affect the enforceability
and binding nature of any other part of this Agreement.
19. Consents.
The obligations of the parties hereto are conditioned upon the receipt of all
necessary approvals, consents, and authorizations required by law or by
contract.
20. Hyatt-Agent.
Spectradyne recognizes that Hyatt Corporation, a Delaware corporation, is the
sole agent of Hyatt with regard to the operation of the Hotel until Spectradyne
shall receive written notice to the contrary from Hyatt, and Hyatt and
Spectradyne agree that Hyatt may perform all obligations of the Hotel and
exercise all rights on behalf of the Hotel hereunder.
Spectradyne acknowledges and agrees that the Hotel's only authorized signatories
are located at the Hotel's corporate offices at Chicago, Illinois.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, by their
officers hereunto duly authorized on the date first hereinabove set forth.
HYATT CORPORATION, as agent of
______________________________
d/b/a ________________________
By: __________________________
Printed Name: ________________
Title: _______________________
<PAGE> 42
SPECTRADYNE, INC.,
a Texas Corporation
By: __________________________
Printed Name: ________________
Title: _______________________
<PAGE> 43
EXHIBIT C
AMENDED AND RESTATED SPECTRAVISION
AND INTERACTIVE SERVICES NATIONAL AGREEMENT
NEW TECHNOLOGY SPECIFICATIONS AND PERFORMANCE CHARACTERISTICS
Spectradyne "New Technology" Services shall be provided with the following
performance characteristics:
1. Both Phase I and Phase II movies will be-delivered to the viewer at 360 lines
of resolution or better, with color clarity and definition superior to the
current Spectravision VHS product.
2. Transmission of movie signals will be equal to or greater than 16 frames per
second to provide !,flicker free,, video images.
3. Phase I will provide a minimum of 8 movie channels, Phase II will provide no
fewer than 20 full length video programs available for viewing at random start
times simultaneously by all hotel guests requesting the same selection.
MASTER ANTENNA SYSTEM MINIMUM SPECIFICATIONS
Spectradyne shall upgrade the Hotels MATV system to the following standards:
All electrical equipment will be U.L. listed or built to U.L.
specifications, and meet all FCC radiation requirements. All
installations shall be made in accordance with national and local
electrical codes.
Standard for signal strength measurement shall be a calibrated field strength
meter. The minimum acceptable specifications are detailed below.
The MATV will be upgraded to provide the transmission standards necessary to
carry the signals required by the New Technology services at broadcast quality
standards. There will be no visible degradation of picture quality from the MATV
system input point to any MATV system output point on the system.
I. Head-End Specifications
1. Single channel processors with AGC and aural carrier reduction will be used
to process each off-air signal. Preamplifiers will be used where necessary to
achieve an input carrier level of sufficient amplitude to be within the range of
the AGC in the channel processor.
a. The output of individual strip amplifiers, modulators or
channel processors will be combined using a methodology which
<PAGE> 44
will provide a minimum of thirty (30) Db of isolation port to
port.
b. Items providing less than thirty (30) Db of isolation will not be used in the
head-end environment to combine signals.
2. A Broadband Amplifier having a bandwidth of 5-450 MHZ, or greater, and
equipped with Sub-Split Return will be used to amplify the combined output. The
amplifier will be designed for two-way compatibility using sub-split return. The
forward direction designed for 54 to 450 MHz or greater and the return designed
for 5.75 to 35.75 MHz. The forward direction is to include both gain and tilt
controls.
3. Visual carrier to spurious signal response shall be greater
than 50db. Cross modulations shall be greater than 5ldb.
4. Visual/aural carrier ratio on any channel, will be 15 dBMv
+/- 2 dBMv.
5. Amplitude response within any single T.V. channel (visual
carrier to aural carrier) will be flat (+/- 2 dB)
6. UHF to VHF converters will be completely solid-state with a
self-contained power supply. Input and output impedance shall be
75 ohms.
The frequency of the output will be crystal controlled and will be within +/-
.005% of the desired output frequency.
7. The VHF to VHF Convertors will be completely solid-state with a
self-contained power supply. Input and output impedance shall be 75 ohms.
The frequency of the output will be crystal controlled and within +/- .005% of
the desired output frequency.
8. Antennas will be selected and installed so as to produce the best picture
obtainable. Any local government permits required for the antenna installation
will be obtained prior to actual installation of the antennas.
Antennas and masts will be constructed and installed so as to withstand 100 mph
winds. All Antennas used will have an adapted impedance of 75 Ohms and weather
boots will be used to protect all outdoor antenna connections.
When antennas are providing the signal source for "off-the-air" channels,
Picture quality will be equal to or better than the picture quality available
from local cable TV sources, as appropriate or applicable. At minimum, ABC, NBC,
CBS, PES, and local UHF channels will be available from the MATV. Closed caption
service at the TV must be provided for each of the three principal network
channels, given programming availability as
<PAGE> 45
provided by network sources.
9. Metal Cabinets designed for E1A 19" rack mounted equipment will be used to
enclose the head-end active equipment. Suitable 115V AC power outlets will be
installed in the cabinet for the equipment powering, including two additional
outlets for maintenance equipment.
10. Pads, cable, and other miscellaneous equipment will be supplied and
installed to make an operating head-end that meets all of the specifications as
outlined. All cable used in the head-end equipment rack will be of Tri or Quad
Shield design and will provide a minimum of 100 percent shielding from radiation
and signal ingress or such other cable as to meet MATV standards of performance
established herein.
Distribution System Specification
1. Frequency Response of the system (excluding amplifiers) will pass 5 MHz to
450 MHz. Amplitude response for this spectrum will be +/- 4 dB with respect to
the line represented by normal cable tilt. The system will be designed as
two-way capable, i.e., subsplit return.
2. Visual Carrier Level in each room will be no.less than 2 dbMV on any single
channel of the system.
a. The maximum allowable variance between any two adjacent
channels will be 2 dBMv.
b. The maximum allowable variance between any two non-adjacent channels will be
12 dBMv @ 450 MHy or 3db per 100 MHy of band width.
3. Room to Room Isolation will be greater than 30 dB. Isolation values of all
devices separating any two given rooms will be used for the purpose of this
calculation as well as the structural return loss of all interconnecting
cabling.
4. Visual carrier-to-noise ratio on any channel (4 MHz
bandwidth) will be at least 42 dB at any T.V. outlet.
a. The visual carrier to coherent noise ratio (intermodulation)
will be greater than 46 dB.
5. Reflections ingressing MATV distribution system, which may cause ghosts and
shadows within the system, will be more than 40 dB below the respective picture
carrier.
6. Taps, splatters, and other passive equipment will be of the totally shielded
type, using a sealed metal or aluminum case, so as to minimize radiation and
ingress. All connections will be "F" type connectors.
<PAGE> 46
a. Taps used will be designed to pass 5 MHz to 450 MHz, or
greater
b. Splitters will be designed to pass 5 MHz to 450 MHz, or
greater
C. Where the last tap on the riser is not a terminated tap, 75
ohm terminations will be used to terminate the end of all riser
lines at the through port output.
7. Coaxial cable shall be of 75 ohm impedance with a return loss of 20 dB
minimum from 5 MHz to 450 MHz. Cable construction will be solid copper or
copper-clad steel center conductor and cellular polyethylene dielectric. Cables
will be provided with two shields. The first shield shall consist of .002 inch
double aluminum coated mylar or polypropylene tape with 1/811 overlap, bonded to
the dielectric. The second shield shall be a minimum 60% coverage braid
consisting of 34 AWG aluminum or tinned copper wire. The jacket shall be
non-contaminating low temperature polyvinyl chloride or Teflon. Where ambient
signal levels, as.measured with a half wave dipole, exceed 15 dB a cable having
an effective shielding of 67 percent or greater will be utilized outside of all
conduits.
a. Cable Sizes used in the system can be either the same as RG-6 or RG-11. The
RG-11 size is used for longer trunk lines and the RG-6 size is used for shorter
feeder lines. Where conservation of signal is of prime importance in elimination
of additional amplifiers, in cascaded systems, a cable having a diameter of .500
inches may be used, or such other configurations meeting performance standards
stipulated herein.
b. RG-11 size cable will have a nominal loss per 100 feet of .96 dB at 55 MHz,
1.9 dB at 211 MHz, 2.75 dB at 450 MHz.
c. RG-6 size cable shall have a nominal loss per 100 feet of 1.6 dB at 55 MHz,
3.05 dB at 211 MHz, 4.4 dB at 450 MHz.
d. .500 cable will have a maximum loss per 100 feet of .56 dB at
55 MHz, 1.09 dB at 211 MHz, 1.63 dB at 450 MHz.
e. Coaxial cable runs will be continuous lengths and no splices shall be
permitted in any conduit run. Cables shall be installed without sharp bends or
physical distortion.
f. Sweep testing of each reel of coaxial cable will be performed over the 5-450
MHz range by the cable manufacturer, as per cable industry standards for
transmission and structural return loss and be so certified in writing by the
cable manufacturer.
8. Coaxial Cable Connectors will be used to connect to equipment
as required. Connectors will be solderless, 75 ohm impedance and
be designed for the specific type of cable used. RG-6 connectors
will be one piece construction having an integral ferrule
<PAGE> 47
requiring a "HEX" type crimp for proper installation on the cable. RG-11
connectors will use the cables center conductor as the connector's center pin.
All connections will be made using crimp tools of a design consistent with the
connectors construction and intended use.
9. Amplifiers, Pads, Cable, and other miscellaneous equipment will be supplied
and installed to make an operating distribution system that meets all of the
specifications as outlined.
III. Supplemental Distribution System
Systems requiring line extender amplifiers will be designed to the same
standards as the primary distribution system. Where more than two amplifiers are
in cascade the third and fourth amplifiers will have their maximum full gain
derated by a minimum of three dB. Further doubling of the cascade will result in
additional gain reductions, of three dB, each time the cascade is doubled.
<PAGE> 48
EXHIBIT D
AMENDED AND RESTATED SPECTRAVISION
AND INTERACTIVE SERVICES NATIONAL AGREEMENT
TELEVISION SPECIFICATIONS
Televisions provided by Spectradyne under this contract shall have at minimum
the following features:
1. 20 or 25 inch screens, at Hyatt's option
2. "Smart Plug" compatibility with the Spectradyne system
3. Closed Caption
4. Stereo sound
S. Channel labeling
6. Sleeptimer
7. Clone Programming
8. Non-volatile memory
9. 100+ Channel Capacity
10. Remote interface connector
11. TV's will be capable of no fewer than 360 scan lines of
resolution
The General Electric Model #20GH2SO twenty inch set and the General Electric
Model #25GH350 twenty-five inch set meet the technical standard of this
specification, however, Hyatt reserves the right to select the appropriate
color, appearance, and decor of any set prior to their purchase and
installation.
All television sets will be equipped with SpectraMates and full function remote
controls with the following minimum features:
1. Separate "Pay TV" buttons
2. one button access to free "Pay TV" movie previews,
descriptions or schedules as appropriate to product (MOVIE)
configurations.
3. one button access for hotel information services
4. Channel recall
5. Numeric channel control keypad as well as channel up and down
buttons
6. Volume up and down buttons
7. Mute button
Spectradyne remote control model RHHH-1 meets the technical standard of this
specification.
<PAGE> 1
EXHIBIT 10.3
NOTE: THIS DOCUMENT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST PURSUANT
TO RULE 406 UNDER THE SECURITIES ACT OF 1933. PORTIONS OF THIS DOCUMENT FOR
WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN REDACTED AND ARE
MARKED HEREIN BY "***". SUCH REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE COMMISSION PURSUANT TO THE CONFIDENTIAL TREATMENT REQUEST.
AMENDED AND RESTATED SPECTRAMAX NATIONAL AGREEMENT
THIS AMENDED AND RESTATED NATIONAL AGREEMENT (hereinafter I referred to as
"National Agreement") made this 31st day of August, 1993, but effective as of
July 1, 1993, by and between Hyatt Corporation, a Delaware corporation, on its
own behalf and on behalf of its subsidiaries and affiliates (hereinafter called
"Hyatt") and Spectradyne, Inc., a Texas corporation (hereinafter called
"Spectradyne").
WITNESSETH:
WHEREAS, Hyatt, located at 200 W. Madison Street, Chicago, Illinois 60606,
operates the Hyatt hotels set forth on Exhibit A attached hereto and made a part
hereof;
WHEREAS, Spectradyne, located at 1501 N. Plano Road, P. 0. Box 830775,
Richardson, Texas 75083-0075, provides its Spectramax service, as hereinafter
described, to certain of Hyatt hotels pursuant to that certain Spectramax
National Agreement dated July 26, 1989, but effective as of July 1, 1989 (the
"Original National Agreement") and under separate Hyatt Spectramax agreements
(the "Original Individual Agreements") made pursuant thereto (all such hotels
and all other Hyatt hotels who utilize Spectradyne in the future are hereinafter
individually called a "Hotel" and collectively called the "Hotels"); and
WHEREAS, the parties wish to amend and restate all of their rights and
obligations under the Original National Agreement pursuant to this National
Agreement;
NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
accepted and acknowledged, the parties hereto hereby agree as follows:
1. National Agreement.
It is understood and agreed between the parties that the provisions of this
National Agreement shall be included in and considered a part of the Individual
Hyatt Spectramax Agreements (as further defined in Section 4(a) of this National
Agreement) as if the provisions of this National Agreement were incorporated
therein. In the event any of the provisions of this National Agreement are
inconsistent with any of the provisions of any Individual Hyatt Spectramax
Agreements, the provisions of this
<PAGE> 2
National Agreement shall prevail.
2. Term.
(a) This National Agreement shall be for a seven (7) year term commencing on
July 1, 1993 ("Commencement Date") and expiring June 30, 2000 ("Expiration
Date") unless terminated earlier in accordance with the provisions of this
National Agreement.
(b) The provisions of this National Agreement notwithstanding, any Individual
Hyatt Spectramax Agreement may be suspended, at Hyatt's option, upon thirty (30)
days prior written notice, in the event a Hotel or any material portion thereof
is closed for renovation. In the event Hyatt chooses to suspend the Individual
Hyatt Spectramax Agreement, any applicable fees shall abate during such
renovations and shall resume on the date when such Hotel or sections thereof
reopen to the public.
(c) The provisions of this National Agreement notwithstanding, either party may
cancel any Individual Hyatt Spectramax Agreement in the event Hyatt ceases to
manage a Hotel as of the date of such cessation. The cancelling party shall
provide the non-cancelling party with at least thirty (30) days prior written
notice of such cancellation.
(d) This National Agreement and the Individual Hyatt Spectramax Agreements are
subject to early termination in accordance with the provisions of Section 16
herein and Section 13 of the Individual Hyatt Spectramax Agreements.
(e) Except for the reasons that constitute a force majeure as set forth in
Section 15 of this National Agreement which would not be grounds for termination
hereunder, this National Agreement may be cancelled by Hyatt upon the early
termination of that certain Amended and Restated Spectravision and Interactive
Services National Agreement of even date herewith between Hyatt and Spectradyne
(the "Spectravision National Agreement").
3. Spectramax.
(a) Spectramax is a registered trademark of Spectradyne. Spectramax services
(commonly known as "free-to-guest") are multichannel, satellite-delivered,
closed-circuit television services, including, but not limited to, satellite
channels licensed by Spectradyne, all of which are delivered to Hotel guests
over the Hotel master antenna television system ("MATVII) using an earth station
and related equipment. The earth station and related equipment are provided by
Spectradyne.
(b) Spectramax services shall be provided in the manner described throughout
this National Agreement and the Individual Hyatt Spectramax Agreements.
(c) Spectradyne shall provide each Hotel, at the Hotel's option,
<PAGE> 3
with a minimum of five (5) satellite channels as set forth in the respective
Individual Hyatt Spectramax Agreements. Such satellite channels shall include
Home Box Office ("HBO"), Entertainment and Sports Programming Network ("ESPN"),
Cable Network News ("CNN") or CNN-Headline ("CNN-HI") Edition, the Disney
Channel ("Disney") or Nickelodeon, and Turner Network Television ("TNT") or
WTBS, Channel 17, Atlanta Superstation ("WTBS") or other equivalent services as
agreed to by the parties.
(d) During the terms of the Individual Hyatt Spectramax Agreements, Hyatt shall
have the option to add or delete satellite channels licensed by Spectradyne upon
ninety (90) days, prior written notice to Spectradyne. If Hyatt elects to add
satellite channels licensed by Spectradyne in addition to those set forth in
Section 3(c) above, such additional satellite channels shall be delivered to
interested Hotels for a fee to be agreed upon between Hyatt and Spectradyne.
It is understood and agreed that, from time to time, Hyatt may desire to receive
a satellite channel not described in Section 3(c) above. In such instance,
Spectradyne, at its sole cost and expense, shall use all commercially reasonable
efforts to obtain the rights to such additional satellite channel and transmit
same to the interested Hotels, for a fee to be agreed upon between Hyatt and
Spectradyne.
4. Individual Hyatt Spectramax Agreements.
(a) A number of Hotels have entered into individual Hyatt Spectramax agreements
with Spectradyne to provide Spectramax services at such Hotels. These Original
Individual Agreements along with all individual Hyatt Spectramax agreements to
be executed pursuant to Section 4(b) hereof, shall be the "Individual Hyatt
Spectramax Agreements" referenced in this National Agreement and shall be
subject to and governed by the terms of this National Agreement.
(b) Each Hyatt Hotel which is not already a party to an Original Individual
Agreement desiring to retain Spectradyne to provide its Spectramax services
shall enter into an Individual Hyatt Spectramax Agreement substantially in the
form set forth as Exhibit B attached hereto and made a part hereof.
(c) The term of each Individual Hyatt Spectramax Agreement shall be conterminous
with the term of this National Agreement. In no event shall the Spectramax
free-to-guest satellite services in any Hotel have a term less than
Spectravision guest-pay movie services in that same Hotel.
(d) Under no circumstances shall the term of any Individual Hyatt Spectramax
Agreement automatically renew.
(e) Spectradyne agrees that any Hotel set forth on Exhibit A is
<PAGE> 4
eligible for Spectramax services and the other benefits hereunder. Hyatt may,
from time to time, add or delete Hyatt Hotels from Exhibit A. Any Hyatt Hotel
desiring to hire Spectradyne to provide Spectramax must enter into an Individual
Hyatt Spectramax Agreement which shall expire on the Expiration Date regardless
of its commencement date. Hyatt shall use all commercially reasonable efforts to
ensure that Hyatt hotels enter into Individual License Agreements.
5. Installation of Equipment.
(a) Spectradyne has heretofore furnished and installed the earth station or
microwave system and related equipment (collectively, the "Equipment") necessary
to provide Spectramax service at many of the Hotels.
(b) With respect to new Hyatt Hotels, Spectradyne shall furnish and install the
Equipment in accordance with the provisions of the Individual Hyatt Spectramax
Agreement.
(c) During the term of this National Agreement, title to the Equipment described
herein is and shall remain with Spectradyne.
(d) Upon the expiration or earlier termination of this Agreement or any
Individual Hyatt Spectramax Agreement (other than pursuant to a default by Hyatt
under Section 16 hereof), Hyatt may give notice no later than thirty (30) days
following such termination, at Hyatt's option to either:
(i) have the Hotels purchase and/or obtain Spectradyne's interest in or
right to use all or any portion of the existing Equipment, as determined solely
by Hyatt, for an amount mutually agreed to be the fair market value of such
Equipment and/or interest or right therein, except for any Equipment not owned
by Spectradyne or Equipment which Spectradyne cannot convey any interest in or
right to use. If, however, Hyatt and Spectradyne are unable to determine the
fair market value of such Equipment and/or interest or right therein, such
Equipment shall remain at the Hotel(s) as set forth in Section 5(d)(ii) below.
In the event that Hyatt elects to have the Hotels purchase such Equipment and/or
interest or right therein, Spectradyne shall deliver to such Hotels free and
clear title to such Equipment along with a Bill of Sale upon receipt of payment
of the agreed upon amount; or,
(ii) require Spectradyne to keep and maintain all such Equipment
provided to the Hotels pursuant to the Spectravision National Agreement,
including the license for the use of the on-site software required to operate
the Equipment, or provide the Interactive Services at the Hotel(s) for a total
rental, maintenance, license and service fee chargeable to the Hotels in the
amount of *** per guest room per month for a term not to exceed thirty-six (36)
months.
<PAGE> 5
(e) The provisions of this Section 5(d) are also contained in Section 6 (h) of
the Spectravision National Agreement. It is understood and agreed that the
rental, license, maintenance and service fee described herein includes rental of
and maintenance and service to the Spectravision and Interactive Services
Equipment as well as the Spectramax Equipment and any software necessary to
operate either the Spectravision or Spectramax systems.
6. Hub Site.
From time to time, Spectradyne may request that a Hotel serve as a "hub site"
from which Spectradyne may provide its Spectramax service to third parties. As
compensation as a "hub site" the Hotel shall receive a monthly fee equal to ***.
In the event Spectradyne requests the Hotel to serve as a "hub site", Hyatt will
use its best efforts to enter into a rider to its Individual Hyatt Spectramax
Agreement, substantially in the form attached hereto and made a part hereof as
Exhibit C.
7. Maintenance.
(a) Equipment, MATV Systems and TV Sets.
Spectradyne, at its sole cost and expense, shall service, repair, replace and
maintain the Equipment, the MATV-systems of the Hotels, and TV Sets (including
the remote controls thereto) provided by Spectradyne pursuant to Spectravision
National Agreement, in good working condition. Spectradyne agrees to replace all
lost remote control units and/or those. TV Sets and remote control units broken
beyond repair. All costs associated with such service, repairs, replacement and
maintenance shall be borne by Spectradyne, except for repairs required due to
the willful misconduct or gross negligence of Hyatt and its agents. Such repairs
shall be made by Spectradyne at its cost and reimbursed by Hyatt.
(b) Service.
In addition to providing Hyatt automated diagnostic and repair services,
Spectradyne shall at all times during the term hereof maintain or cause to be
maintained a sufficient staff of trained technicians meeting the requirements of
Section 9 below who shall be available to perform such service, repairs,
replacement and maintenance on the Equipment, the MATV and the TV Sets
(including the remote controls thereto). Spectradyne shall continue to maintain
a "live" person service desk reachable twenty-four (24) hours a day, seven (7)
days a week by phone and shall provide a guaranteed response time of four (4)
hours on any service calls.
