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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1996
REGISTRATION NO. 333-10407
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
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 AND ACTING GENERAL COUNSEL
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, 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. ("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 86.3%
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
___________________________________
_____________, 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 SEPTEMBER 26, 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. ("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, 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 _________ __, 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 ________________, 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
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. Neither On Command Corporation nor OCV has independently verified,
or assumes responsibility for the accuracy of, the SpectraVision information
contained herein.
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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
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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, 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 _______ 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 86.3% 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
----------------------
(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), the OCC Credit Facility and
indebtedness incurred in the ordinary course of business, which together shall
not exceed $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 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 to coordinate its 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 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 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, 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. Mr.
Kavner has entered into an employment agreement 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 86.3% 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 V
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.
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, 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.
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 outstanding as of September 15, 1996 (after
giving effect to the exercise by Hilton of its option to purchase OCV Common
Stock, which is expected to be exercised immediately prior to the Closing).
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 a minimum percentage to
be determined) of the outstanding OCC Common Stock, the board of directors will
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 a minimum percentage to be determined) 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 a minimum percentage to be determined) 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 V 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 ____________,
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 ____________, 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 __________ 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 &
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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. See "--Opinion of Allen &
Company."
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 certain information considered by Allen
& Company in connection with providing its oral opinion to the Ascent Board of
Directors and the OCV Board of Directors and presented to the Ascent Board of
Directors and the OCV Board of Directors (which are substantially the same
types of analyses performed by Allen & Company in connection with its Opinion):
(i) business prospects and financial condition of OCV and SpectraVision; (ii)
historical business information and financial results of OCV and SpectraVision;
(iii) financial forecasts and 1996 budget of OCV prepared by the management of
OCV; (iv) financial forecasts prepared by Salomon Brothers Inc on behalf of
SpectraVision; (v) discussions with management of OCV; (vi) trends in the
in-room entertainment, PPV and programming industries; (vii) proposed terms and
conditions of the Transactions; (vii) pro forma impact of combining OCV and
SpectraVision both from a financial and ownership perspective; (viii) publicly
available financial information of selected comparable companies in the in-room
entertainment, PPV, programming and satellite communications industries; and
(ix) various other information deemed relevant.
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
----------------
(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 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
50
<PAGE> 53
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
51
<PAGE> 54
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.
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), the OCC Credit Facility and
indebtedness incurred in the ordinary course of business which together shall
not exceed $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 to coordinate its 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 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 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.
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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<PAGE> 72
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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<PAGE> 73
SpectraVision's ten-year exclusive contract was rejected under the
Plan, and On Command Corporation entered into a new agreement with EDS for up to
45 months after the Closing.
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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<PAGE> 74
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
James A. Cronin, III........................... 41 Vice President, Acting Chief Financial Officer
and 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 and Acting General Counsel
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 and Chief Executive Officer 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.
James A. Cronin, III has been Vice President, Acting Chief Financial
Officer and Director of On Command Corporation since its formation in July 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.
Gary L. Wilson has been a Director of On Command Corporation since
September 1996. 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 has been a director of On Command Corporation since
September 1996. 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.
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 of OCV since 1987 and Chief Executive Officer of OCV since
July 1995.
Arthur M. Aaron has been Vice President and Acting General Counsel 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 prior to 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, $_______ for each attended meeting of the On Command Corporation
Board of Directors or committee thereof and each meeting held pursuant to a
special assignment. On Command Corporation also intends to reimburse directors
for ordinary and necessary out-of-pocket expenses incurred in connection with
attending meetings of the Board of Directors or its committees.
EXECUTIVE COMPENSATION
The following table shows the compensation received for the three
fiscal years ended December 31, 1995 by (i) the Vice Chairman of On Command
Corporation in his capacity as President and Chief Executive of OCV, (ii)
Richard Fenwick, Vice President, Engineering of On Command Corporation in his
capacity as Vice President, Engineering of OCV since September 1992, (iii)
Ronald Lessack, Vice President, Operations, of On Command Corporation in his
capacity as Vice President, Operations of OCV and (iv) Arthur M. Aaron, Vice
President and Acting General Counsel of On Command Corporation in his
capacity as Vice President, Business and Legal Affairs of Ascent (the officers
identified in clauses (i), (ii), (iii) and (iv) above being hereinafter referred
to as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION
NAME AND POSITION YEAR ($) ($) ($)(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 Mr. Snyder 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 Mr. Kavner have entered into an employment
agreement that expires on September 11, 2000. Pursuant to the agreement, Mr.