8. Fee.
(a) During the term of this National Agreement, all Spectramax services
(including a minimum of five (5) satellite channels
<PAGE> 6
including HBO, ESPN, CNN or CNN-H, Disney or Nickelodeon, and TNT or WTBS) shall
be provided to the Hotels at no cost to Hyatt or the Hotels. Any additional
satellite channels licensed by Spectradyne which Hyatt elects to add to the
Spectramax services shall be provided to interested Hotels for a fee to be
agreed upon between Hyatt and Spectradyne.
(b) Spectradyne warrants and represents that the value provided to Hyatt Hotels
hereunder is the best or better value provided by Spectradyne to any comparable
hotel company's hotels; and, in particular, is the best or better value provided
by Spectradyne to hotels operated by Marriott Corporation and Hilton Hotels
Corporation. Comparable hotels are defined as those hotels with like Spectradyne
equipment and substantially similar satellite channels, room counts, and quest
occupancy rates. In the event that at any time during the term of this
Agreement, Spectradyne shall offer a better combined value to any comparable
hotel than the value which is provided to Hyatt, the value provided to Hyatt
Hotels under this Agreement shall be automatically increased to the same level,
In no event shall Marriott and Hilton hotels be considered non-comparable
hotels. For purposes of this paragraph "value" shall mean the value of (i) all
fees, allowances and revenues, (ii) all Equipment including television sets and
remote control units, (iii) all software, software licenses and/or other
intellectual property rights, (iv) all services including installation,
maintenance, repair and replacement, and (v) all cost savings or other benefits
provided to the hotels, their parent companies or affiliates.
9. Personnel.
Spectradyne shall provide or cause to be provided adequate personnel and any
subcontractors, as approved by Hyatt, to permit the timely completion of all
work. All such personnel shall be trained and supervised in accordance with
accepted industry practices and shall conform to the reasonable rules and
regulations of Hyatt established from time to time by Hyatt for the conduct of,
and in relation to, the employees of the contractors of the Hotels when such
employees are on Hotel premises. Spectradyne's employees, subcontractors or
agents shall be neat in appearance and wear badges identifying them as employees
or representatives of Spectradyne.
10. Equipment and Material.
Spectradyne shall provide and maintain adequate equipment to permit timely
completion of all operations and shall use materials which are in conformance
with existing federal, state, and local laws and ordinances.
11. Licenses or Permits.
If any governmental license or permit shall be required of Spectradyne for the
proper and lawful conduct of Spectradyne's
<PAGE> 7
business or other activity carried on, in or at any Hotel, or if a failure to
procure such a license or permit might or would in any way affect the operations
of any Hotel, then Spectradyne, at its expense, shall duly procure and
thereafter maintain such license or permit and submit the same to inspection by
Hyatt. Spectradyne, at its sole cost and expense, shall at all times comply with
the requirements of each such license or permit.
Spectradyne shall, at its sole cost and expense, secure and maintain in full
force and effect during the term of this Amended and Restated National Agreement
and every Individual Hyatt Spectramax Agreement, all necessary patents,
copyrights, distribution rights, music rights, licenses, intellectual property
rights, releases, waivers and all other necessary consents of third parties
required of Spectradyne to meet its obligations as set forth in this National
Agreement.
12. Compliance with Laws.
Spectradyne agrees, at its own expense, to comply promptly with all requirements
of any federal, state and local laws and ordinances.
13. Insurance.
Spectradyne shall carry and maintain workers' compensation insurance in
statutory amounts, comprehensive general liability insurance endorsed to include
products and completed operations and contractual liability in a minimum amount
of $1,000,000 combined single limit, and automobile liability insurance in a
minimum amount of $1,000,000 combined single limit. All such policies (except
workers I compensation) or certificates of insurance shall specifically state:
"Hyatt Corporation, its affiliates and subsidiaries and the owners of Hyatt
hotels are named as additional insureds under the above polices; such insurance
shall be primary and not contributory with Hyatt's insurance. Each policy shall
provide that it may not be canceled or changed without at least ten (10) days
prior written notice to Hyatt.
Spectradyne shall furnish to Hyatt a certificate of insurance evidencing such
coverage prior to the commencement of services hereunder and shall continue to
provide Hyatt with subsequent certificates of insurance evidencing uninterrupted
compliance with this insurance requirement until the termination of this
National Agreement.
Spectradyne shall provide Hyatt with certified copies of the policies required
herein upon Hyatt's request.
14. Indemnification.
Spectradyne shall defend, indemnify and hold harmless Hyatt Corporation, its
affiliates and subsidiaries and the owners of
<PAGE> 8
Hyatt Hotels and each of their respective officers, directors, agents and
employees from and against any and all actions, costs, claims, losses, expenses
and/or damages, including reasonable attorneys' fees, arising out of or in any
way relating to or incidental to the performance of the services to be performed
by Spectradyne hereunder or the presence of Spectradyne at the Hotels.
Spectradyne shall further indemnify Hyatt Corporation, its affiliates and
subsidiaries and the owners of Hyatt Hotels and each of their respective
officers, directors, agents and employees from and against any and all actions,
costs, claims, losses, expenses and/or damages, including reasonable attorneys,
fees, for or arising out of any bodily injuries to or the death of any of
Spectradyne's employees working at the Hotel, however caused or occasioned,
excepting the willful misconduct or gross negligence of Hyatt.
Further, Spectradyne shall defend, indemnify and hold harmless Hyatt
Corporation, its subsidiaries, affiliates and the owners of Hyatt Hotels, and
each of their respective officers directors, agents and employees from and
against any claims, demands, causes of action, loss, cost and expense (including
reasonable attorneys, fees) arising out of or in connection with or based upon a
real or alleged breach by Spectradyne of the provisions of this National
Agreement pertaining to Spectradyne's intellectual property rights, including,
but not limited to, those provisions set forth in Sections 5(d)(i) and 5(d)(ii)
above, and any claims, demands, causes of action, loss, cost, expense,
(including reasonable attorneys' fees) or fee based upon an alleged or actual
infringement of any patent or copyright or an alleged unauthorized broadcast or
use of any license as set forth in Section 11 above. Hyatt shall promptly notify
Spectradyne for any matter for which indemnity is sought under this section and,
in any event, prior to the incurrence of any expenditures under this section.
Spectradyne agrees that it is as fully responsible for the acts and omissions of
its subcontractors and of persons either directly or indirectly employed by them
as it is for the acts and omissions of persons directly employed by Spectradyne.
Spectradyne agrees to bind every subcontractor by the terms of this National
Agreement so far as is applicable to the subcontractor's work. However, nothing
contained in the provision of this National Agreement shall create any
contractual relationship between Hyatt and any subcontractor.
15. Force Majeure.
Neither party shall have any liability for the failure to perform or a delay in
performing any of its obligations under this National Agreement if that failure
or delay is the result of any legal restriction, labor dispute, strike, boycott,
flood, fire, public emergency, revolution, insurrection, riot, war, unavoidable
mechanical failure, electricity interruption or any other cause beyond the
control of either party whether similar or
<PAGE> 9
dissimilar to the causes enumerated herein except in any case any event which
can be cured or mitigated by the payment of money: provided, however, that the
failure of Spectradyne to deploy and install the New Technology on the schedule
established and as required pursuant to Section 4 of the Spectravision National
Agreement shall under no circumstances be deemed a force majeure event.
16. Default.
(a) In the event that Spectradyne fails, in any material way, to provide the
services described in Section 7 above, to Hyatt's sole satisfaction, Hyatt or
any Hotel, at,its sole option, upon three (3) days' notice to Spectradyne and
opportunity to cure, may elect to have such service(s) performed by another
vendor at the sole cost and expense of Spectradyne. All amounts owed by
Spectradyne under this paragraph shall be deducted from amounts payable to
Spectradyne by the applicable Hotel.
(b) Except (i) as otherwise provided in paragraph (a) above, and (ii) for
reasons that constitute force majeure as set forth in Section 15 hereof, in the
event either Hyatt or Spectradyne fails to perform or comply with any other
material obligation under this National Agreement or the Amended Restated
Spectravision National Agreement or any Individual Spectramax or Spectravision
Agreement, that failure shall constitute a default. The non-defaulting party
shall notify the defaulting party in writing of the failure and default. In the
event the default is not remedied to the satisfaction of the party having given
such notice within forty five (45) days after the receipt of notice, or if such
default is of a nature that it cannot with due diligence and in good faith, be
cured within forty five (45) days and such defaulting party fails to proceed
promptly and with due diligence and in good faith to cure the same, then
non-defaulting party may declare this National Agreement or the Amended and
Restated National Spectravision Agreement or any or all of the Individual
Spectramax or Spectravision Agreements, as appropriate, terminated as of the one
hundred eightieth (180) day following delivery of the original notice. In the
event that this National Agreement or the Amended Restated Spectravision
Agreement is terminated pursuant to this Section 16, all the Individual
Spectramax and Spectravision Agreements shall automatically terminate on the
same terms without further action or notice of any kind by Hyatt.
17. Test Sites.
Spectradyne understands and agrees that from time to time, during the term of
this Amended and Restated National Agreement and the Individual Hyatt Spectramax
Agreements, Hyatt may use certain of the Hotels as test sites side-by-side with
existing and operating Spectradyne equipment for the purpose of investigating
and evaluating the services offered by other companies which provide services
which are the same as or similar to the services
<PAGE> 10
provided by Spectradyne, so long as such testing causes no damages to
Spectradyne nor uses its Equipment. Any such test shall not exceed a period of
ninety (90) days. Hyatt shall not be deemed to be in default of this National
Agreement or the Individual Hyatt Spectramax Agreements in the event any testing
is conducted at a Hotel serviced by Spectradyne.
18. Advertising.
Hyatt may, in its sole discretion and without obligation, allow Spectradyne to
include third party advertising at the appropriate insertion spots in the ESPN,
CNN or CNN-H programming or in other selected services delivered by Spectradyne
to the Hotels.
19. Independent Contractor.
Spectradyne is an independent contractor and all persons employed to furnish
services hereunder are employees or agents of Spectradyne and not of Hyatt.
20. Notices.
All notices, requests, demands and other communications hereunder shall be in
writing and delivered or mailed, with postage prepaid, to the party intended at
its address as hereinbefore set forth.
21. Binding.
This National Agreement shall inure to and bind the successors, assigns and
representatives of the parties, providing, however, this National Agreement may
not be assigned by Spectradyne without the prior written consent of Hyatt.
Spectradyne shall not have the right to subcontract its obligations as set forth
herein to third parties without the prior written approval of Hyatt.
22. Governing Law.
This National Agreement is subject to and governed by the internal laws of the
State of Illinois without regard to the external laws or federal laws pertaining
to conflicts of laws.
23. Entire Agreement.
This National Agreement contains the entire agreement between the parties
hereto; no representations, inducements, promises or agreements, oral or other,
between the parties not embodied herein, shall be of any force or effect.
24. Amendment to Agreement.
This National Agreement may be amended only by a written instrument signed by
the parties hereto.
<PAGE> 11
25. Legal Fees.
In the event any legal action is taken by either party against the other party
to enforce any of the terms and conditions of this National Agreement, it is
agreed that the unsuccessful party to such actions shall pay to the prevailing
patty therein all court costs, reasonable attorneys' fees and other professional
fees and expenses incurred by the prevailing party.
26. Heading.
The headings used in this National Agreement are inserted only as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this National Agreement nor the intent of any provision thereof.
27. Hyatt - Agent.
Spectradyne acknowledges that Hyatt acts as the agent of the owners of the
Hotels and any action or obligation to be performed or carried out by any Hotel
hereunder shall be performed by Hyatt solely in its capacity as agent for the
owner of such Hotel. Accordingly, Spectradyne acknowledges that Hyatt's
obligations in this Agreement in respect of matters relating to Hotels are
obligations of Hyatt as agent only.
IN WITNESS WHEREOF, the parties hereto have executed this National Agreement as
of the day and year first above written.
HYATT CORPORATION, on its own behalf an on behalf of its
subsidiaries and affiliates
By: /s/ Peter D. Connolly
Printed Name: Peter D. Connolly
Title: Vice President Hyatt Corporation
SPECTRADYNE, Inc.,
a Texas Corporation
By: /s/ Albert D. Jerome
Printed Name: Albert D. Jerome
Title: President and Chief Executive Officer
<PAGE> 12
Exhibits
to
Spectramax National Agreement
Exhibit Description
A Amended and Restated List of Hyatt Hotels
B Form of Individual Hyatt Spectramax Agreement
C "Hub Site" Agreement
<PAGE> 13
EXHIBIT A
AMENDED AND RESTATED LIST OF HYATT HOTELS
Hyatt Regency Albuquerque
330 Tijeras NW
Albuquerque, NM 87102
Hyatt Arlington
1325 Wilson Blvd.
Arlington, VA 22209
Hyatt Regency Atlanta
265 Peachtree St., NE
Atlanta, GA 30303
Hyatt Regency Austin
208 Barton Springs
Austin, TX 78704
Hyatt Regency Beaver Creek
136 East Thomas Place
Avon, CO 81620
Hyatt Regency Bethesda
One Bethesda Metro Center
Bethesda, MD 20814
Hyatt Regency Cambridge
575 Memorial Drive
Cambridge, MA 02139
Hyatt Regency Cerromar Beach
Dorado, Puerto Rico 00646
Hyatt Cherry Hill
2349 West Marlton Pike
Cherry Hill, NY 08002
Hyatt Regency Cincinnati
151 West 5th Street
Cincinnati, OH 45202
Hyatt Regency Coral Gables
50 Alhambra Plaza
Coral Gables, FL 33134
Hyatt Regency Alicante
100 Plaza Alicante
Harbor & Chapman Blvd.
Garden Grove, CA 92640
Hyatt Regency Aruba
<PAGE> 14
L.G. Smith Blvd. 85
Palm Beach, Aruba
Hyatt Regency Baltimore
300 Light Street
Baltimore, MD 21202
Hyatt Regency Bellevue
900 Bellevue Way, N. E.
Bellevue, WA 98004
Hyatt Regency Buffalo
Two Fountain Plaza
Buffalo, NY 14202
Hyatt on Capitol Square
75 East State Street
Columbus, OH 43215
Hyatt Charlotte
5501 Carnegie
Charlotte, NC 28209
Hyatt Regency Chicago
151 East Wacker Drive
Chicago, Illinois 60601
Hyatt Regency Crown Center
2345 McGee Street
Kansas City, MO 64108
Hyatt Regency Columbus
350 North High Street
Columbus, OH 43215
Hyatt Regency Crystal City
2799 Jefferson Davis Hwy.
Arlington, VA 22202
Hyatt Regency Dallas
300 Reunion Boulevard
Dallas, TX 75207
Hyatt Deerfield
1750 Lake Cook Road
Deerfield, IL 60015
Hyatt Dorado Beach
Dorado, P.R. 00646
Hyatt Fair Lakes
12777 Fair Lakes Circle
Fairfax, VA 22033
<PAGE> 15
Hyatt Regency Grand Cypress
One Grand Cypress Blvd.
Orlando, FL 32836
Hyatt Regency Greenwich
1800 East Putnam Avenue
Old Greenwich, CT 06870
Hyatt Regency Hill Country Resort
9800 Resort Drive
San Antonio, TX 78251
Hyatt Regency Houston
1200 Louisiana Street
Houston, TX 77002
Hyatt Regency Irvine
17900 Jamboree Boulevard
Irvine, CA 92714
Hyatt Regency Kauai
1571 Poipu Road
Koloa, HI 96756
Hyatt Regency DFW Airport
International Pkway.
DFW Airport, TX 75261
Hyatt Regency Dearborn
Fairlane Town Center
Dearborn, MI 48126
Hyatt Regency Denver
1750 Welton Street
Denver, CO 80202
Hyatt Dulles
2300 Dulles Corner Blvd.
Herndon, VA 22070
Hyatt at Fisherman's Wharf
555 N. Point Street
San Francisco, CA 94133
Hyatt Grand Champions Resort
44-600 Indian Wells Ln.
Indian Wells, CA 92210
Hyatt Regency Greenville
220 North Main Street
Greenville, SC 29601
Harborside Hyatt Conference Center & Hotel
101 Harborside Drive
<PAGE> 16
Boston, MA 92128
Hyatt Regency Hilton Head at Palmetto Dunes
P.O. Box 6167
Hilton Head, SC 29938
Hyatt Regency Indianapolis
One South Capitol Avenue
Indianapolis, IN 46204
Hyatt Islandia
1441 Quivira Road
San Diego, CA 92109
Hyatt Key West
601 Front Street
Key West, FL 33040
Hyatt Regency Knoxville
500 Hill Avenue, SE
Knoxville, TN 37901
Hyatt Regency Lake Tahoe Resort & Casino
111 Country Club Drive
Incline Village, NV 89450
Hyatt Lisle
1400 Corporetum Drive
Lisle, IL 60532
Hyatt Regency Long Beach
200 South Pine Avenue
Long Beach, CA 90802
Hyatt Regency Los Angeles
711 South Hope Street
Los Angeles, CA 90017
Hyatt Regency Maui
200 Nohea Kai Drive
Lahaina, Maui
Hawaii 96761-1990
Hyatt Regency Milwaukee
333 West Kilbourn Avenue
Milwaukee, WI 53203
Hyatt Regency Monterey
One Old Golf Course Road
Monterey, CA 93940
Hyatt Regency New Orleans
Poydras Plaza & Loyola Avenue
New Orleans, LA 70140
<PAGE> 17
Hyatt Newporter
1107 Jamboree Road
Newport Beach, CA 92660
Hyatt Regency Oak Brook
1909 Spring Road
Oak Brook, IL 60521
Hyatt Regency LaJolla
3777 LaJolla Village Drive
San Diego, CA 92122
Hyatt Regency Lexington
400 West Vine Street
Lexington, KY 40507
The Lodge
Ronald Lane
Oak Brook, IL 60521
Hyatt at Los Angeles Airport
6225 West Century Boulevard
Los Angeles, CA 90045
Hyatt Regency Louisville
320 West Jefferson
Louisville, KY 40202
Hyatt Regency Miami
400 SE Second Avenue
Miami, FL 33131
Hyatt Regency Minneapolis
1300 Nicollet Mall
Minneapolis, MN 55403
Hyatt Regency New Brunswick
Two Albany Street
New Brunswick, NJ 08901
Grand Hyatt New York
Park Avenue at Grand Central
New York, NY 10017
Hyatt Regency O'Hare
9300 West Bryn Mawr
Rosemont, IL 60018
Hyatt Orlando
6375 West Irlo Bronson
Memorial Highway
Kissimee, FL 32741
Hyatt Regency Orlando
<PAGE> 18
International Airport
9300 Airport Boulevard
Orlando, FL 32827
Park Hyatt Chicago
800 North Michigan Avenue
Chicago, IL 60611
Hyatt Regency Phoenix
122 North Second Street
Phoenix, AX 85004
Hyatt Regency Pittsburgh
112 Washington Place
Pittsburgh, PA 15219
Hyatt Regency Reston
1800 President Street
Reston, VA 22090
Hyatt Regency Rochester
125 East Main Street
Rochester, NY 14604
Hyatt Rickeys
4219 El Camino Real
Palo Alto, California 94306-4493
Hyatt Regency San Antonio
123 Losoya
San Antonio, TX 78205
Hyatt Regency San Francisco Airport
San Diego, CA 92101
Burlingame, CA 94010
Hyatt Regency San Francisco
5 Embarcadero Center
San Francisco, CA 94111
Hyatt Regency Sarasota
1000 Boulevard of the Arts
Sarsota, FL 33577
Park Hyatt San Francisco
At Embarcadero Center
333 Battery Street
San Francisco, CA 94111
Park Hyatt Washington
1201 24th Street NW
Washington, D.C. 20037
Hyatt on Printers Row
<PAGE> 19
500 South Dearborn
Chicago, IL 60605
Hyatt Regency Princeton
102 Carnegie Center
Princeton, NJ 08540
Hyatt Richmond
6223 Broad Street
Richmond, VA 23230
Hyatt Regency Sacramento
1209 "L" Street
Sacramento, CA 95814
Hyatt Regency San Diego
One Market Place
San Diego, CA 92101
Grand Hyatt San Francisco
345 Stockton Street
San Francisco, CA 94108
Hyatt San Jose
1740 North First Street
San Jose, CA 95112
Hyatt Regency Savannah
Two West Bay Street
Savannah, GA 31401
Hyatt Regency Scottsdale
7500 East Doubletree
Ranch Road
Scottsdale, AZ 85258
Hyatt Regency St. Louis at Union Square
One St. Louis Union Square
St. Louis, MO 63103
Hyatt Regency Suites Perimeter Northwest
2999 Windy Hill Road
Marietta, GA 30067
Hyatt on Sunset
8401 Sunset Boulevard
West Hollywood, CA 90069
Hyatt Regency Vancouver
655 Burrard Street
Vancouver, B.C.
Canada V6C 2R7
Grand Hyatt Washington
<PAGE> 20
1000 H Street NW
Washington, DC 20001
Hyatt Westlake Plaza
880 South Westlake Boulevard
Westlake Village, CA 91361
Hyatt Regency St. John
P.O. Box 8310
Great Cruz Bay, St. John
US Virgin Islands 00830
Hyatt Regency Suites Palm Springs
285 North Palm Canyon Drive
Palm Springs, CA 92262
Hyatt Regency Tech Center
7800 E. Tufts Avenue
Denver, Colorado 80237
Hyatt Regency Tampa
Two Tampa City Center
Tampa, FL 33602
Hyatt Regency Waikiki
2424 Kalakaua Avenue
Honolulu, Oahu
HI, 96815
Hyatt Regency Washington
400 New Jersey Avenue, NW
Washington, D. C. 20001
Hyatt Regency Westshore
6200 Courtnery Campbell Cswy.
Tampa, FL 33607
Hyatt Regency Woodfield
1800 East Golf Roa
Shaumburg, Illinois 60173
<PAGE> 21
EXHIBIT B
HYATT SPECTRAMAX AGREEMENT
BY THIS AGREEMENT made this _____ day of __________, 199__, between HYATT
CORPORATION, as agent of ________________________ with offices at 200 West
Madison Street, Chicago, Illinois 60606 ("Hyatt") and SPECTRADYNE, INC., a Texas
corporation, with offices at 1501 North Plano Road, Richardson, Texas 75083
("Spectradyne") the parties hereby RECITE AND AGREE as follows:
RECITALS
A. Spectramax is a registered trademark of Spectradyne. Spectramax Services
(commonly known as "free-to-guest") are multi-channel, satellite-delivered,
closed-circuit television services including, but not limited to satellite
channels licensed by Spectradyne, all of which are delivered to hotel guests
over the hotel master antenna television system ("MATV") using an earth station
and related equipment provided by Spectradyne.