Kavner's base salary will be $500,000 per year, subject to increases at the
discretion of the board of directors of On Command Corporation. Mr. Kavner will
also be eligible for an annual bonus based on performance measures determined by
the Compensation Committee of the Board of Directors (the "Compensation
Committee") with a target bonus equal to 70% Mr. Kavner's base salary for
achieving 100% of the target level for the performance measures. In addition,
Mr. Kavner has been granted options to purchase 1,041,562 shares of OCC Common
Stock, exercisable at the following per-share prices: (i) 80% of the options
(833,250) shall be exercisable at a per-share price equal to $15.33 and (ii) 20%
of the options (208,312) shall be exercisable at a per-share price equal to
$17.63 per share; 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 such agreement) or (ii) one year after the agreement is
terminated as a result of Mr. Kavner's death or (iii) on September 11, 2006.
Mr. Kavner 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, Mr. Kavner's the employment agreement provides that upon a
"Change of Control Event" (as defined in such agreement), Mr. Kavner 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 Mr. Kavner'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 Mr. Kavner's
employment agreement. A "Change of Control Event" is defined in Mr. Kavner's
employment agreement as an affirmative determination, either jointly by Mr.
Kavner and the Board of Directors or pursuant to an arbitration which Mr.
Kavner 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 the day-to-day
circumstances of Mr. Kavner's employment or the compensation payable to Mr.
Kavner under his employment agreement.
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
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<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 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."
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<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 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 79.1% 17,149,766 57.2%
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).............................. 80,000 1.0 227,200 *
Robert M. Kavner (3).............................. 55,000 * -- --
Charles Lyons (5)................................. -- -- -- --
C.J. Silas (5).................................... -- -- -- --
James A. Cronin, III (3).......................... -- -- -- --
Wesley D. Minami (5).............................. -- -- -- --
Gary L. Wilson (6)................................ -- -- 3,450,000 12.2
Warren Y. Zeger................................... -- -- -- --
Arthur M. Aaron (5)............................... -- -- -- --
Richard Fenwick, Jr. (3)(4)....................... 14,500 * 38,340 *
Richard Lessack (3)(4)............................ 9,000 * 22,720 *
All executive officers and directors of OCV
as a group (12 persons)...........................
All executive officers and directors of On Command
Corporation as a group (11 persons)...............
</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 excludes shares purchaseable 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, 26,000 shares; Mr. Fenwick, 13,500 shares; and Mr.
Lessack, 8,000 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
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<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.
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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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<PAGE> 84
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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<PAGE> 85
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
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
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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
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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.
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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.
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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
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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 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 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 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 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
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<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)*
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**
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.
** To be filed by amendment.
(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 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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 September 26, 1996.
ON COMMAND CORPORATION
By: /s/ Arthur M. Aaron
---------------------------
Name: Arthur M. Aaron
Title: Vice President and Acting
General Counsel
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ *
- -------------------------------------- Chief Executive Officer September 26, 1996
Robert M. Kavener (Principal Executive Officer)
/s/ *
- -------------------------------------- Executive Vice President--Finance and September 26, 1996
James A. Cronin, III Acting Chief Operating Officer and Director
(Principal Financial Officer)
/s/ *
- -------------------------------------- Director September 26, 1996
Charles Lyons
/s/ * Director September 26, 1996
- --------------------------------------
Robert M. Kavner
/s/ Edward B. Newman
- -------------------------------------- Vice President--Finance September 26, 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> 178
EXHIBIT INDEX
-------------
<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)*
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**
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 Y) 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.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF MERGER
MERGING
ON COMMAND MERGER CORPORATION
WITH AND INTO
ON COMMAND VIDEO CORPORATION
(Pursuant to Section 251 of the General
Corporation Law of Delaware)
On Command Video Corporation, a Delaware corporation ("OCV"), and On
Command Merger Corporation ("Merger Sub") do hereby certify:
FIRST: That each of OCV and Merger Sub is incorporated pursuant
to the General Corporation Law of the State of Delaware.
SECOND: That each of OCV and Merger Sub has approved, adopted,
certified, executed and acknowledged an Agreement and Plan of Merger, dated as
of August 13, 1996 (the "Merger Agreement"), among On Command Corporation, a
Delaware corporation and the direct parent of Merger Sub ("OCC"), Merger Sub
and OCV, all in accordance with Section 251 of the General Corporation Law of
Delaware.
THIRD: That, pursuant to the Merger Agreement, Merger Sub shall
merger with and into OCV, with OCV as the surviving corporation. After giving
effect to the merger of Merger Sub with and into OCV, the separate corporate
existence of Merger Sub will cease and the Certificate of Incorporation and
Bylaws of OCV, as in effect immediately prior to the merger, will be the
Certificate of Incorporation and Bylaws of OCV as the surviving corporation.
FOURTH: That the executed Merger Agreement is on file at the
principal place of business of the OCV, as surviving corporation, located at
3301 Olcott Street, Santa Clara, California 95054; telephone (408) 496-1800.
FIFTH: That a copy of the Merger Agreement will be furnished by
OCV, as surviving corporation, on request and without cost, to any stockholder
of OCV or Merger Sub.
<PAGE> 2
IN WITNESS WHEREOF, each of OCV and Merger Sub has caused this
certificate to be signed by, in the case of OCV, Robert Snyder, its Chief
Executive Officer, and, in the case of Merger Sub, Arthur M. Aaron, its
Executive Vice President--Business and Legal Affairs, this ____ day of ______,
1996.
ON COMMAND VIDEO CORPORATION
By:
------------------------------------------
Robert Snyder
Chief Executive Officer
Attest:
By:
------------------------
ON COMMAND MERGER CORPORATION
By:
------------------------------------------
Arthur M. Aaron
Executive Vice President--Business and
Legal Affairs
Attest:
By:
-----------------------
2
<PAGE> 1
EXHIBIT 10.6
EXECUTION COPY
EMPLOYMENT AGREEMENT
This AGREEMENT is made as of September 11, 1996, by and
between On Command Corporation, a Delaware corporation ("NEWCO"), and Robert M.
Kavner, a resident of the State of California (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 President
and Chief Executive 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 President and Chief Executive 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. The Executive
may also continue to serve as a director of Ascent but would not receive any
compensation for such
<PAGE> 2
position in addition to the compensation provided in this Agreement. 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." 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, this Agreement will terminate in its entirety
and the parties will have no further obligations to each other.
(b) Offices, Duties and Responsibilities. Effective on
the Effective Date, Executive shall be elected President and Chief Executive
Officer of NEWCO. The Executive shall report directly and solely to the Board
of Directors of NEWCO (the "Board"). Throughout the Employment Period, NEWCO
shall cause Executive to be a member of the Board. In addition, the Executive
shall be a member of all committees of the Board (including any executive
committee or nominating committee) other than the Audit Committee and the
Compensation Committee, and other than any special committees on which he might
be regarded as a self-interested member. The Executive's offices initially
shall be located at OCV's present headquarters. The Executive shall have all
duties and authority customarily accorded a chief executive officer, including,
without limitation, the lead responsibility with full autonomy, subject to the
customary authority and direction of the Board, to direct and develop the
capabilities and performance of NEWCO. The Executive shall be a member and the
chairman of any senior executive/management committees which may be established
from time to time by the Board. All employees of NEWCO shall report, directly
or indirectly, to the Executive and the Executive shall have the authority to
hire and fire all such employees within established budget parameters, provided
that the Board shall approve (i) any salary actions (including hiring
decisions) for employees of NEWCO which result in an annual salary in excess of
the amount established by the Board from time to time, but in no event less
than $150,000, and (ii) any bonuses to be awarded to employees of NEWCO, in
excess of the amount established by the Board from time to time, and provided
further that the Board reserves the right to take any such salary or bonus
actions to the Compensation Committee of the Board (the
2
<PAGE> 3
"Compensation Committee") for approval. The Executive's management of NEWCO
shall be (x) in accordance with the policies of the Board and NEWCO's policies
and procedures, both as in effect from time to time, and (y) within the limits
of an annual budget for NEWCO which shall be approved by the Board at least 30
days before the beginning of the fiscal year to which such budget relates. The
annual budget shall provide adequate resources for Executive to operate the
businesses of NEWCO (the "Business") in a manner substantially consistent with
the customary day to day operations of comparable first-class businesses in the
United States. If the Executive proposes the expenditure of any amounts which
exceed the applicable annual budgets for NEWCO, such excess amounts shall not
be committed to Executive's authority unless and until specifically authorized
and approved by the Board.