B. Hyatt is the operator of that certain hotel known as
the _______________ (the "Hotel") located at ___________________.
C. The parties desire to enter into an agreement whereby Spectradyne will
provide to the Hotel upon the terms herein provided, Spectramax Services.
AGREEMENT
In consideration of their respective covenants, the parties hereto mutually
agree as follows:
1. Amended and Restated National Agreement.
This Agreement is subject to and governed by the terms and conditions of that
certain Amended and Restated Spectramax National Agreement effective July 1,
1993, between Hyatt Corporation on its own behalf and on behalf of its
subsidiaries and affiliates and Spectradyne, Inc. (the "National Agreement").
Capitalized terms which are contained in this Agreement shall have the same
definition and meaning as provided for under the Amended and Restated Spectramax
National Agreement (hereinafter referred to as "National Agreement") unless
specifically defined differently herein. In the event any of the provisions of
this Agreement conflict with the provisions of the National Agreement, the
provisions of the National Agreement shall prevail.
2. Spectramax Programming.
(a) Spectradyne will provide the Hotel, at the Hotel's option, with a minimum of
five (5) satellite channels ("Satellite Channels"). Such Satellite Channels
shall include the following or any other agreed upon Satellite Channels
designated by the
<PAGE> 22
parties:
(1) Home Box Office (HBO)
(2) The Disney Channel (Disney) or Nickelodeon
(3) Either Cable Network News (CNN) or CNN-Headline Edition (CNN-H),
(4) Entertainment and Sports Programming Network (ESPN), and
(5) Either Turner Network Television (TNT), or WTBS, Channel 17, Atlanta
Superstation (WTBS).
Hyatt, at its sole option, may choose any five (5) of the eight (8) Satellite
Channels listed above.
(b) All Satellite Channels shall be made available on Spectramax to Hotel guest
rooms at no extra charge to Hotel guests. All Satellite Channels except HBO and
Disney shall also be available on Spectramax on other television sets served by
the Hotel MATV, including those in public areas. HBO and Disney shall be
available on an uninterruptible basis, and the Hotel agrees to make no public
announcement or advertisement that states Hotel has the right to take HBO or
Disney off the air or the right to interrupt such service. Hotel recognizes that
ESPN reserves the right to require that ESPN programming be blacked out during
certain designated events. Spectradyne shall notify the Hotel at least
twenty-four (24) hours in advance of any event required to be blacked out by
ESPN. Hyatt agrees to blackout ESPN on its premises for the blackout period
required by ESPN and recognizes that its failure to comply with any such
blackout requirement may result in the termination of ESPN programming at the
Hotel.
(c) Throughout the life of this Agreement, Hyatt has the option to add or delete
Satellite Channels licensed by Spectradyne upon ninety (90) days, prior written
notice to Spectradyne. If Hyatt elects to add Satellite Channels in addition to
those set forth in (a) above, such additional Satellite Channels shall be
delivered to interested Hotels for a fee to be agreed upon between Hyatt and
Spectradyne.It is understood and agreed that, from time to time, Hyatt may
desire to receive a satellite channel not currently licensed by Spectradyne
above. In such instance, Spectradyne, at its sole cost and expense, shall use
all commercially reasonable efforts to obtain the rights to such additional
satellite channel and transmit same to the Hotel for a fee to be agreed upon
between Hyatt and Spectradyne.
3. Fees and Payment Terms.
During the term of this Agreement all Spectramax Services including the
Satellite Channels described in 2(a) above shall be provided to the Hotel at ***
to Hyatt or the Hotel. Any additional Satellite Channels licensed by Spectradyne
which Hyatt elects to add to the Spectramax Service shall be provided to the
Hotel for a fee to be agreed upon between Hyatt and Spectradyne.
4. Term.
<PAGE> 23
(a) This Agreement shall be for a term commencing on _____________
("Commencement Date") and expiring on June 30, 2000.
(b) In the event that Hyatt shall for any reason cease to be manager or operator
of the Hotel, either party shall have the right to terminate this Agreement as
of the date of such cessation of management or operations. The cancelling party
shall provide the non-cancelling party with at least thirty (30) days prior
written notice of such termination.
(c) This Agreement may be suspended, at Hyatt's option, upon thirty (30) days
prior written notice in the event the Hotel or any portion thereof is closed for
renovation. In the event Hyatt chooses to suspend this Agreement, any applicable
fees shall abate during such renovations and shall resume on the date when the
Hotel or sections thereof reopen to the public.
(d) This Agreement shall automatically terminate upon the expiration or earlier
termination of the National Agreement.
5. Installation of Equipment.
(a) The Hotel is equipped with a master antenna system (herein collectively
called the "MATV") which is a network of cables, wall taps, antennas and
specially designed radio frequency signal processing components, which receive,
process, amplify and distribute video and audio TV and FM signals from a central
location to a multiplicity of televisions within a building or group of
buildings. Title to the MATV is and shall remain with the Hotel. Heretofore,
from time to time, Spectradyne has made repairs to and replacements of the
Hotel's MATV. It is understood and agreed that, before and after the completion
date of any upgrade made to the MATV by Spectradyne as required below or
pursuant to the Amended and Restated Spectravision and Interactive Services
National Agreement effective July 1, 1993 (the "Spectravision National
Agreement"), all equipment which encompasses the MATV is hereby considered
property of the Hotel.
(b) Upon receipt of this Agreement, Spectradyne will make recommendations to
Hyatt as to the best Spectramax earth station and equipment or microwave system
locations at the Hotel, and as to any changes necessary in the Hotel MATV. Hyatt
will allow Spectradyne personnel reasonable access to all areas of the Hotel for
a pre-installation survey. In the event Spectradyne determines to use a
microwave system, Spectradyne shall furnish and install a microwave link instead
of an Earth Station. There shall be no charge to Hyatt for roof mount
installation.
(c) Upon receipt of Spectradyne's notice of the location of a sufficient and
suitable frequency coordinated approved site for the earth station, Hyatt shall
use its best efforts to make such frequency coordinated approved site available
to Spectradyne, as soon as possible thereafter. Hyatt shall then supply and pay
for all electricity necessary to operate such earth station as well as
<PAGE> 24
the other equipment if the earth station is placed on the ground, Spectradyne,
at its sole cost and expense, shall construct a concrete pad with bolts built to
the specifications of the manufacturer of the earth station. Such specifications
shall be supplied by Spectradyne a t its sole cost and expense. If the earth
station is located on the roof, the roof shall be reinforced to Hyatt's and
Spectradyne's engineering specifications at the sole expense of Spectradyne. In
addition, Spectradyne will provide security fencing and trenching from the
concrete pad to the exterior wall or other site on the property, and the
necessary conduit required to run electrical wiring from the concrete pad to the
exterior wall or other site. If Hyatt shall be unable to make such frequency
coordinated approved site available, Hyatt shall use its best efforts to make
available another approved site that is acceptable Spectradyne.
(d) The site of the Spectramax station shall be marked and mutually approved in
writing on a plot plan of the Hotel supplied to Spectradyne by Hyatt (and set
forth on Exhibit A attached hereto and made a part hereof). The installation
shall commence as soon as possible after Spectradyne receives Hyatt's
authorization to proceed. At its sole cost and expense, Spectradyne shall
furnish and install all Spectramax equipment and cables necessary to deliver
Spectramax services in guest rooms of the Hotel. This installation shall be at
the sole expense of Spectradyne except as described in subsections (c) and (g).
(e) Hotel shall obtain, at Spectradyne's cost, any required zoning clearances,
variances, or local permits.
(f) Spectradyne shall effect the installation in a workmanlike and efficient
manner without reasonable interference with the operation of the Hotel.
(g) Hyatt shall provide complimentary guest rooms at the Hotel for Spectradyne
personnel during the installation of such Earth Station and during any
maintenance visits for such Earth Station.
6. Operation.
(a) Spectradyne shall obtain any necessary licenses for the rights to exhibit in
the Hotel those Satellite Channels specified above. Hyatt shall comply with the
rules of Spectradyne's licenses for the Satellite Channels.
(b) In the event Spectradyne discontinues its relationship with any Satellite
Channel Spectradyne will notify Hyatt in writing no less than thirty (30) days
in advance of any discontinuation. Spectradyne will make its best efforts to
provide a substitute Channel. In the event Spectradyne is unable to provide a
substitute Channel, subject to Section 12 hereof, such failure shall, at Hyatt's
option, constitute a default as defined hereunder and shall be subject to the
provisions contained in Section 13 below.
<PAGE> 25
(c) In the event any Satellite Channel publishes a programming guide,
Spectradyne shall provide Hotel with a quantity of guides on a monthly basis
equal to one hundred fifty percent (150%) of the guest rooms in the Hotel at no
cost to Hyatt. Hyatt may, in its sole discretion, which shall not be arbitrarily
withheld, distribute such materials in its guest rooms and may distribute any
lobby promotional materials supplied by Spectradyne. Additional in-room guides
may be purchased from Spectradyne for *** a piece; provided, however, Hyatt is
not required to purchase in-room guides from Spectradyne. If Spectradyne's cost
for such guides increases, the rate for additional guides will be raised to the
extent of such increase.
7. Maintenance.
(a) Spectradyne, at its sole cost and expense, shall maintain the Spectramax
equipment and the MATV in good working condition. Spectradyne agrees to maintain
a good quality signal to the MATV comparable to the broadcast reception for all
Spectravision Services provided to the Hotel, Pursuant to the Spectravision
National Agreement.
(b) Hyatt shall not remove the SpectrAmax equipment or permit it to be removed
from the Hotel and shall not abuse, tamper with, or attempt to operate the
Equipment. Hyatt agrees to permit Spectradyne reasonable access to the Hotel to
inspect, repair, or observe and adjust the Equipment; provided, however, that
Spectradyne in the exercise of its access rights and in performance of its
obligations hereunder shall not unreasonably inconvenience the guests of the
Hotel or unreasonably interfere with the operation of the Hotel.
(c) Any repairs or replacements made necessary by the willful misconduct or
grossly negligent act of Hyatt, its employees, contractors, or agents shall be
done by Spectradyne at Hyatt's cost. Hyatt agrees to immediately reimburse
Spectradyne for such repair costs.
8. Rights of the Parties.
(a) Except as set forth in the National Agreement, notwithstanding the fact that
parts of the Spectramax equipment may be affixed to the Hotel, the Equipment
shall not become real property of Hyatt or a Hotel fixture and shall remain the
property of Spectradyne, except as set forth in Section 5 hereinabove. Hyatt
acknowledges that the Equipment and its operation are proprietary to Spectradyne
and Hyatt will use reasonable efforts to see that access to the Spectramax
equipment is restricted to those persons authorized by Spectradyne.
(b) Nothing in this Agreement shall be construed to grant to Hyatt any ownership
interest in the copyrights, patents, licenses, or trademarks owned or licensed
by Spectradyne or to grant the Hotel the right to redistribute SpectramAx
programming outside the
<PAGE> 26
Hotel.
(c) Except as set forth in the National Agreement, at the termination of this
Agreement in any manner, Spectradyne shall have the right, at its sole risk and
expense, to remove the Spectramax equipment in a neat and workmanlike manner
within ninety (90) days after such termination. Any equipment remaining at the
Hotel after such ninetieth (90th) day shall become property of the Hotel.
(d) Spectradyne shall, at its sole expense, repair any damage to the Hotel
caused by the installation, removal, repair, servicing, or replacement of the
Spectramax equipment, normal wear and tear excepted.
9. Taxes.
Hyatt agrees to pay on behalf of Spectradyne any and all sales, use, ad valorem,
admission, property tax, or amusement taxes, or other similar taxes, tariffs, or
governmental levy of any form whatsoever in connection with the installation of
the Spectramax Equipment. On the offering of the services that Spectradyne
provides to the Hotel for Hotel's guests pursuant to this Agreement, nothing
contained herein shall create a liability for the Hotel to collect any taxes
assessed on the basis of such services provided by Spectradyne, except for those
taxes that Hyatt collects on behalf of Spectradyne as set forth in this
Agreement.
10. Insurance.
Spectradyne shall meet its insurance requirements as set forth in the National
Agreement.
11. Indemnification.
Spectradyne shall defend, indemnify and hold harmless Hyatt and the owner of the
Hotel and each of their respective officers, directors, agents and employees
from and against any and all actions, costs, claims, losses, expenses and/or
damages, including reasonable attorney's fees, arising out of or in any way
relating to or incidental to the performance of the services to be performed by
Spectradyne hereunder or the presence of Spectradyne at the Hotels. Spectradyne
shall,further indemnify Hyatt and the owner of the Hotel and each of their
respective officers, directors, agents and employees from and against any and
all actions, costs, claims, losses, expenses and/or damages, including
reasonable attorneys, fees, for or arising out of any bodily injuries to or the
death of any of Spectradyne's employees working at the Hotel, however caused or
occasioned, excepting the willful misconduct or gross negligence of Hyatt.
Further, Spectradyne shall defend, indemnify and hold harmless Hyatt and the
owner of the Hotel and each of their respective
<PAGE> 27
officers, directors, agents and employees from and against any claims, demands,
causes of action, loss, cost and expense (including reasonable attorneys' fees)
arising out of or in connection with or based upon a real or alleged breach by
Spectradyne of the provisions hereof, and any claims, demands, causes of action,
loss, cost, expense (including attorneys, fees) or fee based upon an alleged or
actual infringement of any patent or copyright or an alleged unauthorized
broadcast or use of any license. Hyatt shall promptly notify Spectradyne for any
matter for which indemnity is sought under this section and, in any event, prior
to the incurrence of any expenditures under this section.
Spectradyne agrees that it is as fully responsible for the acts and omissions of
its subcontractors and of persons either directly or indirectly employed by them
as it is for the acts and omissions of persons directly employed by Spectradyne.
Spectradyne agrees to bind every subcontractor by the terms of this Agreement so
far as is applicable to the subcontractor's work. However, nothing contained in
the provision of this Agreement shall create any contractual relationship
between Hyatt and any subcontractor.
12. Force Majeure.
Neither party shall have any liability for the failure to perform or a delay in
performing any of its obligations under this Agreement if that failure or delay
is the result of any legal restriction, labor dispute, strike, boycott, flood,
fire, public emergency, revolution, insurrection, riot, war, unavoidable
mechanical failure, electricity interruption or any other cause beyond the
control of either party whether similar or dissimilar to the causes enumerated
here except in any case any event which can be cured or mitigated by the payment
of money; provided, however, that the failure of Spectradyne to deploy and
install the New Technology on the schedule established and as required pursuant
to Section 4 of the Amended and Restated Spectravision and Interactive Services
National Agreement, shall under no circumstances be deemed a force majeure
event.
13. Default.
(a) In the event that Spectradyne fails, in any material way, to provide the
services described in Section 7(a) above, to Hyatt's sole satisfaction, at its
sole option, upon three (3) days, notice and opportunity to cure, Hyatt may
elect to have such service(s) performed by another vendor at the sole cost and
expense of Spectradyne. All amounts owed by Spectradyne under this paragraph
shall be deducted from amounts payable to Spectradyne by the Hotel.
(b) Subject to the terms of Section 16 of the National Agreement and except (i)
as otherwise provided in (a) above, and (ii) for the reasons that constitute a
force majeure as set forth herein, in the event that either party (the
"defaulting party") shall fail
<PAGE> 28
to perform or comply with any material obligation under this Agreement, the
failure shall constitute a default. The non-defaulting party shall notify the
defaulting party in writing of the failure and default. If the default is not
remedied to the satisfaction of the party having given such notice within forty
five (45) days after the receipt of notice, or if such default is of a nature
that it cannot, with due diligence and in good faith be cured within forty five
(45) days and such defaulting party fails to proceed promptly and with due
diligence and in good faith to cure the same, the non-defaulting party may
declare this Agreement terminated as of the one hundred and eightieth (180th)
day following the delivery of the original notice.
14. Corporate Room Rates.
Whenever Hyatt's Hotel facilities and services are used by directors, officers,
employees and guests of Spectradyne in furtherance of Hyatt related business
except as set forth in Section 5(g) hereinabove, such personnel shall not be
required to pay more than Hyatt's corporate rates for their use of such Hotel
facilities and services.
15. General Provisions.
(a) Notices. All notices to be given hereunder shall be given in writing and
shall be deemed given when deposited in the U. S. Mail with postage prepaid.
Notices intended for Hyatt shall be addressed to the Hotel at its above-stated
address to the attention of the General Manager, with a copy to the corporate
offices of Hyatt at its above-stated address, attention: General Counsel. Either
party hereto may change its address for notices by giving notice of change to
the other party. Emergency notices concerning blackout requirements for
Spectramax programming or any other matter may be by telephone, or telegraph or
in person. Authorizations required by any provision of this Agreement shall be
in writing and include Hyatt's approval of the earth station site and authority
to commence installation as well as any other consent reasonably necessary to
accomplish the purposes of this Agreement.
Spectradyne acknowledges and agrees that the Hotel's only authorized signatories
are located at Hyatt's corporate offices at Chicago, Illinois.
(b) Assignment. This Agreement may be assigned by Hyatt to any successor
operator of the Hotel only upon the execution of a written agreement by that
successor assuming the obligations of Hyatt under this Agreement. An assignment
without such assumption of obligations will operate as a default under this
Agreement.
This Agreement may not be assigned in whole or in part by Spectradyne without
the prior written approval of Hyatt.
(c) Applicable Law. This Agreement shall be governed in all
<PAGE> 29
respects by the internal laws of the State of Illinois without regard to the
external laws or federal laws pertaining to conflicts of laws.
(d) Modification. This Agreement and any provision of the attached exhibits
shall not be modified or amended except by an instrument in writing executed by
the parties hereto. Both parties agree to execute any other documents reasonably
necessary to accomplish the purposes of this Agreement.
(e) No Joint Venture or Agency Created. Nothing in this Agreement shall be
construed to create any joint venture or principal-agent relationship between
Hyatt and Spectradyne. Neither party shall hold itself out in any manner which
would indicate such a relationship with the other party.
(f) Successors and Assigns. This Agreement shall apply to, and be binding upon,
the parties hereto and their respective successors and permitted assigns.
(g) Exhibit A (The Diagram) is made a part of this Agreement.
(h) Hyatt-Agent. Spectradyne recognizes that Hyatt Corporation, a Delaware
corporation, is the sole agent of Hotel with regard to the operation of Hotel
until Spectradyne shall receive written notice to the contrary from Hyatt, and
Hyatt and Spectradyne agree that Hyatt may perform all obligations of Hotel and
exercise all rights on behalf of Hotel hereunder.
(i) Severability of Provisions. If any part or subpart of this Agreement is
found or held to be invalid, that invalidity shall not affect the enforceability
and binding nature of any other part of this Agreement.
(j) Consents. The obligations of the parties hereto are conditioned upon the
receipt of all necessary approvals, consents, and authorizations required by law
or by contract.
IN WITNESS WHEREOF the parties have executed this Agreement, by duly authorized
signatories, on the date set forth by their signatures.
SPECTRADYNE, Inc., HYATT CORPORATION, as agent of
a Texas Corporation
By: __________________________ By: __________________________
Title: _______________________ Title: _______________________
Dated: _______________________ Dated: _______________________
<PAGE> 30
EXHIBIT C
EARTH STATION HUB SITE
Rider to Hyatt Spectramax Agreement
THIS RIDER TO HYATT SPECTRAMAX AGREEMENT, is made this _____ day of __________,
19__, but effective as of ____________, 19__ by and between
__________________________ hereinafter called "Hyatt") and Spectradyne, Inc.
(hereinafter called "Spectradyne").
WITNESSETH:
WHEREAS, Hyatt and Spectradyne entered into that certain Hyatt Spectramax
Agreement effective as of ____________, 19__, providing for Spectradyne to
provide its Spectramax service at the _____________________ hotel ("Hotel"); and
WHEREAS, Hyatt and Spectradyne desire to amend the Agreement effective as of
_______________________ in order for Spectradyne to use the Hotel as an Earth
Station,Hub Site for the purpose of providing Spectramax service to third
parties.
NOW THEREFORE, the parties hereto amend the Agreement by this instrument as
follows:
1. The term of this Rider shall commence on ____________, 19__ and expire on
June 30, 2000. This Rider is subject to early termination in accordance with the
provisions of the National Agreement and the Hyatt Spectramax Agreement.
Upon expiration or earlier termination of the Agreement, Hyatt may determine to
allow Spectradyne to maintain its Earth Station Hub Site at the Hotel. In such
event, the parties hereto shall enter in to a mutually agreeable agreement under
which the Hotel shall serve as an Earth Station Hub Site.
2. Spectradyne shall, at its sole cost and expense, install the Earth Station
which shall become a fixed position dish which cannot be used for
teleconferencing.
3. During the above term and any extensions thereof, Spectradyne will have the
right to redistribute the signals from the Earth Station to other hotels. Upon
Hyatt's approval, which shall not be unreasonably withheld, Spectradyne will
have the right to add various antennas on the roof of the Hotel premises as
required for operation of the Earth Station at no cost whatsoever to the Hotel.
4. Title to the Earth Station and related equipment and antennas shall remain
with Spectradyne. Spectradyne assumes all risk of loss of or damage to the Earth
Station and related equipment and antennas.
5. In consideration of allowing the Hotel to serve as an Earth
<PAGE> 31
Station Hub Site, Spectradyne shall pay the Hotel a fee equal to *** per month.
Except as herein expressly set forth in this Rider, the Hyatt Spectramax
Agreement shall remain in full force and effect, subject to its terms and
conditions.
IN WITNESS WHEREOF the parties hereto have executed this Rider to Hyatt
Spectramax Agreement as of the day and year first above written.
HYATT CORPORATION, as agent of
______________________________
d/b/a ________________________
By: __________________________
Title: _______________________
Date: ________________________
SPECTRADYNE, Inc.,
a Texas corporation
By: __________________________
Title: _______________________
Date: ________________________
<PAGE> 1
EXHIBIT 10.4
NOTE: THIS DOCUMENT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST PURSUANT
TO RULE 406 UNDER THE SECURITIES ACT OF 1933. PORTIONS OF THIS DOCUMENT FOR
WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN REDACTED AND ARE
MARKED HEREIN BY "***". SUCH REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE COMMISSION PURSUANT TO THE CONFIDENTIAL TREATMENT REQUEST.