(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
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 $500,000 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. 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.
3
<PAGE> 4
(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 prepare 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. The Board shall consider
and approve such plans on an annual basis, subject to such modifications as are
otherwise consistent with this Agreement, and each fiscal year the current plan
shall be considered by the Compensation Committee as the basis for establishing
the bonus standards 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
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.
4
<PAGE> 5
(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, 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 the benefits available to senior executives of
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,
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 home in Los Angeles, California, the acquisition of a
home in the greater San Francisco or San Jose areas and relocation of Executive
and his family to that area (with such expenses to include, but not be limited
to, closing costs, seller's broker's fees, title insurance, interest costs
associated with maintaining more than one residence while the other residence
is in the process of being sold, prepayment penalties and reasonable temporary
living expenses, and any loss on such sale, without regard to such expenses,
not to exceed $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 home in the greater San Francisco or San
Jose area, whichever is earlier, in connection with (x) travel between
Executive's home in Los Angeles 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
5
<PAGE> 6
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
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 and pursuant to NEWCO's Stock Option Plan, options
("Options") to purchase 1,041,562 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
6
<PAGE> 7
pertinent form within a reasonable period of time after the Combination. The
Options shall be exercisable in the following amounts at the following
per-share prices: (i) eighty percent (80%) of the Options (833,250 shares)
shall be exercisable at a per-share price 15.33 and (ii) twenty percent (20%)
of the Options (208,312 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 the 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.
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:
7
<PAGE> 8
(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 issued pursuant to a Stock
Option Plan adopted 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
8
<PAGE> 9
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) Ascent Benefits. After the Effective Date, the
Executive shall cease to participate in Ascent's Non-Employee Directors Stock
Plan, and shall forfeit any and all rights and interests under such plan;
provided, however, that the Executive shall retain the stock options and stock
awards previously granted to him thereunder, which shall continue to vest in
accordance with their original terms as long as the Executive remains employed
by NEWCO or is a member of the Ascent Board of Directors.
(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 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
9
<PAGE> 10
forth in the immediately preceding sentence, then such compensation and
benefits shall constitute the Executive's 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 parties agree to use their best efforts in the administration of Agreement
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, to the extent
possible consistent with the other terms of this Agreement and the Options, 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.
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, customer databases, and other information of a
similar nature to the
10
<PAGE> 11
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 termination
of the Employment Period for all Business Trade Secrets and for a period of
five (5) years after 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
11
<PAGE> 12
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 (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
12
<PAGE> 13
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)
his then current Base Salary; (ii) an Annual Bonus equal to seventy percent
(70%) of his then current Base Salary for each year 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
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<PAGE> 14
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 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
the Executive) shall not constitute a "parachute payment" as defined in Section
280G of 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 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 president and CEO 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
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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; or (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.
(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 reimbursement
through the date of termination of his employment, provided that the Option and
any other stock options granted to
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<PAGE> 16
the Executive under the NEWCO option or any successor plan or under Ascent's
Non-Employee Director Stock 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 without further notice and there will be no forfeiture,
penalty,
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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 the Executive's 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
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 such
determination, the Executive shall have the right: (i) to
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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 NEWCO for the entire Employment
Period or (ii) one year following
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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 unenforceable by reason of their extending for
too great a period
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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
acknowledges 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 injunctive relief.
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11. Arbitration. (a) Subject to NEWCO's right to
enforce Sections 3, 4 and 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 Section 7(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 to 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 of this Agreement, and any such
unenforceability or prohibition
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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
Agreement 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 may 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:
If to Executive, addressed to:
Robert M. Kavner
331 S. Cliffwood
Los Angeles, CA 90049
With a copy to:
Robert Adler, Esq.
Munger, Tolles & Olson
355 South Grand Ave.
35th Floor
Los Angeles, CA 90071
Telecopier No. (213)687-3702
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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) 595-0127
15. Miscellaneous. This Agreement constitutes the entire
agreement, and supersedes 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.
/THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK/
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
/s/
---------------------------
Robert M. Kavner, Executive
ON COMMAND CORPORATION
By:
---------------------------
Title:
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<PAGE> 1
EXHIBIT 10.7(a)
PURCHASE AND OPTION AGREEMENT
PURCHASE AND OPTION AGREEMENT ("Agreement"), dated as of July 7, 1993
between ON COMMAND VIDEO CORPORATION, a Delaware corporation (the "Company")
and Hilton Hotels Corporation (the "Purchaser").
The Company and the Purchaser agree as follows:
SECTION 1
PURCHASE AND SALE OF COMMON STOCK
1.1 PURCHASE AND SALE OF SHARES. The Company hereby sells and the
Purchaser hereby purchases 410,561 shares (the "Shares") of the Company's Common
Stock par value $.01 per share ("Common Stock") for a purchase price of $25.00
per Share (an aggregate of $10,264,025), payable $3,421,325 in cash
concurrently herewith and $6,842,700 by delivery of a promissory note in the
form of Exhibit 1.1 (the "Note"). The Purchaser acknowledges receipt of a
certificate representing 136,853 Shares. The Purchaser agrees that the
certificates for the remaining Shares, which are being issued concurrently
herewith, shall be held by the Company as security for payment of the Note, to
be delivered to Purchaser as set forth in the Note. The Company acknowledges
receipt of the aforesaid cash payment and of the Note.
SECTION 2
STOCK OPTION
2.1 GRANT OF OPTION. The Company grants to the Purchaser the
right and option (the "Option") to purchase up to 410,561 shares of Common
Stock (the "Option Shares") at a purchase price of $25.00 per share (as
increased, the "Purchase Price"). The Purchase Price shall increase to $27.50
on June 1, 1995, to $30.25 on June 1, 1996 and to $33.28 on June 1, 1997.
2.2 EXERCISE OF OPTION. The Option may be exercised, in whole or
in part, at any time or from time to time, from the date hereof through the
earlier of May 31, 1998 or the closing date (the "Option Termination Date") of
the Company's initial public offering netting proceeds to the Company of at
least $10 million (a "Qualifying Offering"). The Company agrees to provide
notice of such offering to the Purchaser at least 10 days prior to such
effective date. Any exercise of the Option shall
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be by means of a written notice of exercise delivered to the Company, together
with a check payable to the Company in the amount of the Purchase Price times
the number of Option Shares being purchased. A certificate or certificates
representing the Option Shares so purchased will be delivered upon receipt of
such notice and payment.
2.3 ANTI-DILUTION. If the number of issued and outstanding shares
of Common Stock changes by reason of any stock dividend, split-up,
recapitalization, merger or other change in the corporate or capital structure
of the Company and such change has the effect of diluting the Purchaser's
rights under the Option, the number of shares subject to the Option and the
Purchase Price (but not the total purchase price) shall be appropriately
adjusted so that the Purchaser shall receive upon exercise of the Option the
number and class of shares or other securities or property that the Purchaser
would have received in respect of the shares purchasable upon the exercise of
the Option if the Option had been exercised immediately prior to such event.