Hilton Hotels Corporation
ON COMMAND VIDEO Agreement
This Agreement between on Command Video Corporation, ("OCV") and Hilton Hotels
Corporation ("Hilton"), sets forth the terms for installation of video services
and all other material & services as described more fully herein. Hilton
operates the Hotels listed in Exhibit B ("Hotel") for the lodging of customers
in separate, private rooms and parlors which are customarily available for
overnight sleeping accommodation ("Rooms").
WHEREAS, Hilton desires to make available to its guests the opportunity to view
pre-recorded entertainment programs ("Programs") and broadcast television
channels conveniently in the privacy of their own Rooms at its Hotels using an
ON COMMAND VIDEO System provided by OCV;
Now, THEREFORE, the parties do hereby AGREE AS FOLLOWS:
1. ON COMMAND VIDEO SYSTEM. As used herein, the term "System" shall mean the
video entertainment system designed by OCV, whereby guests in a specified number
of separate rooms at the Hotel may remotely access, at will, a specified number
of prerecorded Program selections (such as movies), as well as the standard
network or broadcast television channels or other programming services
("Channels") that are available in the Hotel, for display on television
receiving sets ("TVs") in the guests' private rooms. The System includes a
specified number of pre-recorded Program selections; a remote control unit for
the TV in each room; an OCV communications module attached to or integrated into
each guest room TV; an adequate number of video playing devices; and all
necessary electronic, computer and switching equipment, software, printers or
other devices necessary to provide for video entertainment or for Interactive
Services as defined herein, not including TVs. OCV shall install the System at
no cost to Hotel. OCV shall supply the necessary reception, descrambling, and
remodulation equipment to supply ESPN, CNN, and HBO to each room at no charge.
The System does not include necessary power, electrical wiring, connections, or
cooling facilities, which are to be provided by Hotel pursuant to usual and
customary standards for a full service Hilton Hotel except as provided herein.
However, OCV will provide engineering and specifications for necessary signal
wiring and distribution, and will perform installation for any additional wiring
which is necessary, as part of the System, such engineering specifications
<PAGE> 2
and wiring LO be provided at no cost to Hotel.
OCV shall supply each Hotel with new, closed caption, "smart plug",
network-affiliation displayed 20 inch TVs. OCV shall supply one TV for every old
or existing Hotel Room TV replaced. OCV shall also supply extra TVs up to a
limit of ten (10) TVs or two percent (2%) of the total number of replaced or
purchased TVs, whichever is greater. The TV package provided by OCV shall
include replacement swivel mounts (Hotel to receive cash credit if these are not
required), installation/labor costs, and remote controls plus 10% spares for all
guest rooms. In the event Hotel wishes to obtain 25 inch TVs in lieu of the 20
inch they will forfeit *** for each such TV from their revenue share.
In the event Hotel already has "smart plug" TVs, OCV, shall make payment to
Hotel of *** for each room TV, net of tax, and assume title to that TV. OCV
shall be responsible for all maintenance of TVs during the term of this
agreement at no cost to the Hotel.
OCV shall be responsible for all costs and all maintenance of TVs during the
Lien of this agreement.
Any value which may be gained from liquidation of the existing Hotel TVs which
are replaced by OCV shall belong to OCV, net of sales tax, and the replacement
TV's shall belong to the hotel at the conclusion of the term.
2. SYSTEM TERM.
(a) OCV shall design, construct and provide to Hotel a System and related
materials for operation in each of the Hotel's guest Rooms as set forth below
with access to a multitude of prerecorded Program selections in accordance with
section 4 hereof, as well as the Channels, for a term beginning on the Term
Commencement Date (as defined in Section 7) and ending on the seventh
anniversary of the Term Commencement Date (the "Term").
On the third anniversary of the term commence date, Hilton and OCV shall review
all other available hotel video systems. In the event they agree a superior
technology exists, OCV shall make the equivalent technology available to Hilton
on terms acceptable to Hilton. If they don't agree, a 3rd party industry
consultant may be retained by either party at their expense, to determine if a
superior technology exists. If any such 3rd party consultant determines that
superior technology does exist, OCV shall make the equivalent technology
available to Hilton on terms acceptable to Hilton. If OCV does not provide such
technology within 90 days, OCV shall be in default.
In the event that OCV releases new products or services to another hotel or
company, or makes the same or similar services available at more attractive
terms and conditions than such products and services are offered herein, OCV
agrees to immediately make such products and services or terms and
<PAGE> 3
conditions available to hotel on the same or better terms and
conditions.
At the end of the initial Term of this Agreement, unless OCV is notified by
Hilton in writing to the contrary thirty (30) days prior to the Term expiration
date, this Agreement shall be extended on a month-to-month basis. In the event
of such extension, this Agreement including all revisions or extensions in
effect shall remain in force on a month-to-month basis unless terminated by
Hilton for any reason with thirty (30) days written notice.
3. FEE AND PAYMENT TERMS.
(a) Based upon daily information reported by the System monitoring unit to be
provided and installed by OCV at no cost to Hotel, Hotel shall charge Hotel
guests on a per use basis for access to the System an amount (the "Rental Fee")
based on a reasonable pricing schedule as established from time to time by OCV.
OCV shall use its best efforts to maximize revenue through the use of the OCV
system.
Hilton may, in its sole discretion, adjust the Rental Fee as to any guest of the
Hotel in conjunction with a controversy with such guest in which case the
"Rental Fee" shall mean the Rental Fee for such guest as so adjusted. OCV
understands and agrees that Hotel shall generally refund the Rental Fee to the
guest in the event the guest disputes the charge.
(b) In addition to the Rental Fee, Hotel shall collect from guests any
applicable taxes levied thereon and shall pay those taxes to the appropriate
government agencies.
(c) Hotel shall within 14 days of the end of each month remit to OCV an amount
equal to *** of the adjusted Rental Fee for the prior month and shall retain an
amount equal to *** of such adjusted Rental Fee as their fee.
(d) Rental Fees due OCV shall be held in trust for OCV and shall remain the
property of OCV.
(e) OCV shall provide Hilton Hotels ESPN, CNN and HBO, at no charge during the
duration of the term. Those hotels who can not take advantage of this free
programming, shall receive a monthly payment of *** per room per month from the
time the OCV system is installed until such time that they can receive this
benefit.
(f) The books and records of the Hotel pertinent to the Rental Fee for any month
in the Term of this Agreement shall be open to inspection and audit by an
authorized representative of OCV upon reasonable advance written notice to and
the approval of the Hilton. OCV shall have the tight to inspect and audit such
books for the two preceding years during which OCV was under contract. OCV must
bring any claim resulting from such audit within ninety
<PAGE> 4
(90) days of such audit. OCV's light to inspect and audit the books and records
of the Hotel shall not extend beyond three months from the expiration or
termination of this Agreement.
(g) The System monitoring unit shall generate an accurate record ("Access
Record") of the access to the System by any guests, including a record of the
access charges for each individual guest's bill or Room account. OCV shall be
responsible for all costs associated with the programming of the computer within
the System monitoring unit to enable it to provide the aforesaid data.
Hotel and OCV agree that the Access Record shall be held in strictest confidence
by the personnel of OCV and Hotel; and that OCV shall make available to Hilton
information sufficient to ensure proper billing of guests and other information
or System usage reports as Hotel may reasonably request to track System usage.
OCV may review and use the Access Record for such purposes as OCV may reasonably
deem appropriate, except that OCV shall not disclose any such information to
third parties. In the event of any such disclosure by OCV, OCV shall indemnify
and hold harmless Hilton and Hotel from all claims, loss, damages or actions
arising from such disclosure.
(h) OCV agrees to provide a data communications link which shall include
equipment, software, and cabling sufficient to connect the Hotel's property
management computer to the System for the purpose of posting Rental Fee charges
to guest folios. OCV agrees that there shall be no cost to the Hotel for this
link or for development, testing or maintenance of the link.
(i) OCV shall be responsible for all personal property taxes on all System
equipment as well as Hotel TVs.
4. PROGRAM SELECTIONS.
(a) OCV agrees not to broadcast on the System or cause to be presented in the
Hotel any commercial or marketing message, information, or service promoting OCV
or any other entity, service, or product without the prior written consent o Hi
ton.
(b) Hotel has the tight to use *** up to three (3) percent of the System video
cassette players but not less than six players and other System components as
may be necessary to present Programs or other material that Hotel may desire to
make available to its guests on a free-to-the guest basis. OCV shall assist
Hotel in making these offerings easily available to the guest through the System
menus or as part of the regular channel line-up or by some other means.
Both parties agree that the System shall carry without charge to Hotel, Programs
or messages accessed without charge to the guest
<PAGE> 5
including but not limited to free-to-the-guest programming services or network
TV programming; bulletin board or reader board messages; airline or airport
information; video and/or audio feeds from the Hotel, convention centers, or
other sources; hotel or local service information; and promotional or sales
messages for Hotel or Hilton Corporation products, services, or brands subject
to Hiltons approval. Except as otherwise stated in this agreement program costs
shall be the responsibility of ***. The cost of generation of a "barker" screen
and other Hilton specific screens and Hilton's Logo shall be born by ***.
(c) Program titles to be made available on the System shall be selected by OCV
following guidelines mutually agreed upon between OCV and Hilton; provided,
however, that the Hotel or Hilton may, in its sole discretion veto any number of
titles(s) which it finds to be inappropriate for guests of the hotel and OCV
shall provide a replacement acceptable to Hotel and Hilton. If the exercise of
such veto authority by Hotel or Hilton reduces revenues per occupied room
generated by the system to a level (for the top *** of Hilton rooms) 20% below
the revenues per occupied room in other similar full service non Hilton hotels
served by OCV for a period exceeding one year, OCV shall have the right to
terminate this agreement sixty days after written notification to Hilton of
OCV's intention to terminate.
Hilton and OCV shall review and revise from time to time, the "Standards and
Practices" and shall mutually agree on their content as a general guide to adult
programming. OCV assumes full responsibility and shall hold Hilton harmless
against any and all claims as a result of the showing of adult programming.
OCV agrees that less than 20% of the Program titles shown on the System at any
time will be Adult non-rated titles.
(d) OCV agrees to allow Hotel to use the System as a means to charge guests for
other services or Program offerings during the Term. Such offerings may include
but shall not be limited to video programming such as special events, sporting
events, teleconferences, network programming, or video tapes. Other offerings
may include informational services or messages. The content and format of these
offering and the manner in which they are provided shall be mutually agreed upon
by Hotel and OCV and approved by Hilton.
With Hilton's approval OCV shall be entitled to a mutually agreed upon revenue
generated by the System from Programs or services for which the guest or a third
party such as an advertiser or broker is directly charged a fee. OCV shall have
*** share of any revenue generated through the advertising, promotion, or sales
of Hotel or Hilton products or services.
5. OWNERSHIP OF THE SYSTEM.
(a) The parties agree that the System, which consists of the
<PAGE> 6
racks and control boxes only, which are provided by OCV are the sole and
exclusive property of OCV. The then existing TVs shall belong to Hotel at the
completion of the term.
The parties further agree that the ultimate control and ownership of the Hotel
MATV system in general and regulation of the programming, presentation, and
services it provides to guests resides with Hotel. The MATV system ("MATV") is a
network of cables, wall Laps, antennas and specially designed radio frequency
signal processing components, which receive, process, amplify and distribute
video and audio TV and FM signals from a central location Lo a multiplicity of
TVs within a building or group of buildings.
(b) Hotel shall allow authorized personnel of OCV to have access to the System
in order to conduct routine maintenance, observation and monitoring of the
System, to ensure suitable operating conditions and to implement improvements in
the System. OCV access to System shall be in accordance with procedures agreed
to by Hotel.
(c) If, during the Term, OCV desires to change any System component or software
to improve service or to take advantage of technological advancements, OCV
shall, in writing, describe to Hotel the plans and specifications for the
installation thereof at ***. No changes to the System shall be made by OCV
without written approval from Hilton. Such changes approved by Hotel shall be
made without disruption of Hotel TVs or MATV service and with minimum
interruption of System service and guest inconvenience.
(d) Hotel shall use reasonable efforts to protect the safety and security of the
System and all related property of OCV at all times while the System is
installed at the Hotel, and shall be liable for any damage to the System
resulting from gross negligence on its part. Hotel shall use reasonable efforts
to prevent any vandalism, theft, or damage of or to any of the equipment
supplied by OCV. Any System components, software, or video tapes that are lost,
stolen, vandalized, or damaged, unless through gross negligence by Hotel, are
the responsibility of OCV.
6. HOTEL FACILITIES; INSURANCE.
(a) During the Term, Hotel shall provide and make reasonable efforts to maintain
a TV in each designated Room; signal wiring and connections; electrical power
and sockets; cooling facilities; and a location for all equipment comprising the
System (collectively, the "Hotel Facilities"); all in accordance with written
specifications provided by OCV and agreed to by Hotel.
(b) Hotel shall obtain and maintain, at its sole cost and expense throughout the
term of this Agreement, insurance policies reasonably acceptable to OCV and
Hotel. Said policies protecting
<PAGE> 7
the System and related equipment supplied by OCV shall provide comprehensive
public liability insurance with limits of at least $2,000,000. A certificate of
insurance evidencing such insurance shall be delivered to OCV if requested.
(c) OCV shall obtain and maintain, at its sole cost and expense throughout the
term of this Agreement, insurance policies reasonably acceptable to OCV and
Hotel. Said policies shall provide comprehensive public liability insurance with
limits of at least $2,000,000. A certificate of insurance evidencing such
insurance shall be delivered to Hotel if requested. Such insurance shall name
Hotel and Hotel Operator as additional insured.
(d) OCV shall obtain and maintain, at its sole cost and expense throughout the
term of this Agreement, Workman's Compensation Insurance policies sufficient to
cover any and all claims made by OCV employees, agents, or subcontractors. Hotel
or Hotel Operator shall not be responsible for any such claims.
7. INSTALLATION.
(a) Hotel shall provide such access as OCV reasonably may request to enable OCV
to complete installation of the System, including providing all Hotel Facilities
as set forth in the specifications and in reasonable time to allow OCV to
complete installation. Such installation shall not exceed six months from
execution of this agreement. OCV shall test the System to ensure functionality
from the beginning of the Term, which shall begin on the date upon which OCV and
Hotel agree installation to be complete and the System to be functional (the
"Term Commencement Date") which agreement shall be attached hereto as Exhibit A,
when completed.
(b) OCV agrees to bear any costs associated with installing or maintaining the
System that Hotel would not have experienced if the OCV System were not
installed in the Hotel. These costs shall include but shall not be limited to
purchasing, installing, and maintaining: all cables required by the OCV System
or used to connect the OCV System to other Hotel systems such as the MATV system
or property management computer, telephone service to the System, the OCV
communications module attached to or integrated into each guest room TV
including TVs replaced during the Term, modifications to the Hotel's MATV system
and changes required Lo Room wall taps. OCV shall establish a budget for such
MATV upgrade of *** per room. In the event the upgrade costs exceed this budget,
the overage will come from Hotels portion of the revenue share.
OCV guarantees that the equipment installed and/or the connections to the
existing TV antenna or cable system, amplifiers and receivers will not impair in
any way the ordinary reception of broadcast programs or other services on the
cable system.
<PAGE> 8
Installation and removal shall be of the highest quality workmanship and in
accordance With the terms and conditions of this Agreement OCV agrees to
coordinate with the Hotel any installation, repair, maintenance, replacement, or
removal so as not to disrupt or inconvenience the Hotel's guests or employees or
the daily Hotel operations and so as to initiate and complete those tasks as
expeditiously as possible.
(c) At the time of installation, OCV shall move or reassign any channels in the
Hotel's MATV system, with Hiltons approval, whose frequencies conflict with the
OCV System. If required by Hotel's or Hilton's licensing agreements with
individual networks or channels, OCV shall trap or filter out any channels so
moved so they cannot be viewed on any public or lobby TV and shall ensure
optimum signal levels for each channel so moved and the elimination of any
possible channel interference.
(d) All equipment installed, provided, or modified by OCV, its agents, or
subcontractors shall be listed by the Underwriters Laboratory, Inc. or shall be
built to their standards. OCV represents and warrants that all design,
equipment, and installation shall be in strict compliance with the National
Electrical Code Handbook as published by the National Fire Protection
Association and as amended periodically, Federal Communications Commission
requirements, and local or other governing codes.
8. OPERATION AND MAINTENANCE OF THE SYSTEM.
(a) Hotel shall, for day-to-day operations and at no cost to OCV, use reasonable
efforts to notify OCV by telephone of any failure of the System or the System's
functions in any given Room or as to any given Program. For the purpose of such
notification, Hotel staff shall call the following telephone number: (800)
915-7147 or the then current number, which shall be attended twenty-four hours a
day seven days a week by OCV staff having the capability of expeditiously
dispatching OCV service personnel to the Hotel.
(b) Any repairs or replacements to any equipment supplied by OCV made necessary
by any grossly negligent or willful act by Hotel or any of its employees,
contractors, servants, agents or others (not to include guests) authorized by
Hotel, shall be undertaken by OCV at Hotel's expense. All other repairs shall be
performed at OCV's expense.
(c) Hotel shall use reasonable efforts to ensure that no unauthorized person
tampers with or attempts to make repairs to any equipment supplied by OCV under
the terms of this Agreement. Should an emergency arise, Hotel agrees to use
reasonable efforts to contact OCV by telephone and thereupon any repairs then
authorized may be carried out in accordance with the directions so given by OCV.
Any costs of such repair other than a reasonable amount of the labor and time of
Hotel staff shall be
<PAGE> 9
borne by OCV.
(d) OCV shall provide promptly all maintenance, repairs and replacement of
materials and equipment necessary to ensure satisfactory operation of the
System, including a high signal quality, throughout the Term as defined in 8g.
Upon being notified by Hotel that a repair or service is required at the Hotel,
OCV shall immediately dispatch repair representatives and it shall be incumbent
on OCV to ensure that these representatives arrive at the Hotel within twelve
(12) hours of the time OCV Is notified of the service requirement unless such
representatives are delayed in transit by strikes, natural disasters, extremely
adverse weather conditions or similar causes.
Upon arrival at the Hotel, OCV's service representatives shall immediately
undertake necessary repairs to return the entire System to the performance
standards required under this Agreement and said repair services shall be
completed within forty-eight (48) hours of the time OCV is initially notified of
the System breakdown unless by reason of fire, accident, natural disaster, or
similar cause, the Hotel or the System has been substantially destroyed. In the
event repairs are not effected within 48 hours, OCV shall be liable to the hotel
for the lost commissions (***) the hotel would have received if the rooms were
operable from the time of the failure based upon the average daily revenue for
the previous three months plus all other remedies at law or equity.
(e) AU maintenance and technical assistance shall be provided by OCV free of
charge except as provided in Section 8(b) or occasioned by a breach by Hotel of
Hotel's obligations under Section 6(a).
(f) Hotel staff shall be responsible for swapping inoperable guest room TVs with
spares maintained in inventory at the Hotel for situations in which a single TV
has failed. OCV shall be responsible for diagnosing and repairing failures
involving groups of TVs.
OCV shall contract with a TV service or maintenance organization acceptable to
Hotel for TV manufacturer's warranty repair or other TV repair work at OCV's
expense. At no time will the Hotel be without a working spare or OCV shall be in
default.
(g) OCV shall install, operate, and maintain the System and any other existing
equipment, video service, or MATV components used in the Hotel in accordance
with the following technical specifications.
1. In no case shall the signal levels measured exceed the maximum output rating
for the headend or modulators) employed.
<PAGE> 10
2. The level difference between channel picture carriers shall not exceed 2 dB
for adjacent channels nor 12 dB between the strongest and weakest channel
normally carried.
3. The spurious signal level shall be at least 50 dB below the video carrier
level. Cross modulations shall be less than 51 dB.
4. Visual/aural carrier ratio on any channel will be 22 dB (+/- 2 dB.)
5. Amplitude response within any channel (visual carrier to aural carrier) will
be flat (+/-2 dB.)
6. The nominal signal level for every channel delivered at the point at which
the MATV channels (Free-To-Guest, Pay-Movies, Information Channels) are combined
shall be 48 dBmV (+/-3 dBmV).
7. Pay movie or other channels provided by OCV shall have a signal-to-noise
ratio of at least 50 dB or higher.
8. Equipment installed and/or the connections to the existing MATV system,
amplifiers and receivers will not impair in any way the ordinary reception or
transmission of broadcast programs or other services on the MATV.
9. All equipment, connections, cables, and passive devices will
be designed and installed so as to minimize radiation and
ingress.
10. Signal Strength from room outlet to TV must be 0 to 10 dbmv.
9. SPECIAL REPRESENTATIONS OF HOTEL.
Hotel agrees, confirms and covenants that:
(a) Unless otherwise authorized by Program copyright holder or licensor,
Programs provided by OCV shall be exhibited in the Rooms only, and not in public
areas (including lobbies, hallways, restaurants, bars, meeting rooms, etc.) of
the Hotel; and shall not be exhibited other than in accordance with this
Agreement or by any other means of transmission of any kind whatsoever. Hotel
shall not modify the System or means of transmission unless so authorized by
OCV.
(b) Equipment comprising part of the System shall not be removed by Hotel for
any purpose except in the case of any emergency where such removal is reasonably
necessary and Hotel uses reasonable efforts to notify OCV of such removal by
telephone.
(c) Hotel shall notify OCV as soon as is reasonably possible and upon Hotel's
actual notice of any unauthorized use, access, theft, damage, or malfunction of
or to the System or any other equipment of OCV.
<PAGE> 11
(d) Program video cassettes shall be kept under lock and key provided by OCV and
shall not be accessible to unauthorized Hotel staff without OCV's prior consent.
There shall be no unauthorized use, exhibition or viewing of any cassette by any
person other than on the System on the terms set forth herein. Hotel shall use
reasonable efforts to prevent any person under its control from duplicating or
making alterations of any kind to cassettes. Hotel shall report promptly to OCV
any unauthorized use of the cassettes in the event that Hotel becomes aware of
such use. Hotel shall provide space in the Hotel for the placement of the
System. OCV understands that this space is also used daily by the Hotel staff.