2.4 ASSIGNMENT. The Option granted hereunder may only be sold,
assigned, transferred or pledged by the Purchaser to a person or entity to whom
the Purchaser has transferred its entire interest in the Shares and the Option
Shares. Any such sale, assignment, transfer or pledge shall be subject to the
terms and conditions of that certain Right of First Refusal Agreement dated as
of November 20, 1991 between the Company, the Principal Stockholder and certain
other shareholders of the Company, as amended (the "Right of First Refusal
Agreement"), to which Purchaser shall hereafter be a party as set forth in
Section 6.1 below.
SECTION 3
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
The Company represents and warrants as follows:
3.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its incorporation. The Company has all requisite corporate power and
authority to carry on its business as now being conducted. True, correct and
complete copies of the charter documents and bylaws of the Company have been
delivered to Purchaser.
3.2 CORPORATE POWER AND AUTHORIZATION. The Company has the corporate
power to execute, deliver and perform this Agreement, and has taken all
necessary corporate and legal action to authorize it to enter into and perform
this Agreement. This Agreement is a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms (except
as enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting
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creditors' rights generally or by principles governing the availability of
equitable remedies).
3.3 CAPITAL STOCK. The Company has an authorized capital consisting
only of 6,000,000 shares of Common Stock, of which 3,245,047 shares are duly
and validly issued, fully paid and outstanding as of the date hereof (4,105,608
shares upon consummation of the sale of the Shares and the purchase from the
Company concurrently herewith of 450,000 shares by Comsat Video Enterprises,
Inc. (the "Principal Stockholder")). The Company has duly reserved 410,561
shares of Common Stock as Option Shares. Except as set forth in this Agreement
and in Exhibit 3.3A hereto, there are no options, warrants, calls, subscriptions
or other rights or other agreements, arrangements or commitments of any nature
obligating the Company now or at any time in the future to issue, transfer or
sell any shares of Common Stock. Except as set forth in the Right of First
Refusal Agreement, there are no preemptive rights to subscribe for or purchase
any Common Stock. A copy of the Right of First Refusal Agreement is attached
hereto as Exhibit 3.3B. The Shares and the Option Shares (a) are duly
authorized by the Articles of Incorporation of the Company to be issued in
accordance with this Agreement and (b) will be at the time of their purchase
duly and validly issued and fully paid and nonassessable and clear of any
liens, security interests, charges, encumbrances or rights of others
whatsoever. Other than as set forth in Section 5.6, there are no agreements or
understandings obligating the Company at any time to retire, redeem or
repurchase any of its equity securities.
3.4 NO VIOLATION. Neither the execution, delivery nor consummation
of this Agreement nor compliance by the Company with any of the provisions
hereof will (a) violate, conflict with or result in any breach of any provision
of its charter documents or bylaws, (b) to the knowledge of the Company result
in a violation or breach or termination of, or constitute a material default
under, any material agreement or obligation to which it is subject, or (c) to
the knowledge of the Company, violate any judgment, order, writ, injunction,
decree, award, statute, rule or regulation to which it is subject.
3.5 ACTIONS PENDING. Except as set forth in Exhibit 3.5, there is no
pending action, suit or proceeding to which the Company is a party, or to which
the property of the Company is subject, nor is any such action, suit or
proceeding, to the knowledge of the Company, threatened, that would result in
any material adverse change in the business, prospects, operations, income,
financial condition or results of operations, present or prospective, of the
Company.
3.6 OFFERING OF SECURITIES. The Shares will be issued in accordance
with all applicable provisions of law, including the provisions of the
Securities Act of 1933, as amended (the "Act") and applicable state securities
laws. The foregoing representation and warranty is made in reliance upon the
representations of Purchaser set forth in Section 4.2.
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3.7 FINANCIAL STATEMENTS. Attached hereto as Exhibit 3.7 are copies
of the audited Consolidated financial statements of the Company as at December
31, 1992, and unaudited consolidated financial statements of the Company as of
March 31, 1993. Such financial statements (including any notes and schedules
thereto) present fairly the financial position of the Company as at the date
thereof and the results of its operations for such period in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except that the unaudited financial statements are subject to
normal year-end audit adjustments and do not include footnotes). Since March
31, 1993, there has been no material adverse change in the assets, liabilities,
financial condition or results of operations of the Company reflected in such
financial statements other than those occurring in the ordinary course of
business. There is no fact known to the Company that materially and adversely
affects the business, properties, assets, operations or condition, financial or
otherwise, of the Company, that has not been disclosed by the Company to the
Purchaser or that is not set forth in the financial statements referred to in
this Section 3.7.
3.8 BROKER'S OR FINDER'S FEES. No finders or brokers fees,
commissions or compensation are payable to any person in connection with the
transactions contemplated by this Agreement.
3.9 SURVIVAL. All representations and warranties under this
Agreement shall survive the execution and delivery of this Agreement and any
investigation by the Purchaser.
SECTION 4
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants that:
4.1 AUTHORITY; BINDING AGREEMENT. The Purchaser has the legal
capacity to execute this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by the Purchaser, and constitutes a valid and binding agreement of
the Purchaser, enforceable against the Purchaser in accordance with its terms
(except as enforceability may be limited by bankruptcy, insolvency, moratorium
or other similar laws affecting creditors' rights generally or by principles
governing the availability of equitable remedies).
4.2 STOCK INTEREST INVESTMENT REPRESENTATIONS. The Purchaser
represents and warrants as set forth in Exhibit 4.2, which is incorporated
herein by this reference.
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SECTION 5
COVENANTS OF THE COMPANY
The Company covenants and agrees that until the earlier of (a) the
Company's Common Stock being publicly traded as a result of a Qualifying
Offering, (b) the Company having been acquired by another unaffiliated person
or (c) the Purchaser beneficially owning fewer than 136,854 shares of Common
Stock (or a comparable number of securities into which the Common Stock is
converted):
5.1 FINANCIAL STATEMENTS. The Company shall deliver to the Purchaser
any financial statements, reports, and other materials that are supplied or
given to directors or other shareholders, as promptly as they are so supplied.
5.2 OBSERVATION RIGHTS. Subject to the following sentence, the
Company shall permit a representative designated from time to time by the
Purchaser to attend all meetings of its Board of Directors or any Committee of
the Board in person or by conference call, and, in this respect, shall give the
Purchaser copies of all notices, minutes, consents and other materials that it
provides to its directors. Such representative may be excluded from portions
of meetings where the subject matter is issues relating to other hotel chains
or the Company's relationship with Purchaser.
5.3 INSPECTION. The Company shall permit representatives designated
by the Purchaser to visit and inspect the Company's properties, to examine the
Company's books of accounts and records and to discuss the Company's affairs,
finances and accounts with its officers, all at such reasonable times as may be
requested by the Purchaser. The Company may exclude from such inspection any
property, records or other items that, if disclosed to Purchaser, would give it
an unfair competitive advantage.
5.4 PREEMPTIVE RIGHTS. The Purchaser shall have the preemptive right,
in the proportion set forth in the following sentence, to purchase all or any
portion of shares of Common Stock of the Company, and any rights, options,
warrants or other instruments or securities exchangeable for or convertible
into Common Stock or evidencing any right to subscribe for, purchase or
otherwise acquire Common Stock, that may be issued for cash, evidences of
indebtedness or other consideration that the Purchaser is capable of delivering.
The portion of the securities that the Purchaser shall have the right to
purchase in any such issuance shall be that portion necessary to ensure that
the Purchaser shall own, after each such purchase ten percent (10%) of the
Company's total issued and outstanding Common Stock. The foregoing right shall
not apply to the 500,000 shares of Common Stock issuable under the Company's
present stock option plan.
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<PAGE> 6
5.5 CONFIDENTIALITY. The Company and its employees, officers and
directors shall keep this transaction and the Purchaser's identity hereunder
confidential and shall not disclose to any person the fact of this transaction
or the identity of the Purchaser (other than to the Company's officers,
directors, attorneys, accountants and agents who become aware of such
information in the course of the Company's business) without the express
written consent of the Purchaser except to the extent required by applicable
law and after consultation with the Purchaser.