(e) Subject to space being available, Hotel agrees to provide OCV's employees
with complimentary rooms at the Hotel during site surveys and initial
installation, up to twelve (12) room nights (including site surveys).
Thereafter, those OCV employees required to provide maintenance and repair
services to the Hotel System shall receive complimentary overnight
accommodations on a space available basis. Such complimentary guest rooms shall
not exceed one (1) room per day nor shall Hotel provide such rooms for a period
longer than two (2) days during repair stay.
10. PUBLICITY REGARDING THE SYSTEM.
The Hotel may in its sole discretion adequately publicize the existence of the
System and access to the Programs for use by guests. If OCV shall develop and
provide to Hotel in-room or other advertising materials to encourage use of the
System by guests of the Hotel, Hotel shall cause those materials to be placed in
the Rooms or elsewhere at the Hotel, as applicable, provided that Hotel, at its
sole discretion, may refuse to display such materials which it finds to be
unsuitable.
11. TRAINING AND CONSULTATION.
OCV shall provide a training course for as many employees of the Hotel as the
Hotel deems desirable, on the use and operation of the System. Such training
shall be available at installation or as requested by Hotel. Personnel of OCV
shall be available for reasonable telephone consultation to provide further
assistance to Hotel personnel regarding use and operation of the System.
12. CONFIDENTIALITY.
The parties agree that the functions and components of the System, facts
regarding the equipment and materials related thereto, the manner of operation
thereof and the terms of the Agreement, and Rental Fees payable hereunder, all
constitute proprietary information of OCV and that all guest information
constitutes proprietary information to Hotel. Such proprietary guest information
shall include but shall not be limited to guest names or other personal guest
information, hotel occupancy information or guest billing information not
related to usage of
<PAGE> 12
the OCV System.
Hotel shall use reasonable efforts to prevent any third party from having access
to the System other than Hotel's personnel as may be reasonably necessary to
enable Hotel to maintain the Hotel Facilities and otherwise as expressly
permitted by OCV in writing. OCV shall not permit any third party to have access
to any proprietary or guest information obtained from Hotel or Hotel Operator.
13. EXCLUSIVE VIDEO ENTERTAINMENT SYSTEM.
As part of the consideration to OCV for Hilton's installation of the System,
Hilton agrees that the System shall be the sole and exclusive guest room
pay-per-view video entertainment system provided by the Hilton to guests during
the rental Term.
14. DEFAULT: FORCE MAJEURE.
(a) If Hotel should breach or become in default of performance of any material
term or condition contained in this Agreement, and should fail to begin efforts
to cure, correct or remedy such breach or default within thirty (30) days after
receipt of a written notice thereof specifying the nature of such default from
OCV, OCV may exercise any or all of the following remedies: (1) cancel and
terminate this Agreement and require Hotel to immediately make available to OCV
the repossession of the System and all components thereof in which case OCV
shall remove the System at OCV's expense as provided herein; (2) obtain
injunctive and other equitable relief; and (3) obtain such damages and other
rights and remedies as OCV may have at law or equity.
(b) If OCV should breach or default in the performance of any obligation or
covenant in this Agreement, which default shall continue for thirty (30) days
after Hilton has given OCV written notice thereof, specifying the nature of such
default, then Hilton may exercise any or all o the following remedies: (1)
cancel and terminate this Agreement by written notice Lo OCV in which case OCV
shall remove the System at OCV's expense as provided herein; (2) obtain
injunctive and other equitable relief; and (3) obtain such damages and remedies
as Hotel may have at law or equity. The TVs become the property of the Hotel at
no charge.
(c) In the event performance by either party is prevented due to weather, acts
of God, strikes, or labor disputes, ("Force Majeure") for a period not to exceed
thirty (30) days during any twelve (12) month period, such failure of
performance shall not be deemed default hereunder.
(d) In the event of default by Hotel, Hotel shall have the right to purchase the
TVs in their property by paying OCV a price based on straight line depreciation
over a seven year life starting at the actual cash price not more than *** on
day one, and ending at
<PAGE> 13
*** on day 2,555. If the TVs were purchased by OCV from the Hotel for ***: the
depreciation start shall be ***.
15. OCV INDEMNITY AND REPRESENTATIONS
(a) OCV shall hold harmless, indemnify and defend Hotel, Hotel Operator, its
employees, owners, officers, subsidiaries or affiliates from and against all
claims, actions, suits, damages, proceedings or liability arising out of or in
connection with OCV's obligations under this Agreement, the System and related
products including, but not limited to, attorney's fees, except for claims,
actions, suits or liability resulting solely from the willful misconduct or
gross negligence of Hotel, its servants, agents, employees or subcontractors.
(b) Hotel shall hold harmless, indemnify and defend OCV, its employees, owners,
officers, subsidiaries or affiliates from and against all claims, actions,
suits, damages, proceedings or liability, costs and expenses arising out of or
in connection with any breach or claimed breach of Hotel's obligation under this
Agreement and solely out of willful misconduct or gross negligence of Hotel, its
servants, agents or employees.
(c) OCV agrees to defend or, at its option, to settle and Hotel agrees that OCV
shall have the right to defend or, at OCV's option, to settle at OCV's expense,
any indemnified claim, suit or proceeding brought against Hotel or Hotel
Operator, its employees, owners, officers, subsidiaries or affiliates including,
but not limited to, patent, copyright, publicity or privacy, trademark, unfair
competition, the viewing of program material and the content thereof,
infringement and the alleged misuse of the system, the system hardware or
software, or any product or any part thereof, supplied by OCV to Hotels or its
affiliates under this Agreement except that Hilton shall be told not less
frequently than monthly about the proceedings and have the right to reject any
Settlement which, in Hilton's sole discretion, negatively impacts the Company in
any way including, but not limited to, Hiltons right to the benefit of this
contract, reputation, licenses, etc. Nothing in this section in any way relieves
OCV of its obligations to provide the System and related products. Without
limitation, OCV specifically agrees that this indemnity covers the pending
actions by Spectradyne against OCV, and OCV is fully responsible for that
action.
OCV agrees to pay, subject to the limitation hereinafter set forth, any damages,
expenses, costs or final judgment entered against Hotel or Hotel Operator, its
employees, owners, officers, subsidiaries or affiliates, in any such suit or
proceeding brought against Hotel or Hotel Operator, its employees, owners,
officers, subsidiaries or affiliates.
Hotel agrees to notify OCV in writing of any such claim, suit or proceeding, to
the extent that Hotel knows of such claim, suit or proceeding within 180 days of
Hotel's first actual knowledge of
<PAGE> 14
the claim, suit or proceeding, and at OCV's expense, Hotel will give OCV
reasonable, proper and full information and assistance to settle or to defend
any such claim, suit or proceeding.
(d) If the system, any related product or any part thereof, furnished by OCV to
Hotel or its affiliates becomes or its affiliates becomes or, in the opinion of
OCV, may become the subject of any claim, suit or proceeding described in this
Section 15, or in the event of an adjudication that such product or part
infringes or violates any United States patent or copyright or other claimed
right, or if the use, lease or sale of such product or part is enjoined, OCV
may, so long as there is no interruption of service, at its option and expense:
(1) procure for Hotel the light under such patent or copyright to use, lease or
sell, as appropriate, such product or part, or (2) replace, modify or remove
such product or part. If Hotel determines, in its sole discretion, that such
replacement, modification or removal of the product or part has a significant
negative impact on the overall functioning of the System or satisfaction of
Hotel guests, Hotel has the right to terminate this Agreement thirty (30) days
after giving written notification to OCV of Hotel's intention to terminate. This
right is in addition to all other legal remedies including but not limited to
equitable relief and damages. In the event of such termination, OCV agrees to
return the Hotel and MATV System to their original, working condition within 30
days of termination, and to cooperate and facilitate the installation of any
replacement system including, but not limited to, Spectradyne. OCV further
agrees to return the Hotel and TV's to original condition with the minimum
possible interruption of Hotel TV or MATV system services offered to guests and
at OCV's expense. OCV shall give 30 days written notice to Hotel before removing
any equipment.
(e) OCV shall indemnify and hold harmless Hilton, its affiliated companies,
participation hotels and their owners, and the foregoing indemnities respective
officers, directors, employees and agents from all liabilities, claims, causes,
damages and expenses incurred in connection with any claims against such
indemnities arising out of or caused by Hilton's or the participating hotel's
transmission in accordance with the Agreement of any programming services
delivered by OCV which contains any libelous or slanderous material, or violates
any copyright (other than music performance rights), right of privacy, or
literary or dramatic right and for any special, indirect, incidental or
consequential damages arising therefrom.
(f) OCV shall secure and maintain (i) licenses, permits and approvals required
by governmental authorities having jurisdiction over services to be performed by
OCV and (ii) necessary patents, copyrights, distribution rights, licenses,
releases, waivers and other necessary consents of third parties. OCV agrees to
indemnify, hold harmless and defend Hotel Owner, its agents and employees from
any claims or lawsuits arising from OCV's breach Of its obligations under this
Agreement.
<PAGE> 15
(g) All regulations or laws pertaining to censorship, importation or display of
films as an in-hotel service or in general shall be complied with by OCV, and
OCV shall be solely responsible on a continuing basis to secure, at OCV's
expense, any and all permits and approvals respecting the Programs, copyrights,
distribution rights, music rights, releases and any other approvals as may be
necessary for the purposes of this Agreement. OCV further agrees to indemnify
and hold Hotel and Hotel Operator harmless and blameless for and against any
infringement, claims of any kind, royalties, violations and expenses associated
therewith.
(h) OCV represents and warrants that the System or any individual product or
part thereof or use of the System, shall not infringe any United States or other
patent or copyright, or any other intellectual property or proprietary rights.
Without limitation, OCV specifically agrees LO indemnify, defend and hold
harmless Hilton from any claim by Spectradyne arising from Hilton's use of OCV
services or this Agreement.
16. INTERACTIVE SERVICES.
(a) OCV shall make available to the Hotel upon election by the General Manager
of the Hotel the interactive guest services applications (individually
"Applications") underlined below ("Interactive Services") without charge.
Folio Review allows the guest to summon and examine the current status of their
hotel bills on the in-room TV screen at any time. If the Hotel desires, it may
designate a certain period of the day in which guests can also initiate Checkout
processing in the Hotel property management computer. A folio printer will
create a copy of the guest bill which can either be retrieved by the guest upon
departure or mailed to the guest.
Video Messaging in allows the hotel guest to summon and read current messages on
the in-room TV screen at any time. The Hotel shall be the exclusive contact with
the guest for all guest inquiries about Video Messaging.
Video Breakfast allows the Hotel guest to summon a specialized breakfast menu on
the in-room TV screen and place an order for the next morning's room-service
breakfast. Breakfast items are listed on the TV screen for the guest to select.
Upon selection, the order is verified, with costs, before the order is printed
on a dedicated OCV-owned printer in the kitchen.
Multiple Language Support automatically selects an appropriate language based on
information from the PMS or front desk terminal or the guest to allow all menus
to appear in the language selected.
Guest Survey allows guests to participate in survey as to their satisfaction
with the hotels performance.
<PAGE> 16
Housekeeping Status allows the hotel personnel to update the room status in the
Computer.
Bellstand Application allows the guest to summon assistance from the bellman.
Guest Recognition provides the ability to customize menus and the look of the
system based on identifying information provided by hotel staff or the PMS
interface. Customized items should include menus presented, resources
available/privileges, pricing, etc.
Hotel Engineering proactively reports on potential problems in the system by
providing diagnostic data daily.
(b) OCV shall ensure that the System will not allow a guest to access any
message, folio, pay movie, or checkout function or any other service other than
those which are applicable to the room from which access is initiated. OCV shall
provide filters, traps, or some other mechanism sufficient to prevent TVs not
intended to provide System services or TVs in public areas from receiving images
or information intended for another guest room TV.
(c) OCV will use reasonable efforts to keep Interactive Services current with
changes required to the Hotel's property management system.
17. SYSTEM REMOVAL
(a) Upon expiration of this Agreement or its termination for whatever reason,
OCV agrees to return the Hotel and its MATV system to their original, working
condition excepting normal wear and tear in sufficient time, not to exceed six
months, to provide for an orderly transition to a new vendor. OCV further agrees
that System removal shall be conducted by OCV as expeditiously as possible with
minimum or no interruption of Hotel TV or TV master antenna services offered to
guests. System removal will be handled entirely at OCV's expense.
(b) Upon termination of this Agreement, Hotel shall take all reasonable actions
necessary to allow OCV to remove the System promptly.
(c) In the event the safety of the System is threatened due to earthquake,
flood, fire, strike, civil disruption or similar causes, OCV shall be entitled
to enter upon the Hotel premises and to remove the System from danger upon
reasonable notice to Hotel and without disruption to Hotel TVs, MATV system, the
daily operations of the Hotel, or any other Hotel service.
(d) OCV agrees to coordinate System removal with the Hotel so as not to disrupt
or inconvenience the Hotel's guests or employees or the daily Hotel operations
and so as to initiate and complete
<PAGE> 17
System removal as expeditiously as possible.
18. GENERAL TERMS.
(a) This Agreement shall be governed by the laws of the State of California and
jurisdiction for any dispute shall be within the State of California.
(b) Except as otherwise set forth herein, the provisions hereof shall be binding
upon, and shall inure to the benefit of, the respective successors and assigns
of the patties hereto; provided that no assignment of this Agreement shall be
made without the express prior written consent of both parties, such consent not
to be withheld unreasonably.
(c) This Agreement may be modified or amended only by a written agreement signed
by both parties. No waiver by either party of any breach or default hereunder
shall be construed as a waiver of any precedent or subsequent breach or default.
(d) This Agreement together with Exhibits A & B, sets forth the entire agreement
and understanding of the Parties relating to the subject matter hereof, and
merges and supersedes all prior discussions and understanding between the
parties related thereto., whether written or oral.
(e) As a material inducement to Hilton entering this agreement, Hilton, in
Hiltons sole discretion may elect to apply the terms, conditions, and benefits
of this agreement to its franchise properties during the term of this agreement,
but shall have no obligation to do so.
Hilton Hotels Corporation: On Command Video Corporation:
By: /s/ Dennis Koci, VP-HCC By: Robert Snyder
Date: 4/27/93 Date: 4/27/93
<PAGE> 18
Exhibit A
to
Hilton Hotels
ON COMMAND VIDEO Agreement
On Command Video has completed the functional testing of the On Command Video
System at the ________________ Hilton Hotel, and, On Command Video deems such
installation to be complete and the System to be functional as of
_______________ (Term Commencement Date).
<PAGE> 19
Exhibit B
HILTON HOTELS
WESTERN REGION
ANAHEIM 1576
ANCHORAGE 591
LOS ANGELES 900
MINNEAPOLIS 816
NEW ORLEANS 1602
PALACIO DEL RIO 482
PASADENA 291
PORTLAND 455
SAN DIEGO 343
SEATTLE 173
CHICAGO 1543
O'HARE 858
PALMER HOUSE 1639
SAN ANTONIO 387
EASTERN REGION
ATLANTA AIRPORT 501
ATLANTA 1222
CAPITAL 541
FONTAINEBLEAU 1206
LOGAN 541
MCLEAN 458
MIAMI AIRPORT 500
PITTSBURGH 714
RYE TOWN 438
SHORT HILL 300
WASHINGTON 1123
NEW YORK 2042
WALDORF ASTORIA 1416
HAWAII/CALIF/ARIZONA
HAWAIIAN 2542
LAX 1279
KONA 431
TURTLE BAY 485
OAKLAND 362
SF AIRPORT 527
SAN FRANCISCO 1890
NEVADA REGION
RENO RESORT * 2001
SELECT HOTELS REGION
ANAHEIM/ORANGE * 230
AUBURN HILLS * 224
BRENTWOOD * 203
N.O. AIRPORT 312
NOVI 236
OAKBROOK TER 212
<PAGE> 20
PHOENIX * 226
SOUTHFIELD INN * 195
TARRYTOWN 236
VALENCIA INN 152
NEWARK AIRPORT 336
BEVERLY REGION
BEVERLY HILTON 581
* To be covered by a mutually agreeable Agreement between Hilton Hotels
Corporation and On Command Video Corporation
<PAGE> 1
EXHIBIT 10.7(c)
LETTER AGREEMENT
AUGUST 13, 1996
We agree as follows.
1. DECEMBER 8 LETTER AGREEMENT. This Agreement, together with the
other agreements delivered in connection herewith, amend, replace and supersede
in its entirety our Letter Agreement of December 8, 1995, as it has been amended
to date.
2. JULY 1995 TRANSACTION. The number of shares of On Command Video
Corporation ("OCV")common stock issued to Ascent Network Services, Inc.,
formerly known as COMSAT Video Enterprises, Inc.("CVE") pursuant to the
Contribution Agreement dated August 1, 1995 (the "CONTRIBUTION AGREEMENT")
(1,878,624 shares, as previously adjusted to reflect an inventory adjustment)
will be immediately reduced to 1,408,036 by a cancellation of 470,588 shares,
reflecting a share value for OCV at the time of $42.50 and a value of
$59,841,526 for the contributed assets net of the inventory adjustment.
3. OPTION PRICE INCREASE DATE; EXTENSION. In consideration of the
acknowledgement by Hilton Hotels Corporation ("HILTON") that Hilton has been
given notice of (i) the issuances for cash of OCV Common Stock set forth on
EXHIBIT A hereto and (ii) the issuance of OCV Common Stock in connection with
the Contribution Agreement, Hilton hereby confirms, only with respect to such
issuances, that Hilton has elected not to exercise its preemptive right set
forth in Section 5.4 of the July 7, 1993 Purchase and Option Agreement between
OCV and Hilton (as amended, the "PURCHASE AND OPTION AGREEMENT").
4. FUTURE TRANSACTIONS BETWEEN OCV AND COMSAT AND ANY OF ITS
AFFILIATES. Any material transactions in the future between OCV and CVE or any
of its affiliates (or any successor direct or indirect majority shareholder of
OCV) will be subject to the fiduciary duties of Ascent Entertainment Group, Inc.
("ASCENT") and CVE, or any such successor, as the direct and indirect majority
shareholders of OCV, including, where necessary or appropriate, the advice of
independent counsel and, to the extent the independent directors and independent
counsel deem necessary or appropriate, independent financial experts. The
parties agree that it is not necessary to retain independent counsel for OCV,
other than Wilson, Sonsini, Goodrich & Rosati, and consent to the retention of
Gary Wilson Partners ("WILSON") on behalf of Ascent and OCV, in connection with
the recently announced transaction between SpectraVision and OCV (the
"TRANSACTION"). The parties further agree that no independent financial experts
other than Wilson should be retained to represent OCV separately with respect to
such Transaction. The agreements in the preceding two sentences assume the
absence of material conflicts of interest in the Transaction between OCV on the
one hand and Ascent and its affiliates on the other hand, and that all material
facts with respect to such conflicts and the Transaction have been disclosed to
Hilton and OCV's Board of
<PAGE> 2
Directors. The covenants set forth in this paragraph shall expire upon the sale
or disposition by Hilton of all or substantially all of its shares of OCV common
stock or securities into which they are converted.
5. LIQUIDITY.
(a) RIGHT TO SELL. An investment banker selected by Hilton will,
if Hilton requests and at Hilton's expense, be engaged to attempt to locate a
buyer for Hilton's equity interests in OCV at fair market value (based on an
enterprise theory of valuation). If Hilton so requests, all of the parties
hereto agree to cooperate in respect of such sales efforts. The Right of First
Refusal Agreement is terminated as to Hilton and any assignee of its rights;
provided, however, that no sale may be made to any party that is a competitor of
OCV in hotel video services. If Ascent directly or indirectly disposes of all or
any portion of its interests in OCV to any person that is not an affiliate of
OCV, Hilton will be afforded an opportunity to dispose of a pro rata portion of
its position in OCV on the same terms.
(b) SPECTRAVISION. Hilton has received the briefing paper and
other materials supplied to the OCV Board of Directors in connection with an
August 12, 1996 meeting, subsequently rescheduled to September 4, 1996 and,
based upon such information, Hilton is favorably disposed to support the
Transaction. Concurrently with the consummation of the Transaction (the
"TRANSACTION CLOSING TIME"), unless Hilton's OCV shares (or the securities into
which such shares are converted) (including the securities issuable upon
exercise of Hilton's option, together the "HH SHARES") are registered under the
Securities Exchange Act of 1934 (the "EXCHANGE ACT") and freely tradeable under
applicable securities laws, Hilton will be granted, demand and piggyback
registration rights no less favorable than as described on page 42 of On Command
Corporation's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on August 16, 1996, to enable Hilton to register, at OCV's
expense, the HH Shares for sale without restriction. Hilton agrees that if OCV
Common Stock or securities into which it is converted is registered under the
Exchange Act in connection with the Transaction and the HH Shares are freely
tradeable, a "QUALIFYING OFFERING" under Section 2.2 of the Purchase and Option
Agreement shall be deemed to have occurred as of the Transaction Closing Time
and (i) all of OCV's obligations under Section 5 of the Purchase and Option
Agreement shall terminate, and (ii) Hilton's option to purchase OCV Common Stock
will terminate as of the Transaction Closing Time unless exercised by then, if
Hilton has received the notice contemplated by Section 2.2. OCV acknowledges
that Hilton's notice of exercise in the form attached as EXHIBIT C will comply
(subject to Hilton making the payments thereunder) with the Purchase and Option
Agreement.
(c) PUT RIGHT. If in connection with the Transaction Hilton's
option will terminate by virtue of the terms of the Purchase and Option
Agreement, and Hilton exercises such option and purchases any or all of the
shares of OCV Common Stock subject thereto (together with all securities into
which such shares may be converted, the "OPTION SHARES"), Hilton and Ascent
agree as follows. On or prior to the date 90 days after the Transaction Closing
Time (the "HH NOTICE
2
<PAGE> 3
DATE"), Hilton may give notice to Ascent requesting Ascent to purchase all, but
not less than all, of the Option Shares which Hilton still owns at the HH Notice
Date, and within five (5) business days after the HH Notice Date Ascent shall
purchase all such Option Shares at an aggregate price equal to Hilton's purchase
price of the Option Shares still owned by Hilton. Ascent represents and warrants
that it has, and will keep readily available, sufficient funds (including
borrowing capacity) to enable it to meet its obligations in this Section 5(c).
Both parties agree to act in good faith with respect to the rights and
obligations contained in the preceding sentences and not take any actions which
could reasonably be expected to artificially affect the market for the
securities subject to such rights and obligations; provided, however, that the
foregoing shall not limit Hilton's actions in connection with (i) lawful sales
of any securities it owns or (ii) other contracts with OCV.
(d) OTHER LIQUIDITY OBLIGATIONS. If the Transaction is not
consummated, Ascent and OCV will use their best efforts to provide Hilton and
the other minority shareholders of OCV, in a voluntary transaction, with
liquidity for their interests in OCV reflecting fair market value (based on an
enterprise theory of valuation). Ascent and COMSAT Corporation ("COMSAT") shall
support OCV's efforts, provided that such support shall not include any
obligation on the part of either of them to purchase any such interests for
their own accounts, or to agree to any actions on the part of OCV that could
reasonably be expected to cause COMSAT to exceed any of the regulatory debt
limitations imposed on COMSAT by the Federal Communications Commission (the
"FCC").
6. FEES AND EXPENSES. Hilton will immediately be paid $180,000
by OCV in reimbursement of Hilton's approximate fees and expenses incurred in
connection with the matters culminating in the December 8, 1995 Letter Agreement
and subsequent related matters leading to this Agreement.
7. MISCELLANEOUS PROVISIONS. This Agreement is specifically
enforceable. This agreement is governed by California law, without regard to
conflicts of law principles, but such election shall have no effect on the law
governing other transactions with OCV. No presumption of construction will exist
against the drafter of this Agreement, and the provisions of statutes or
applicable principles of law to the contrary are waived. In any legal
proceedings relating to this Agreement, the prevailing party will be entitled to
recover, in addition to any other appropriate relief, legal fees and costs. The
parties agree that for and in consideration of the covenants and obligations set
forth in this Agreement, upon the completion of the adjustments and payments
referred to in Sections 2 and 6, the parties shall enter into a Mutual Release
in the form attached hereto as EXHIBIT B. Except as expressly set forth herein
and in the Mutual Release (when it is executed), no party is waiving or
releasing any right or remedy. Nothing in this Agreement shall be deemed to
constitute a guaranty by COMSAT of the performance obligation of OCV, CVE or
Ascent, but while it is directly or indirectly the controlling stockholder of
Ascent or OCV it will support Ascent's and OCV's compliance with the terms
hereof and take no actions that would prevent Ascent's or OCV's compliance,
provided that such support shall not include any obligation
3
<PAGE> 4
on the part of COMSAT to agree to any actions on the part of Ascent or OCV which
could reasonably be expected to cause COMSAT to exceed any of the regulatory
debt limitations imposed on COMSAT by the FCC.
HILTON HOTELS CORPORATION ASCENT ENTERTAINMENT GROUP, INC.
By:_________________________ By:____________________________
Name: Name:
Title: Title:
COMSAT CORPORATION ASCENT NETWORK SERVICES, INC.
By:___________________________ By:_____________________________
Name: Name:
Title: Title:
ON COMMAND VIDEO CORPORATION
By:_____________________________
Name:
Title:
4
<PAGE> 5
EXHIBIT A TO LETTER AGREEMENT
COMMON STOCK ISSUANCES
OCV TO CVE
JULY 8, 1993 TO PRESENT
<TABLE>
<S> <C> <C> <C>
December 1993 416,667 shares @ $30.00 per share
March 1994 384,616 shares @ $32.50 per share
June 1994 357,143 shares @ $35.00 per share
July 1994 333,334 shares @ $37.50 per share
</TABLE>
Exhibit A - 1
<PAGE> 6
EXHIBIT B TO LETTER AGREEMENT
MUTUAL RELEASE
Hilton Hotels Corporation ("HILTON"), On Common Video Corporation
("OCV"), Ascent Entertainment Group, Inc. ("ASCENT"), Ascent Network Services,
Inc. (formerly COMSAT Video Enterprises, Inc. "ANS") and COMSAT Corporation
("COMSAT"), for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, covenant and agree as follows:
1. RELEASE BY HILTON. Hilton, on behalf of itself and its affiliates,
directors, officers, employees, successors and assigns, hereby fully releases
and discharges each of OCV, Ascent, ANS and COMSAT, and their respective
affiliates, directors, officers, employees, agents, and each of their respective
successors and assigns, from and against any and all claims, demands,
obligations, actions, liabilities, causes of action or damages of any kind or
nature whatsoever, in law or in equity, arising at or prior to the date of this
Mutual Release, based upon any act or omission or otherwise arising out of or
related to the contribution of assets by ANS to OCV pursuant to the Contribution
Agreement dated August 1, 1995 (the "CONTRIBUTION AGREEMENT"), the valuation of
such assets, the issuance of common stock by OCV to ANS in connection with such
contribution or pursuant to the purchases by ANS listed on EXHIBIT A hereto and
the initial public offering by Ascent of its common stock in December 1995.
2. RELEASE BY OCV, ASCENT, ANS AND COMSAT. Each of OCV, Ascent, ANS and
COMSAT, on behalf of themselves and their respective affiliates, directors,
officers, employees, agents, and each of their respective successors and
assigns, hereby fully releases and discharges Hilton, and its affiliates,
directors, officers, employees, successors and assigns, from and against any and
all claims, demands, obligations, actions, liabilities, causes of action or
damages of every kind or nature whatsoever, in law or in equity, arising at or
prior to the date of this Mutual Release, based upon any act or omission or
otherwise arising out of or related to the contribution of assets by ANS to OCV
pursuant to the Contribution Agreement, the valuation of such assets, the
issuance of common stock by OCV to ANS in connection with such contribution or
pursuant to the purchases by ANS listed on EXHIBIT A hereto, Hilton's assertion
of its rights as a securityholder of OCV, and Hilton's challenges to the IPO.
3. AUGUST 13, 1996 AGREEMENT UNAFFECTED. This Mutual Release is not
intended to release, nor does it release, Hilton, OCV, Ascent, ANS or COMSAT
from any obligations or liabilities other than as set forth in Sections 1 and 2
above and, specifically, shall not constitute a release of: (a) any obligations
they may owe to each other under the agreements among them dated as of August
13, 1996 (the "1996 AGREEMENTS"); (b) liabilities or claims for any breach of
the 1996 Agreements; or (c) any rights or remedies they have under any other
contracts or agreements between or among any of them.
Exhibit B - 1
<PAGE> 7
4. NO ADMISSION. It is specifically stated and understood that none of
Hilton, OCV, Ascent, ANS or COMSAT hereby admit any liability or culpability of
any nature, any and all such liability or culpability being expressly denied.
IN WITNESS WHEREOF the undersigned duly authorized officers have
executed this Mutual Release as of September __, 1996.
HILTON HOTELS CORPORATION ASCENT ENTERTAINMENT GROUP, INC.
_________________________ _______________________________
NAME: NAME:
TITLE: TITLE:
COMSAT CORPORATION ON COMMAND VIDEO CORPORATION
_________________________ _______________________________
NAME: NAME:
TITLE: TITLE:
ASCENT NETWORK SERVICES, INC.
________________________________
NAME:
TITLE:
Exhibit B - 2
<PAGE> 1
EXHIBIT 10.8
EXECUTION COPY
EMPLOYMENT AGREEMENT
This AGREEMENT is made as of September 11, 1996, by and
between On Command Corporation, a Delaware corporation ("NEWCO"), and Brian
Steel, an individual (the "Executive").
WHEREAS, Ascent Entertainment Group, Inc., a Delaware
corporation ("Ascent"), has entered into agreements with SpectraVision, Inc.
("SpectraVision") to combine (the "Combination") the assets and certain
liabilities of SpectraVision with the assets of Ascent's majority owned
subsidiary, On Command Video Corporation ("OCV");
WHEREAS, Ascent has created NEWCO as a holding company to own
and operate the combined assets and businesses of SpectraVision and OCV; and
WHEREAS, NEWCO desires to employ the Executive as Executive
Vice President, Chief Operating Officer and Chief Financial Officer of NEWCO,
and the Executive desires to accept such employment, on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements made herein, and intending to be legally bound hereby, NEWCO
and the Executive agree as follows:
1. Employment; Duties.
(a) Employment and Employment Period. NEWCO shall employ the
Executive to serve as Executive Vice President, Chief Operating Officer and
Chief Financial Officer of NEWCO for a period (the "Employment Period")
commencing on September 11, 1996 (the "Effective Date") and continuing
thereafter for a term of four years until the fourth anniversary of the
Effective Date unless terminated in accordance with the provisions of this
Agreement. In the event that Newco desires to extend the employment of the
Executive, it must give written notice of such desire by the third anniversary
of the Effective Date, and after such notice the parties shall enter into an
exclusive negotiation period of not less than six months, unless otherwise
mutually agreed upon by the parties in writing. Each 12 month period ending on
the anniversary date of the Effective Date is sometimes referred to herein as a
"year of the Employment Period."
<PAGE> 2
Notwithstanding the foregoing, if the Combination has not been consummated by
October 31, 1996 on terms reasonably similar to those set forth in the On
Command Corporation Registration Statement on Form S-4 filed with the Securities
and Exchange Commission on August 16, 1996, and if either party desires to
terminate this Agreement as a result of the failure to so consummate the
Combination, then the parties agree to negotiate in good faith an equitable
basis for such termination in light of all of the circumstances then existing.
(b) Offices, Duties and Responsibilities. Effective on the
Effective Date, Executive shall be elected Executive Vice President, Chief
Operating Officer and Chief Financial Officer of NEWCO. The Executive shall
report directly and solely to the Chief Executive Officer and the Board of
Directors of NEWCO (the "Board"); provided that so long as Robert M. Kavner is
Chief Executive Officer and/or Chairman of the Board, the Executive shall report
solely to Mr. Kavner and the Board. The Executive's offices initially shall be
located at OCV's present headquarters. Throughout the Employment Period, NEWCO
shall cause the Executive to be a member of the Board. The Executive shall have
all duties and authority customarily accorded a chief operating officer and
chief financial officer, including, without limitation, the lead responsibility
with full autonomy, subject to the customary authority and direction of the
Board (and the Chief Executive Officer), to direct and develop the operating
capabilities and performance of NEWCO. The Executive shall be a member of any
senior executive/management committees which may be established from time to
time by the Board. The Executive shall not be required to perform services other
than those comparable in scope, dignity and stature to those customarily
performed by chief operating officers and chief financial officers of companies
similar to NEWCO.
(c) Devotion to Interests of NEWCO. During the Employment
Period, the Executive shall render his business services solely in the
performance of his duties hereunder. The Executive shall use his best efforts to
promote the interests and welfare of NEWCO. Notwithstanding the foregoing, the
Executive shall be entitled to undertake such outside activities (e.g.,
charitable, educational, personal interests, board of directors
2
<PAGE> 3
membership, and so forth, that do not compete with the Business) as do not
unreasonably or materially interfere with the performance of his duties
hereunder as reasonably determined by the Board in consultation with the
Executive.
2. Compensation and Fringe Benefits.
(a) Base Compensation. NEWCO shall pay the Executive a base
salary ("Base Salary") at the rate of $290,000 per year during the Employment
Period with payments made in installments in accordance with NEWCO's regular
practice for compensating executive personnel, provided that in no event shall
such payments be made less frequently than twice per month. During the
Employment Period, the Base Salary of the Executive, and the aggregate of Base
Salary and target Annual Bonus (as defined in Section 2(b) below) of the
Executive, shall be the highest base salary and target Annual Bonus of any
executive or director of NEWCO, other than the Chief Executive Officer of NEWCO.
The Base Salary for the Executive shall be reviewed for increases each year
during the Employment Period commencing the second year of the Employment
Period. Any Base Salary increases shall be approved by the Board in its sole
discretion.
(b) Bonus Compensation. The Executive will be eligible to
receive bonuses ("Annual Bonus") during the Employment Period in accordance with
the following parameters: (i) the target bonus for each fiscal year during the
Employment Period shall be 70% of Base Salary for achieving 100% of the target
level for the performance measures; and (ii) the performance measures, the
relative weight to be accorded each performance measure and the amount of bonus
payable in relation to the target bonus for achieving more or less than 100% of
the target level for the performance measures shall be determined for each year
during the Employment Period by the Compensation Committee after consultation
with the Executive. As part of the consultation process set forth in the
preceding sentence the Executive shall assist NEWCO's Chief Executive Officer in
preparing, before the end of each fiscal year ending during the Employment
Period, a business plan for NEWCO with respect to at least the following three
year period. Each fiscal year the current business plan shall be considered by
the Compensation
3
<PAGE> 4
Committee as the basis for establishing the bonus standards for the Executive
for such year with such reasonable modifications as the Compensation Committee
may reasonably determine and which are consistent with this Agreement. In
addition, in connection with awarding the bonus for any fiscal year, the
Compensation Committee will consider whether the achievement of the standards
established for that year have been materially affected by circumstances beyond
the Executive's reasonable control, such as acquisitions, dispositions, or
limitations on NEWCO's ability to raise or deploy adequate capital to accomplish
the business plan approved by the Board. For the period from the Effective Date
through December 31, 1996, the Executive shall receive an Annual Bonus to be
determined in the sole discretion of the Compensation 3 Committee and which may
be equal to 70% of Base Salary pro rated for the period during which the
Executive is employed, but absent the standards described above will take into
consideration achievement of reasonable goals and objectives for such period.
During the final partial fiscal year of the Employment Period, the Annual Bonus
shall be based on the standards set by the Compensation Committee for that
fiscal year and pro rated for the period during which the Executive is employed.
(c) Fringe Benefits. The Executive also shall be entitled to
participate in group health, dental and disability insurance programs, and any
group profit sharing, deferred compensation, supplemental life insurance or
other benefit plans as are generally made available by NEWCO to the senior
executives of NEWCO on a favored nations basis, which benefits shall be
comparable, in the aggregate, to benefits available to senior executives at
similarly situated companies, provided, however, for as long as Ascent owns at
least 50% of the voting equity of NEWCO, such benefits shall not be greater in
the aggregate than those available to the senior executives of Ascent, and
specifically the President and Chief Executive Officer and Executive Vice
President, Finance and Chief Operating Officer. Such benefits in all events
shall include payment or reimbursement of (i) documented expenses reasonably
incurred in connection with travel and entertainment related to NEWCO's business
and affairs, (ii) documented expenses incurred in connection with the sale of
the Executive's homes in the greater San Francisco area and in Bronxville, New
York, the acquisition
4
<PAGE> 5
of a different home in the greater San Francisco or San Jose areas and
relocation of Executive and his family to their existing home in the greater San
Francisco area and to a new home (including from their existing home in the
greater San Francisco area) in the greater San Francisco or San Jose area (with
such expenses to include, but not be limited to, closing costs, seller's
broker's fees, interest costs associated with maintaining more than one
residence while the other residences are in the process of being sold, title
insurance, prepayment penalties and reasonable temporary living expenses, and
any losses, without regard to such expenses, on such sales not to exceed in the
aggregate $200,000)) with such similar documented expenses as described in this
subsection (ii) to be paid in connection with any subsequent relocation of the
Executive by NEWCO during the Employment Period, (iii) a monthly payment for or
reimbursement of automobile and other transportation related expenses of $1,100
per month, (iv) documented expenses reasonably incurred, for a period of one
year from the Effective Date or until the Executive has purchased and has
occupied with Executive's family a new home in the greater San Francisco or San
Jose area, whichever is earlier, in connection with (x) travel between
Executive's existing homes in the greater San Francisco area and in Bronxville,
New York and NEWCO's principal offices, and (y) local lodging expenses not
otherwise accounted for in (i) above, and (v) Executive's reasonable legal fees
and costs incurred in connection with the drafting, negotiation and execution of
this Agreement. All benefits described in the foregoing (i), (ii), (iv) and (v)
that are reportable as earned or unearned income will be "grossed up" by NEWCO
in connection with federal and state tax obligations to provide Executive with
appropriate net tax coverage, so that the benefits received by the Executive
from the foregoing clauses (i), (ii), (iv) and (v) shall be net of income and
employment taxes thereon. NEWCO reserves the right to modify or terminate from
time to time the fringe benefits provided to the senior management group,
provided that the fringe benefits provided to the Executive shall not be
materially reduced on an overall basis during the Employment Period and provided
further that the benefits provided in clauses (i) through (v) above shall not be
reduced at all. Notwithstanding the foregoing, until such time as NEWCO shall
implement group health, dental and disability insurance plans for
5
<PAGE> 6
its executives, or for a period of one year following the Combination, whichever
is less, Executive will be entitled to participate in the group health, dental,
and disability insurance plans made available to the senior management group of
OCV immediately prior to the Effective Date.
(d) [Intentionally omitted]
(e) Stock Options. NEWCO hereby grants to Executive as of the
Effective Date options ("Options") to purchase 385,312 shares of NEWCO's common
stock, par value $0.01 per share (the "Common Stock"). NEWCO will use its best
efforts to register the shares of Common Stock underlying the Options by filing
and exercising best efforts to make and keep effective for the entire period of
exercise of the Options, a Registration Statement on the pertinent form within a
reasonable period of time after the Combination. The Options shall be
exercisable at the following per-share prices: (i) eighty percent (80%) of the
Options (308,250 shares) shall be exercisable at a per-share price of $15.33 and
(ii) twenty percent (20%) of the Options (77,062 shares) shall be exercisable at
a per-share price of $17.63; provided, however, that if the average of the daily
high and low bid prices of the Common Stock on the NASDAQ Stock Exchange for the
twenty trading days following the third trading day after NEWCO's public release
of financial results for the third quarter of 1996 is less than $17.63, then the
exercise price shall be such average. The Options shall be exercisable by the
Executive according to the following schedule:
(i) with respect to 25% of the Option shares on or after
the commencement of the second year of the Employment Period;
(ii) with respect to an additional 25% of the Option
shares on or after he commencement of the third year of the Employment Period;
and
(iii) with respect to an additional 50% of the Option
shares on or after the commencement of the fourth year of the Employment Period.
6
<PAGE> 7
Notwithstanding the foregoing, 100% of the Options shall immediately vest and
become immediately exercisable, without any further action by the Executive,
upon the occurrence of any "NEWCO change of control" or a "Change of Control
Event," each as defined in Section 7(a) below, or upon the occurrence of any
event that results in NEWCO's Common Stock no longer being traded on any of the
New York Stock Exchange, American Stock Exchange or NASDAQ National Market
System (including, without limitation, as a result of any "going private"
transaction with Ascent). The Options, to the extent they remain unexercised,
shall automatically and without further notice terminate and become of no
further force and effect at the time of the earliest of the following to occur:
(x) Three months after the date upon which a termination
for cause by NEWCO (as provided in Section 5(b)) shall have become effective and
final; or
(y) Ten years after the Effective Date.
The Options shall have anti-dilution provisions identical to
those contained in the Warrant Agreement between NEWCO and the Warrant Agent
related to the Warrants, except (i) for anti-dilution provisions, if any,
related to sales of Common Stock of NEWCO to non-affiliates, and (ii) there
shall be no adjustment for dividends or distributions of cash or assets unless
the aggregate amount thereof exceeds 15% of the fair market value per share,
rather than the 5% provided in the Warrant Agreement, and the Options shall
additionally contain provisions permitting Executive's cashless exercise thereof
by paying the exercise price through the delivery of Options valued at the
difference between the exercise price of the Options delivered and the market
value of the shares of Common Stock underlying such Options. The Options shall
be represented by a stock option agreement between Executive and NEWCO
containing only terms consistent in all material respects with the provisions of
this Agreement, which stock option agreement shall be prepared by NEWCO and
presented for Executive's review at least ten (10) business days prior to the
Effective Date, shall otherwise qualify under Rule 16b-3 of the Securities and
Exchange Commission, and may be included under a Stock Option Plan adopted
7
<PAGE> 8
by NEWCO, which shall not alter the terms herein related to the option or the
Option shares. In addition, if NEWCO adopts a stock option plan that in
Executive's sole judgment provides for any term(s) more favorable to the grantee
than any term(s) set forth above, Executive will be entitled to the benefit of
such more favorable term(s) with respect to the Options, other than with respect
to the vesting schedule thereof, but in no event will any term(s) applicable to
the Options be less favorable to Executive than those set forth above.
During the Employment Period, the Executive may be granted
additional non-statutory stock options but only as determined by the
Compensation Committee in its sole discretion, provided that the Executive
acknowledges that he has been advised by NEWCO that it is NEWCO's current
intention not to issue any additional options to the Executive during the three
year period following the Effective Date. Notwithstanding any other provision of
this Agreement except Section 5(b), the Compensation Committee may provide in
its discretion that any stock options granted to the Executive which have not
vested prior to his termination of employment shall continue to vest in
accordance with their original terms as if the Executive's employment had not
terminated.
(f) Transition Loan. In order to facilitate the Executive's
early transition from the Executive's current employment, Ascent will cause a
$240,000 unsecured no interest loan (the "Transition Loan") to be made to the
Executive on the Effective Date by NEWCO. The Transition Loan will be due and
payable by the Executive on the first anniversary of the Effective Date;
provided that if the Executive is still employed by Ascent, NEWCO, OCV or any of
their successors or affiliates on such first anniversary date, or if the
Executive's employment is terminated by NEWCO other than for "cause" prior to
such date or is terminated by the Executive other than in connection with an
Executive Election Event prior to such date, then the Transition Loan will be
forgiven in its entirety.
(g) Consulting Compensation. If the Executive is still
employed by NEWCO on the date preceding the fourth anniversary of the Effective
Date, and if by such date the Executive and NEWCO
9
<PAGE> 9
have not executed a written agreement for an additional term of employment, then
the Employment Period shall expire and, in addition to and without limitation of
any rights of either party under this Agreement or otherwise, NEWCO shall retain
the Executive as a non-exclusive consultant and, as compensation for such
consulting services, shall pay the Executive an amount equal to twenty-five
percent (25%) of his then current Base Salary for an additional period of twelve
(12) months (the "Consulting Period"), and during the Consulting Period the
Executive shall continue to receive Fringe Benefits (as defined below), and to
vest in any employee stock options previously awarded to the Executive, but the
Executive shall not be entitled to receive any Base Salary increases, bonuses,
or further awards of stock options. Without limiting any of the Executive's
other rights under this Agreement or otherwise, if the Executive is still
employed by NEWCO on the date preceding the fourth anniversary of the Effective
Date and is retained as a consultant and is entitled to the compensation and
benefits set forth in the immediately preceding sentence, then such compensation
and benefits shall constitute his sole compensation resulting from the
expiration of this Agreement, and the Executive waives any claims to any
additional compensation other than as a result of NEWCO's breach of this
Agreement.
(h) Performance-Based Compensation; Conflicting Provisions.
The Executive acknowledges that NEWCO intends to administer this Agreement and
to take actions so as to comply with the requirements of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code") to ensure the Federal tax
deductibility under that section of compensation paid to the Executive pursuant
to performance-based compensation. Solely to the extent of any conflict between
the provisions of this Agreement and the provisions of any agreement between
Executive, on the one hand, and Ascent, NEWCO and/or any affiliated or related
entity of either of them, on the other hand, relating to stock options
(including the Options), life insurance, health insurance, any other employee
equity participation, profit sharing or retirement plan, group health plan or
other employee benefits (individually and collectively, together with the Ascent
stock awards, referred to herein as the "Fringe Benefits"), the provisions of
this Agreement will control.
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3. Trade Secrets; Return of Documents and Property.
(a) Executive acknowledges that during the course of his
employment he will receive secret, confidential and proprietary information
("Trade Secrets") of NEWCO and of other companies with which NEWCO does business
on a confidential basis and that Executive will create and develop Trade Secrets
for the benefit of NEWCO. Trade Secrets shall include, without limitation, (a)
literary, dramatic or other works, screenplays, stories, adaptations, scripts,
treatments, formats, scenarios, characters, titles of any kind and any rights
therein, "know-how," formulae, secret processes or machines, inventions,
computer programs (including documentation of such programs) (collectively,
"Technical Trade Secrets") and (b) matters of a business nature, such as
customer data and proprietary information about costs, profits, markets and
sales, custom databases, and other information of a similar nature to the extent
not available to the public, and plans for future development (collectively,
"Business Trade Secrets"). All Trade Secrets disclosed to or created by
Executive shall be deemed to be the exclusive property of NEWCO (as the context
may require). Executive acknowledges that Trade Secrets have economic value to
NEWCO due to the fact that Trade Secrets are not generally known to the public
or the trade and that the unauthorized use or disclosure of Trade Secrets is
likely to be detrimental to the interests of NEWCO and its subsidiaries. During
the Employment Period, Executive therefore agrees to hold in strict confidence
and not to disclose to any third party any Trade Secret acquired or created or
developed by Executive during the term of the Employment Period except (i) when
Executive is required to use or disclose any Trade Secret in the proper course
of the Executive's rendition of services to NEWCO hereunder, (ii) when such
Trade Secret becomes public knowledge other than through a breach of this
Agreement, or (iii) when Executive is required to disclose any Trade Secret
pursuant to any valid court order in which the Executive is compelled to
disclose such Trade Secret. The Executive shall notify NEWCO immediately of any
such court order in order to enable NEWCO to contest such order's validity. For
a period of two (2) years after the termination of the Employment Period for all
Business Trade Secrets and for a period of five
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(5) years after the termination of the Employment Period for all Technical Trade
Secrets, the Executive shall not use or otherwise disclose Trade Secrets unless
such information (x) becomes public knowledge or is generally known in any
industry in which NEWCO conducts business among executives comparable to the
Executive other than through a breach of this Agreement, (y) is disclosed to the
Executive by a third party who is entitled to receive and disclose such Trade
Secret, or (z) is required to be disclosed pursuant to any valid court order, in
which case the Executive shall notify NEWCO immediately of any such court order
in order to enable NEWCO to contest such order's validity.
(b) Upon the effective date of notice of the Executive's or
NEWCO's election to terminate this Agreement, or at any time upon the request of
NEWCO, the Executive (or his heirs or personal representatives) shall deliver to
NEWCO (i) all documents and materials containing or otherwise relating to Trade
Secrets or other information relating to NEWCO's business and affairs, and (ii)
all other documents, materials and other property belonging to NEWCO, which in
either case are in the possession or under the control of the Executive (or his
heirs or personal representatives). The Executive shall be entitled to keep his
personal records relating to NEWCO's business and affairs except to the extent
those contain documents or materials described in clause (i) or (ii) of the
preceding sentence, in which case Executive may retain copies for his personal
and confidential use.
4. Discoveries and Works. All discoveries and works made or
conceived by the Executive during his employment by NEWCO pursuant to this
Agreement, jointly or with others, that relate to NEWCO's activities
("Discoveries and Works") shall be owned by NEWCO, it being understood that the
Discoveries and Works referred to in this paragraph are limited to those that
are made, disclosed, reduced to tangible or written form or description, or are
reduced to practice by the Executive in the course of his performing services
for NEWCO. Discoveries and Works shall include, without limitation, literary,
dramatic or other works, screenplays, stories, adaptations, scripts, treatments,
formats, scenarios, characters, titles of any kind and any rights therein, other
works of authorship, inventions, computer programs
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(including documentation of such programs), technical improvements, processes
and drawings. The Executive shall (i) promptly notify, make full disclosure to,
and execute and deliver any documents reasonably requested by, NEWCO to evidence
or better assure title to such Discoveries and Works in NEWCO, (ii) assist NEWCO
in obtaining or maintaining for itself at its own expense United States and
foreign copyrights, trade secret protection or other protection of any and all
such Discoveries and Works, and (iii) promptly execute, whether during his
employment by NEWCO or thereafter, all applications or other endorsements
necessary or appropriate to maintain copyright and other rights for NEWCO and to
protect their title thereto. Any Discoveries and Works which, within sixty days
after the termination of the Executive's employment by NEWCO, are made,
disclosed, reduced to a tangible or written form or description, or are reduced
to practice by the Executive and which pertain to work performed by the
Executive while with NEWCO shall, as between the Executive and NEWCO be presumed
to have been made during the Executive's employment by NEWCO.
5. Termination. During the Employment Period, Executive's
employment with NEWCO may be terminated only as follows:
(a) By the Executive (an "Executive Election") at any time
upon sixty (60) days advance written notice to NEWCO upon an "Executive Election
Event" (as defined below). In such event or if the Executive's employment is
terminated by NEWCO without "cause" (as defined below), there will be no
forfeiture, penalty, reduction or other adverse effect upon any rights or
interests relating to any Fringe Benefits, all of which will fully vest, to the
extent not previously vested, immediately upon such termination becoming
effective and final. Without limiting the foregoing, in the event of an
Executive Election or if the Executive's employment is terminated without
"cause," the Executive shall be entitled to receive the following benefits
through the longer of (A) the remainder of the Employment Period as if this
Agreement had remained in effect until the end of the Employment Period and (B)
one year following the date of such termination (the "Duration Period"): (i) the
Executive's then current Base Salary; (ii) an Annual Bonus equal to seventy
percent (70%) of his then current Base Salary for each year
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during the Duration Period; and (iii) all other benefits provided pursuant to
Sections 2(c), (d) and (e) of this Agreement. The Executive shall have no
obligation to seek other employment in the event of his termination pursuant to
this paragraph (a), provided, however, that his compensation from any such
employment obtained shall offset up to fifty percent (50%) of NEWCO's
obligations under clauses (i) and (ii) above, but only after payments pursuant
to clauses (i) and (ii) are made with respect to a one year period following
termination. NEWCO shall have the option at any time during the Duration Period,
after prior written notice to the Executive, to pay to the Executive in a lump
sum the net present value, assuming a discount rate equivalent to the yield to
maturity of United States Treasury Bonds maturing on the same date as the end of
the Duration Period, of the amounts remaining under clauses (i) and (ii) of this
paragraph (a), and the amount of such lump sum payment shall be reduced by
compensation actually paid or payable to the Executive from other employment for
the time period remaining on NEWCO's payment obligation under this Agreement at
the time such payment is made on the basis set forth in the preceding sentence.
If NEWCO pays such lump sum, NEWCO shall have no further compensation payment
obligations under clauses (i) and (ii) above. The Executive shall have the right
to instruct NEWCO to decrease any such payment or any other benefit due under
this paragraph (a) to an amount not to exceed an amount to be designated by the
Executive in writing for the purpose of providing that such payment (together
with any other benefits provided to Executive) shall not constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"); provided, however, that NEWCO's agreement to decrease such
payment shall not result in any liability from NEWCO to the Executive with
respect to any excise tax under Section 4999 of the Code (or any similar state
or local provision), or any penalties or interest with respect to such excise
tax. NEWCO shall place an amount equivalent to its obligations owed to the
Executive in connection with this Section 5(a) in an escrow account to be
administered by an unrelated third party, or shall provide some other comparable
form of security (e.g., an irrevocable letter of credit) for such obligations
reasonably acceptable to the Executive. In all circumstances of termination
under this Section 5(a), NEWCO shall
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remain obligated under clause (iii) and all stock options (including the Option)
will remain exercisable for the maximum period provided in each applicable
grant.
An "Executive Election Event" shall be any of the following:
(I) any change in the reporting structure set forth in Section 1(b) above; (II)
any requirement that the Executive perform material services of lesser stature
than those typically performed by the chief operating officer or chief financial
officer of comparably sized companies; (III) any reduction in Executive's title;
(IV) a "Change of Control Event" (as defined in Section 7(a) below); provided
that in such event, the 50% offset from subsequent employment set forth in the
preceding paragraph shall be increased to 100% and such offset shall apply
during the first year after termination as well; (V) any other material default
of this Agreement which continues for ten (10) business days following NEWCO's
receipt of written notice from the Executive specifying the manner in which
NEWCO is in default of this Agreement; (VI) the Board's requiring Executive to
be based at any office location other than the principal offices of NEWCO, or
the relocation, without Executive's consent, of such principal offices to a
location outside the greater San Francisco and San Jose areas prior to the
second anniversary of the Effective Date; (VII) any purported termination of
Executive's employment otherwise than as expressly permitted by the Agreement;
(VIII) an action by the Board, without the prior written consent of the
Executive, which results in NEWCO materially diminishing the scope or magnitude
of those operations in which it is expected to engage immediately following the
Combination; or (IX) within three (3) months after the termination of Robert
Kavner as President and CEO of NEWCO by NEWCO without "cause", by reason of
death or disability or the termination of such employment by Mr. Kavner in
connection with an "Executive Election Event" (as defined in Mr. Kavner's
Employment Agreement), the Executive and the Board shall have mutually agreed
that such termination would be reasonably likely to have a materially
detrimental effect on the condition, reputation or future prospects of NEWCO or
its successor entity, the day-to-day circumstances of Executive's employment or
the compensation payable to Executive hereunder; (provided that in the event of
Mr. Kavner's death or disability (i) the Executive's
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benefits shall not exceed the benefits, excluding insurance proceeds, to which
he or his estate would be entitled upon termination for his own death or
disability and (ii) the Executive's Option shall vest ratably upon such
termination); if the Executive and the Board are unable to agree on such a
determination, the Executive shall have the right to submit the matter to
arbitration pursuant to Section 11 below, it being agreed that the arbitrator
shall award the Executive costs and attorneys' fees under Section 11(c) if the
Executive has submitted the matter to arbitration with a reasonable basis for
doing so, even if the Executive is not the prevailing party therein.
(b) By NEWCO at any time for "cause." For purposes of this
Agreement, NEWCO shall have "cause" to terminate the Executive's employment
hereunder upon (i) the continued and deliberate failure of the Executive to
perform those material duties reasonably prescribed by the Board and in
accordance with the terms of this Agreement (other than any such failure
resulting from his incapacity due to physical or mental illness), which failure
continues for ten (10) business days following the Executive's receipt of
written notice from the Board specifying those duties which the Executive is so
failing to perform, (ii) the engaging by the Executive in intentional serious
misconduct that is materially and demonstrably injurious to NEWCO or its
reputation, which misconduct, if it is reasonably capable of being cured, is not
cured by the Executive within ten (10) business days following the Executive's
receipt of written notice from the Board specifying the serious misconduct
engaged in by the Executive, (iii) the conviction of the Executive of commission
of a felony involving a crime of moral turpitude, whether or not such felony was
committed in connection with NEWCO's business, or (iv) any material breach by
the Executive of Section 8 hereof. If NEWCO shall terminate the Executive's
employment for "cause," there will be no forfeiture, penalty, reduction or other
adverse effect upon any vested rights or interests relating to any Fringe
Benefits. In such event, NEWCO, in full satisfaction of all of NEWCO's
obligations under this Agreement and in respect of the termination of the
Executive's employment with NEWCO, shall pay the Executive his Base Salary, a
prorated Annual Bonus and all other compensation, benefits and
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reimbursement through the date of termination of his employment, provided that
the Option and any other stock options granted to the Executive under the NEWCO
option or any successor plan shall terminate three months after the date of
termination of his employment for "cause".
6. Disability; Death.
(a) If, prior to the expiration or termination of the
Employment Period, the Executive shall be unable to perform substantially his
duties by reason of disability or impairment of health for at least six
consecutive calendar months, NEWCO shall have the right to terminate Executive's
employment by giving sixty (60) days written notice to the Executive to that
effect, but only if at the time such notice is given such disability or
impairment is still continuing. Following the expiration of the notice period,
(i) the Employment Period shall terminate with the payment of the Executive's
Base Salary for the month in which notice is given and a prorated Annual Bonus
through such month, (ii) there will be no forfeiture, penalty, reduction or
other adverse effect upon any vested rights or interests relating to any Fringe
Benefits and (iii) the Option shall vest in its entirety and shall remain
exercisable for its full term as if the Executive had not become disabled,
notwithstanding the limitations of Section 2(e) of this Agreement. In the event
of a dispute as to whether the Executive is disabled within the meaning of this
paragraph (a), or the duration of any disability, either party may request a
medical examination of the Executive by a doctor appointed by the Chief of Staff
of a hospital selected by mutual agreement of the parties, or as the parties may
otherwise agree, and the written medical opinion of such doctor shall be
conclusive and binding upon the parties as to whether the Executive has become
disabled and the date when such disability arose. The cost of any such medical
examinations shall be borne by NEWCO.
(b) If, prior to the expiration or termination of the
Employment Period, the Executive shall die, NEWCO shall pay to the Executive's
estate his Base Salary and a prorated Annual Bonus through the end of the month
in which the Executive's death occurred, at which time the Employment Period
shall terminate
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without further notice and there will be no forfeiture, penalty, reduction or
other adverse effect upon any vested rights or interests relating to any Fringe
Benefits; provided that upon the Executive's death the Option and any other
stock options granted to the Executive under the NEWCO option plan or any
successor plan shall become fully vested and shall terminate one year after the
date of termination of his employment for death, notwithstanding the limitations
of Section 2(e) of this Agreement.
(c) Nothing contained in this Section 6 shall impair or
otherwise affect any rights and interests of the Executive under any
compensation plan or arrangement of NEWCO which may be adopted by the Board.
7. Change of Control.
(a) If, prior to the termination of the Employment Period,
there is a "Change of Control Event" (as hereinafter defined in this paragraph
(a)), the Executive shall have the right to exercise his Executive Election in
accordance with Section 5(a), but shall not have the right to give such notice
in accordance with Section 5(a) in any event later than 120 days following such
Change of Control Event. Prior to any "change of control" (as hereinafter
defined in this paragraph (a)), and from time to time thereafter at the
Executive's request upon relevant changed circumstances in the ownership or
management of NEWCO, the Executive and the Board will mutually determine whether
such "change of control" or changed circumstances would be reasonably likely to
have a materially detrimental effect on the condition, reputation or future
prospects of NEWCO or its successor entity, the day-to-day circumstances of the
Executive's employment or the compensation payable to the Executive hereunder.
An affirmative determination with respect to any of the foregoing by the
Executive and the Board, or by an arbitrator as provided below, shall be
referred to herein as a "Change of Control Event", it being agreed that the
arbitrator shall award the Executive costs and attorneys' fees under Section
11(c) if the Executive has submitted the matter to arbitration with a reasonable
basis for doing so, even if the Executive is not the prevailing party therein.
If the Executive and the Board are unable to agree on
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such determination, the Executive shall have the right: (i) to submit to
arbitration pursuant to Section 11 below the determination of whether the
"change of control" or changed circumstances would be reasonably likely to have
any of the materially detrimental effects mentioned above, and an affirmative
determination by the arbitrator shall constitute a "Change of Control Event";
(ii) to accept continued employment with NEWCO or its successor entity on the
terms of this Agreement; or (iii) to terminate his employment by giving sixty
(60) days written notice to NEWCO to that effect. If the Executive elects to
terminate his employment pursuant to clause (iii) of this paragraph (a),
following the expiration of the notice period provided therein, the Employment
Period shall terminate with the payment of the Executive's Base Salary for the
month in which notice is given. "Change of control" for purposes of this
paragraph (a) shall mean either, any event as a result of which a single third
party, or "group" as defined in Rule 13d-3 of the Securities Exchange Act of
1934, as amended, other than Ascent or its affiliates owns more than fifty
percent (50%) of the voting stock of NEWCO (a "NEWCO change of control"), or,
any event as a result of which a single third party, or "group" (as defined
above) other than COMSAT Corporation or its affiliates directly or indirectly
owns more than fifty percent (50%) of Ascent.
(b) In the event that NEWCO adopts any "change of control"
provisions applicable to any NEWCO benefits plans, respectively, providing for
the accelerated vesting and/or payment of any benefits for its senior management
group, to the extent that such provisions give Executive greater rights than
those provided in paragraph (a) above, such provisions shall apply to the
Executive to the same extent as other NEWCO senior executives on a favored
nations basis with respect to the benefits affected by such NEWCO provisions.
8. Non-Competition.
(a) As an inducement for NEWCO to enter into this Agreement,
the Executive agrees that for a period commencing as of the Effective Date and
running through the earlier of (i) the end of the Employment Period if the
Executive remains employed by
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NEWCO for the entire Employment Period or (ii) one year following termination of
the Executive's employment by NEWCO for "cause" as defined in Section 5(b)
hereof, or by the Executive for any reason (other than an Executive Election
Event or an event described in Section 7(a)(iii) above, in which case the
provisions of this paragraph (a) shall not apply) (the "Non-Competition
Period"), the Executive shall not, without the prior written consent of the
Board, undertake employment or services for a company engaged in a business
which is or has publicly announced its intention to become directly competitive
with the business then being primarily conducted by NEWCO, with respect to any
geographic area in which NEWCO then engages in such business, if the loyal and
complete fulfillment of the duties of the competitive employment or services
would call upon Executive to reveal, to make judgments on or otherwise to use
Trade Secrets of NEWCO (as defined in Section 3 above) to which Executive had
access by reason of his employment by NEWCO.
(b) Non-Solicitation of Employees. During the Non-Competition
Period, the Executive will not (for his own benefit or for the benefit of any
person or entity other than NEWCO) solicit, or assist any person or entity other
than NEWCO to solicit, any officer, director, executive or employee (other than
an administrative or clerical employee) of NEWCO to leave his or her employment.
(c) Reasonableness; Interpretation. The Executive acknowledges
and agrees, solely for purposes of determining the enforceability of this
Section 8 (and not for purposes of determining the amount of money damages or
for any other reason), that (i) the markets served by NEWCO are national and
international and are not dependent on the geographic location of executive
personnel or the businesses by which they are employed; (ii) the length of the
Non-Competition Period is linked to the term of the Employment Period and the
severance benefit provided for in Section 5(a); and (iii) the above covenants
are manifestly reasonable on their face, and the parties expressly agree that
such restrictions have been designed to be reasonable and no greater than is
required for the protection of NEWCO. In the event that the covenants in this
Section 8 shall be determined by any court of competent jurisdiction in any
action to be
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unenforceable by reason of their extending for too great a period of time or
over too great a geographical area or by reason of their being too extensive in
any other respect, they shall be interpreted to extend only over the maximum
period of time for which they may be enforceable, and/or over the maximum
geographical area as to which they may be enforceable and/or to the maximum
extent in all other respects as to which they may be enforceable, all as
determined by such court in such action.
(d) Investment. Nothing in this Agreement shall be deemed to
prohibit the Executive from owning equity or debt investments in any
corporation, partnership or other entity which is competitive with NEWCO,
provided that such investments (i) are passive investments and constitute five
percent (5%) or less of the outstanding equity securities of such an entity the
equity securities of which are traded on a national securities exchange or other
public market, or (ii) are approved by the Board.
9. Indemnification; Liability Insurance. The Executive shall be
entitled to indemnification and coverage under NEWCO's liability insurance
policy for directors and officers to the same extent as other directors and
officers of NEWCO. During and after the term of employment, NEWCO hereby agrees
to indemnify and hold Executive harmless against any and all claims arising from
or in connection with his employment by or service to NEWCO to the full extent
permitted by law and, in connection therewith, to advance the expenses of
Executive incurred in defending against such claims subject to such limitations
as may actually be required by law.
10. Enforcement; Joint and Several Liability. The Executive
cknowledges that a breach of the covenants or provisions contained in Sections
3, 4 and 8 of this Agreement will cause irreparable damage to the Business and
NEWCO, the exact amount of which will be difficult to ascertain, and that the
remedies at law for any such breach will be inadequate. Accordingly, the
Executive agrees that if the Executive breaches or threatens to breach any of
the covenants or provisions contained in Sections 3, 4 and 8 of this Agreement,
in addition to any other remedy which may be available at law or in equity,
NEWCO shall be entitled to seek specific performance and
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injunctive relief.
11. Arbitration. (a) Subject to NEWCO's right to enforce Sections
3, 4 nd 8 hereof by an injunction issued by a court having jurisdiction (which
right shall prevail over and supersede the provisions of this Section 11), any
dispute relating to this Agreement, including the enforceability of this Section
11, arising between the Executive and NEWCO shall be settled by arbitration
which shall be conducted in the greater San Francisco and San Jose, California
area, or any other location where the Executive then resides at NEWCO's request,
before a single arbitrator in accordance with the commercial arbitration rules
of the American Arbitration Association ("AAA"). Within 90 days after the
Effective Date, the parties shall mutually agree upon three possible
arbitrators, one of whom shall be selected by the AAA within 2 days after notice
of a dispute to be arbitrated under this Section 11. The parties shall instruct
the arbitrator to use his or her best efforts to conclude the arbitration within
60 days after notice of the dispute to AAA.
(b) The award of any such arbitrator shall be final. Judgment
upon such award may be entered by the prevailing party in any federal or state
court sitting in the greater San Francisco and San Jose, California area or any
other location where the Executive then resides at NEWCO's request.
(c) Subject to Sections 7(a) and 5(a), the parties will bear
their own costs associated with arbitration and will each pay one-half of the
arbitration costs and fees of AAA; however, the arbitrator may in his sole
discretion determine that the costs of the arbitration proceedings, including
attorneys' fees, shall be paid entirely by one party to the arbitration if the
arbitrator determines that the other party is the prevailing party in such
arbitration.
12. Severability. Should any provision of this Agreement be
determined o be unenforceable or prohibited by any applicable law, such
provision shall be ineffective to the extent, and only to the extent, of such
unenforceability or prohibition without invalidating the balance of such
provision or any other provision
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of this Agreement, and any such unenforceability or prohibition in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
13. Assignment. The Executive's rights and obligations under this
greement shall not be assignable by the Executive. NEWCO's rights and
obligations under this Agreement shall not be assignable by NEWCO except as
incident to the transfer, by merger or otherwise, of all or substantially all of
the business of NEWCO. In the event of any such assignment by NEWCO, all rights
of NEWCO hereunder shall inure to the benefit of the assignee.
14. Notices. All notices and other communications which are
required or ay be given under this Agreement shall be in writing and shall be
deemed to have been duly given when received if personally delivered; when
transmitted if transmitted by telecopy, electronic or digital transmission
method, provided that in such case it shall also be sent by certified or
registered mail, return receipt requested; the day after it is sent, if sent for
next day delivery to a domestic address by recognized overnight delivery service
(e.g., Federal Express); and upon receipt, if sent by certified or registered
mail, return receipt requested. Unless otherwise changed by notice, in each case
notice shall be sent to:
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If to Executive, addressed to:
Brian Steel
387 Victoria Bay
Alameda, CA 34502
With a copy to:
Brian Steel
30 Northway
Bronxville, N.Y. 10708
And to:
Robert Adler, Esq.
Munger, Tolles & Olson
355 South Grand Ave.
35th Floor
Los Angeles, CA 90071
Telecopier No. (213)687-3702
If to NEWCO, addressed to,
On Command Corporation c/o
Ascent Entertainment Group, Inc.
1200 Seventeenth Street
Denver, CO 80202
Attention: Charlie Lyons
Telecopier No. (303) 595-0823
With a copy to:
Ascent Entertainment Group, Inc.
1200 Seventeenth Street
Denver, CO 80202
Attention: Arthur M. Aaron, Esq.
Telecopier No. (303) 595-0823
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15. Miscellaneous. This Agreement constitutes the entire
agreement, and upersedes all prior agreements, of the parties hereto relating to
the subject matter hereof, and there are no written or oral terms or
representations made by either party other than those contained herein. No
amendment, supplement, modification or waiver of this Agreement shall be binding
unless executed in writing by the party to be bound thereby. The validity,
interpretation, performance and enforcement of the Agreement shall be governed
by the laws of the State of California. The headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
/s/_______________________________
Brian Steel, Executive
ON COMMAND CORPORATION
By:___________________________
Title:
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EXHIBIT 10.9
EMPLOYMENT AND CONSULTING AGREEMENT
THIS AGREEMENT is made on November 20, 1991, between ON COMMAND VIDEO
CORPORATION, a California corporation ("Company"), and Robert Snyder ("Mr.
Snyder").
RECITALS
A. The Company is in the business of designing, manufacturing, installing,
and operating hotel pay-per-view video selection and distribution systems
allowing hotel guests to select from a large number of programs for viewing at
any time they choose.
B. Mr. Snyder has been employed by the Company on an "at-will" basis for a
number of years in a number of capacities, most recently as President and Chief
Operating Officer.
C. Mr. Snyder desires to obtain increased compensation and the other
covenants of OCV in this written Employment and Consulting Agreement, and to
assure his continued engagement by the Company, first, as an employee of the
Company, and second, as a provider of exclusive consulting services subsequent
to his employment, in order to induce Comsat Video Enterprises, Inc., a
Delaware corporation ("CVE"), to make a substantial equity investment in the
Company pursuant to a Stock Purchase Agreement dated the date of this Agreement.
D. OCV desires to secure the services and the other covenants of Mr.
Snyder in this written Employment and Consulting Agreement, and to induce CVE's
investment in OCV.
NOW, THEREFORE, in consideration of the above premises, and the terms,
covenants, and conditions set forth in this Agreement, the parties agree as
follows:
1. Engagement as Employee and Consultant
1.1 The Company hereby employs Mr. Snyder and Mr. Snyder hereby accepts
employment, upon the terms, covenants, and conditions contained in this
Agreement.
1.2 The Company hereby engages the exclusive consulting services of Mr.
Snyder, and Mr. Snyder hereby accepts an exclusive engagement as a consultant
to the Company, upon the terms, covenants, and conditions contained in this
Agreement.
2. Term
2.1 The term of Mr. Snyder's employment under this Agreement shall extend
for five years from the date of this Agreement, unless Mr. Snyder is terminated
as set forth in Paragraphs 10 or 11 (the "employment period"). On expiration of
this five-year term, any continued employment shall be at will,
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terminable by either party at any time, with or without cause, on notice to the
other.
2.2 Mr. Snyder shall provide the consulting services contemplated by this
Agreement from the date of termination of his employment for any reason
whatsoever other than pursuant to Paragraph 10, until the expiration of seven
years after the date of this Agreement (the "exclusive consulting period"). The
parties agree that their undertakings to enter the exclusive consulting
agreement are independent of the employment agreement except as to duration and
shall be performed regardless of whether the termination of the employment is
made with or without "good cause" as set forth in Paragraph 11.
3. Duties.
3.1 Mr. Snyder is hereby employed initially as President and Chief Operating
Officer. During the employment period, Mr. Snyder's duties and responsibilities
shall remain comparable to those performed by Mr. Snyder prior to this
Agreement and shall include those as may be directed by the Board of Directors
of the Company from time to time. Mr. Snyder will devote the time, energy and
skill as a full-time employee as is necessary to perform the services required
hereunder and to promote the Company's interests.
3.2 During the exclusive consulting period, Mr. Snyder shall serve as a
consultant to the Company on an exclusive basis. During the exclusive
consulting period, Mr. Snyder shall make himself available to the Company on
reasonable notice as needed for up to one hundred hours per year for
consultation on matters within his expertise. During the exclusive consulting
period, Mr. Snyder shall have the status of an independent contractor.
4. Compensation
4.1 During the employment period, the Company shall pay to Mr. Snyder in
installments to be paid monthly, a basic salary at the rate of One Hundred
Thirty Thousand Dollars ($130,000) per year, subject to review by the Company's
Board of Directors for possible increases on January 1 of each year starting
with 1993. During the employment period, Mr. Snyder also shall be eligible to
receive incentive bonus compensation based on Mr. Snyder's and the Company's
performance in accordance with an incentive bonus program to be established by
mutual agreement of Mr. Snyder and the Board of Directors.
4.2 During the exclusive consulting period, the Company shall pay to Mr.
Snyder in installments to be paid monthly, a fixed fee of Twenty Thousand
Dollars ($20,000) per year.
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5. Expenses
5.1 During the employment period, the Company shall reimburse Mr. Snyder
for all authorized traveling and entertainment expenses and other disbursements
reasonably incurred by Mr. Snyder for or on behalf of the Company in the
performance of his employment which are properly substantiated by Mr. Snyder
and are in accordance with the expense policies adopted by the Board of
Directors.
5.2 During the exclusive consulting period, the Company shall reimburse Mr.
Snyder for expenses incurred on behalf of the Company to the extent authorized
in advance in writing by the Company and properly substantiated by him.
6. Vacations
6.1 During the employment period, Mr. Snyder shall be entitled to have
reasonable non-cumulative vacations in accordance with Company policies during
each year which shall be at such times as shall be mutually agreed upon between
Mr. Snyder and the Board of Directors of the Company.
6.2 Mr. Snyder shall not be entitled to vacation benefits during the
exclusive consulting period.
7. Other Benefits
7.1 During the employment period, Mr. Snyder shall be eligible to
participate in such "benefit plans" as may be in force from time to time
throughout the Company, subject to the eligibility requirements applicable to
said plans, including but not limited to savings and deferral plans, profit
sharing plans, pension plans, group health and accident insurance and group
life insurance, if any, as determined by the Company's Board of Directors.
Nothing contained herein shall be construed as requiring the Company to provide
such other benefit plans or any of them, nor does the Company represent that
such shall be provided. If any such benefit plans are provided by the Company,
the Company reserves the right to unilaterally cancel all or any one or more of
them as provided in any document or agreement establishing such plans, and such
cancellation shall in no way be construed as breach of this Agreement by the
Company nor constitute an excuse for the failure of Mr. Snyder to continue to
comply with the requirements hereof.
7.2 Mr. Snyder shall not be entitled to any such benefits during the
exclusive consulting period.
8. Proprietary Information and Inventions; Confidentiality;
Non-Solicitation; Non-Competition
8.1 General. The parties recognize and acknowledge the industry in which
the Company is engaged is highly competitive
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and fast-changing, and that the success and continued viability of the Company
depends primarily on its ability continually to improve and develop its
services and products so that it can offer services and products that are
technologically equal to or superior to, and equally or better suited to the
needs of particular markets, than those offered by the Company's competitors,
many of whom have greater financial resources and larger sales organizations
than it. To gain and maintain this competitive position, the Company intends
that Mr. Snyder will obtain knowledge of trade secrets, developments,
discoveries, inventions, ideas and theories acquired at the expense of the
Company including through Mr. Snyder's own efforts. Mr. Snyder has been a key
person to the Company and has an intimate knowledge and thorough understanding
of this information of the Company, and the parties further recognize and agree
that the Company has a legitimate interest in protecting this information for a
limited period of time. The parties further recognize and agree that the only
practicable way to protect this information is to restrict the activities of
Mr. Snyder during the exclusive consulting period as well as during the
employment period. The parties have, therefore, agreed upon the following
covenants:
8.2 Proprietary Information and Inventions Agreement Remains in Effect. Mr.
Snyder hereby reconfirms, and shall remain bound by, his obligations under the
Proprietary Information and Inventions Agreement between the Company and Mr.
Snyder dated December 31, 1987 a copy of which is attached as Exhibit A to this
Agreement.
8.3 Exclusivity Covenant. Recognizing that the territory in which the
Company conducts business through marketing and provision of its services and
products (including businesses conducted by licensees pursuant to licenses
granted by the Company such as the Exclusive License Agreement with CVE dated
the date of this Agreement) is nationwide and worldwide in scope, and that
competitors of the Company are located in various parts of the United States of
America and in other countries, and compete with the Company in nationwide and
worldwide markets, and that within this territory, the Company (including its
licensees such as CVE) has achieved favorable identification through promotion
and marketing efforts, it is mutually acknowledged that any restriction less
than nationwide and worldwide in scope would be of little, if any, value to the
Company. Mr. Snyder, therefore, agrees that throughout the exclusive consulting
period, as well as the employment period, Mr. Snyder will not, except as
otherwise provided herein, engage or participate, directly or indirectly,
(whether as principal, agent, employee, employer, consultant, stockholder,
partner, investor, lender, or in any other individual or representative
capacity whatever) in the conduct or management of, or as an equity or debt
investor in, any business competitive with that of the Company located anywhere
within the United States or in any foreign country where the Company then
conducts business as described above. Mr. Snyder expressly agrees that these
covenants are reasonable as to
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time, geographical area and otherwise and that they are no greater than is
required for the protection of the Company. The Company will respond to
written inquiry from Mr. Snyder as to whether or not a particular market or
area is considered by the Company to be included within the territory
restricted by this covenant.
8.4 "Competitive" Business Defined. For the purposes of this Agreement, a
business shall be considered to be competitive with the business conducted by
the Company if such business is engaged in designing, manufacturing, installing,
maintaining, or operating services or products similar to: (a) any service or
product currently provided by the Company (alone or through its licensees) as of
the date of execution of this Agreement by all parties; (b) any service or
product which evolves from or results from enhancements in the ordinary course
during the exclusive consulting period, as well as the employment period, to
the services or products currently provided by the Company (alone or through
its licensees) as of the date of execution of this Agreement by all parties; or
(3) any future service or product of the Company (or its licensees) as to which
Mr. Snyder materially and substantially participates in the design,
manufacture, installation, maintenance, or operation; provided, however, that
in no event shall the services, products, or activities described Schedule 8.4
attached hereto and incorporated herein by reference as permitted activities,
if any, be considered to be competitive under this Agreement.
8.5 Non-Solicitation Covenant. During the exclusive consulting period, as
well as the employment period, Mr. Snyder will not solicit any officer,
director, executive or employee of the Company (or of its licensees) to leave
his or her employment nor will he call upon, solicit, divert or attempt to
solicit or divert from the Company any of their customers or suppliers whose
names he was aware of during the term of his employment or consulting with the
Company.
8.6 Permitted Activities. Nothing in this Agreement shall be deemed to
prohibit Mr. Snyder from calling upon or soliciting a customer or supplier of
the Company (or its licensees) during the exclusive consulting period if such
action relates solely to a business which is not competitive with the business
conducted by the Company as described in subparagraph 8.3. Furthermore,
nothing in this Agreement shall be deemed to prohibit Mr. Snyder during the
employment period or during the exclusive consulting period from owning equity
or debt investments in any corporation, partnership, or other business which is
competitive with the Company, provided such investment is described in the
attached Schedule 8.6 prior to execution by the parties, or (for investments
made after the execution of this Agreement) (a) which are passive investments
and constitute one percent (1%) or less of the outstanding equity securities of
such an entity whose equity securities are traded with the general public on a
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national securities exchange or other public market, or (b) which investments
were previously approved in writing by the Company.
9. Restriction on Transfer or Encumbrance of Stock
Mr. Snyder agrees during the term of his employment and consulting with
the Company, not to sell, transfer, encumber, or otherwise relinquish or
diminish his ownership interest in the shares of common stock of the Company
held by him at the date of this Agreement, except for (a) sales of up to twenty
percent (20%) of those shares held by Mr. Snyder at the date of this Agreement
(assuming for the purposes of this Paragraph 9 only that all options to
purchase common stock of the Company outstanding at the date of this Agreement
have been exercised) in any single calendar year for purposes of covering
extraordinary expenses of Mr. Snyder or his family (including but not limited
to educational or medical expenses, or purchasing, remodeling, or furnishing
his residence(s), etc.) which cannot be met readily from other resources
available to him, and (b) sales of such additional shares as may be permitted
by consent of the Board of Directors. Any sales shall be made in compliance
with the Right of First Refusal Agreement among Mr. Snyder, CVE, and the
Company dated the date of this Agreement.
10. Death, Disability
This Agreement shall terminate in the event of the death of Mr. Snyder.
In the event that Mr. Snyder shall become so disabled as to be incapable of
performing his duties with the Company for six (6) consecutive months
(determined as provided below), or is adjudged incompetent by a court of
competent jurisdiction, the Company may terminate this Agreement effective on
thirty (30) days' notice. Mr. Snyder's compensation and any benefits under this
Agreement shall continue until such effective date of termination. The
determination of whether Mr. Snyder has become so disabled as to be incapable
of performing his duties shall be made by the Company's Board of Directors
after seeking the advice of three physicians. The Board's determination shall
be binding on all parties.
11. Termination of Employment for Cause; Constructive Termination
11.1 The five-year employment period provided in Paragraph 2 of this Agreement
may be terminated by the vote of a majority of the Board of Directors of the
Company on notice from the Company, with obligation only for compensation up to
the date of termination, for willful malfeasance, material nonfeasance, gross
neglect having a material, adverse effect on the Company, or material breach of
paragraph 8, any of which shall constitute "good cause" for termination.
11.2 Mr. Snyder will be deemed to have been terminated by the Company other
than for good cause if he resigns from the
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Company upon the occurrence of any of the following ("constructive
termination"): (1) a material reduction in salary or benefits, (2) a material
reduction in responsibilities, or (3) a requirement to relocate, except for
office relocations that would not increase Mr. Snyder's one-way commute
distance by more than 35 miles.
11.3 As Mr. Snyder's sole and exclusive remedy for termination of employment
other than for good cause, Mr. Snyder's consulting compensation for the years
of the consulting term extending through December 31, 1996 shall be increased
to the amount of his annual basic salary in effect at the time of the
termination of his employment.
12. Remedies; Severability; Nonwaiver
12.1 Both parties understand and agree that a breach by Mr. Snyder of any of
the terms, covenants, and conditions of this Agreement will cause irreparable
damage to the Company which may not be adequately remedied solely by an action
for damages, and Mr. Snyder expressly waives the defense that a remedy in
damages will be adequate. Therefore, the Company shall be entitled to seek and
obtain an injunction from any court of competent jurisdiction, restraining any
further violation of this Agreement, in addition to any other available
remedies.
12.2 If any agreement, covenant, or other provision of this Agreement is
invalid, illegal or incapable of being enforced by reason of any rule or public
policy, all other agreements, covenants, and provisions of this Agreement,
shall, nevertheless, remain in full force and effect. If any of the rights and
restrictions contained herein shall be deemed to be unenforceable by reason of
the extent, duration or scope thereof, or otherwise, then the parties
contemplate that the court making such determination shall reduce such extent,
duration, scope, or other provisions hereof, and enforce such rights or
restrictions in their reduced form for all purposes and manner contemplated
hereby.
12.3 A party's election of any one or more remedies shall be cumulative and
shall not constitute a waiver of the party's right to pursue other available
remedies. Each party shall be entitled to offset against payments which it may
owe to the other party amounts which may become due to that party from the
other (including damages arising from breaches of obligations under this
Agreement).
12.4 Any failure by the Company to enforce any provision of this Agreement
shall not be construed as a waiver of such provision, or prevent the
enforcement of each and every other provision of this Agreement.
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13. Notice
Any communication, notice, request, demand or other communication
permitted or required to be given hereunder shall be in writing and shall be
(i) delivered personally, or (ii) by registered or certified mail or courier,
postage prepaid, return receipt requested, and addressed to Mr. Snyder at the
last address reflected in the Company's records and to the Company at its
principal office, in each case with copies to CVE c/o Robert J. Perry,
Communications Satellite Corporation, 950 L'Enfant Plaza, S.W., Washington,
D.C. 20024 and Michael F. McAllister, Comsat Video Enterprises, Inc., 22300
Comsat Drive, Clarksburg, MD 20871.
If delivered personally or by courier, the day after a communication,
notice, request, instruction or document is dispatched shall be the date on
which such delivery is made, and, if delivered by mail, three days after the
date on which such notice, communication, request, instruction or document is
deposited in the mail shall be deemed the date of delivery. A party may change
addresses for communications by prior written notice to the other party.
14. Further Acts
14.1 The parties to this Agreement agree to execute any further instruments
and to perform any further acts reasonably necessary to carry out the
provisions of this Agreement.
14.2 Return of Confidential Information and Company Property
Mr. Snyder will return to the Company upon request or upon termination
of his employment and consulting with the Company all keys, credit cards,
equipment, computer diskettes and other data storage media, documents, and
other tangible items, produced or used by Mr. Snyder or coming into his
possession by or through his contact with the Company, and which are not his
personal property. Mr. Snyder also shall return to Company any tangible
items which contain proprietary or confidential information of the Company,
including, but not limited to, the following types of information and other
information of a similar nature: discoveries; ideas; concepts; software in
various stages of development; designs, drawings; specifications; techniques;
models; data; source code, object code or modules; documentation; diagrams;
flow charts; research; development; processes; procedures; pending patents and
inventions; trade secrets; "know-how"; marketing development plans, techniques,
and materials; books and records and financial data including balance sheets
and profit and loss statements; costs of materials; identities, preferences,
and other information related to suppliers and customers; price lists and
policies.
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15. Binding Effect
All rights and obligations under this Agreement shall inure to the
benefit of and be binding upon the heirs, personal representatives, permitted
assigns, and successors of the parties.
16. Entire Agreement
This document contains the entire agreement of the parties with respect
to its subject matter, and supersedes any and all agreements or understandings,
whether written or oral, that may have been made between the parties prior to
the date of execution. This Agreement may not be changed or terminated orally,
and no change, termination or waiver of any of its provisions shall be valid,
unless in writing and signed by the party against whom such claim, termination
or waiver is sought to be enforced.
17. California Law
This Agreement shall be governed and construed in accordance with the
laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this agreement this 20th
day of November, 1991.
ROBERT SNYDER ON COMMAND VIDEO CORPORATION
/s/ Robert Snyder By: /s/
- -------------------------- --------------------------
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[ON COMMAND VIDEO LETTERHEAD]
EMPLOYMENT and CONSULTING AGREEMENT
MODIFICATION
The date of the Employment and Consulting Agreements between On Command Video
Corporation and Robert B. Fenwick and Robert Snyder is hereby changed to
January 31, 1994 from November 20, 1991.
/s/ CHARLES LYONS
- ----------------------------
Charles Lyons
for the Board of Directors
On Command Video Corporation
Dated: 3/3/94
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<PAGE> 1
EXHIBIT 23.2
DELOITTE & TOUCHE LLP CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
On Command Video Corporation
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-10407 of On Command Corporation of our report dated September 19, 1996
related to the financial statements of On Command Video Corporation as of
December 31, 1995 and 1994 and for the years then ended appearing in the
Information Statement/Prospectus, which is part of this Registration Statement,
and to the reference to us under the heading "Experts" in such Information
Statement/Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of On Command Video Corporation,
listed in Item 21. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
October 3, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 26, 1994, with respect to the financial
statements of On Command Video Corporation included in Amendment No. 3 the On
Command Corporation Registration Statement (Form S-4 No. 333-10407) and related
Information Statement/Prospectus for the registration of On Command
Corporation's common stock and warrants to purchase common stock of On Command
Corporation.
Our audit also included the financial statement schedule of On Command Video
Corporation listed in Item 21. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
October 3, 1996
<PAGE> 1
EXHIBIT 23.4
REPORT ON SCHEDULE AND CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
SpectraVision, Inc.:
The audits referred to in our report dated March 1, 1996, except as to the
second paragraph of Note 7, which is as of March 22, 1996, included the related
financial statement schedule as of December 31, 1995, and for each of the years
in the three-year period ended December 31, 1995, included in the registration
statement. This financial statement schedule is the responsibility of
SpectraVision, Inc.'s management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein. Our report contains an
explanatory paragraph that states that SpectraVision, Inc.'s filing under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court on June 8, 1995 and its expected noncompliance with certain covenants
related to its debtor-in-possession financing raise substantial doubt about
SpectraVision, Inc.'s ability to continue as a going concern. The consolidated
financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
October 3, 1996