5.6 PUT OPTION. The Purchaser may, commencing at the earlier of the
dates set forth in the following sentence, and ending on the Option Termination
Date, upon written notice delivered to the Company (the "Put Notice"), elect to
sell the Shares to the Company. The dates are (i) June 1, 1995 or (ii) the
date that Purchaser in good faith, after consultation with counsel, determines,
and notifies the Company, that its ownership of the Shares or the Option Shares
is reasonably likely directly or indirectly to jeopardize its ability to retain
any material licenses that it now holds or may hold in the future in connection
with regulated gaming activities. Upon delivering the Put Notice, the
Purchaser shall be obligated to sell, and the Company shall be obligated to buy,
such shares at a price per share equal to their purchase price plus the amount
of interest that would have accrued on the purchase price during the period
from the date the shares were initially purchased through the date the Put
Notice is delivered to the Company, at an interest rate equal to the average of
the one-year U.S. Treasury Bill rate from the date hereof through the date of
the Put Notice, compounded annually (the "Put Price"). The Put Price shall be
paid by the Company to the Purchaser as soon as reasonably practicable
following receipt by the Company of the Put Notice, but in no event later than
thirty (30) days following such receipt, by wire transfer in immediately
available funds, as directed in the Put Notice. The Company agrees that if any
other obligations to retire, redeem or repurchase equity securities are entered
into with other parties, they shall be made expressly subordinate and junior to
the Purchaser's rights hereunder, on terms satisfactory to the Purchaser.
SECTION 6
COVENANTS OF THE PURCHASER
The Purchaser covenants and agrees that until the Company's Common
Stock is either publicly traded as a result of a Qualifying Offering or the
Company been acquired by another unaffiliated person:
6.1 RIGHT OF FIRST REFUSAL AGREEMENT. By signature below, the
Purchaser agrees to be bound by the terms of the Right of First Refusal
Agreement and shall hereafter be deemed to be a "Shareholder" thereunder with
all of the rights and obligations of the Shareholders set forth therein.
Transfers of the Shares, Options or Option Shares between the Purchaser and any
of its wholly-owned (directly or indirectly) subsidiaries, or between such
subsidiaries, shall not be considered "Transfers" under the
6
<PAGE> 7
Right of First Refusal Agreement, but the transferee in each such case shall be
bound by this Agreement and the Right of First Refusal Agreement.
6.2 CONFIDENTIALITY. The Purchaser and its employees, officers and
directors shall keep this transaction, and information obtained pursuant to
rights under Section 5, confidential and shall not disclose to any person the
fact of this transaction or the identity of the Company (other than to the
Purchaser's officers, directors, attorneys, accountants and agents who become
aware of such information in the course of the Purchaser's business) without
the express written consent of the Company, except to the extent required by
applicable law and after consultation with the Company.
SECTION 7
REGISTRATION RIGHTS
7.1 "PIGGYBACK" REGISTRATION RIGHTS. If at any time the Company
proposes to register any of its Common Stock or other securities into which
the Purchaser's Shares or Option Shares have been converted (the
"Securities") under the Act, whether or not for sale for its own account, on a
form and in a manner that would permit registration of the Securities for sale
to the public under the Act, the Company shall promptly provide the Purchaser
with a reasonably detailed, written notice of such proposal. Upon the written
request of the Purchaser given within twenty (20) days after the receipt of any
such notice by the Company, the Company shall cause to be registered under the
Act all of the Securities that the Purchaser requests be registered. The
amount that the Purchaser shall be entitled to include in any such registration
may be (a) limited if, in the reasonable and good faith determination of the
managing underwriter for any such offering, such limitation is necessary in
order to enable the Company to sell securities in such offering or (b)
proportionately reduced to accommodate the registration requests of other
shareholders who have similar registration rights. If reasonably required by
the managing underwriter of any such offering, the Purchaser shall enter into
an underwriting agreement containing normal terms and provisions applicable to
all selling shareholders, but shall not be required to make representations and
warranties relating to the Company.
7.2 WITHDRAWAL. The Purchaser shall have the right to withdraw its
shares from the registration statement, but if the same relates to an
underwritten offering it may only do so during the time period and on terms
agreed upon among the underwriters for such underwritten offering.
7.3 EXPENSES. All expenses incurred by the Company or the Purchaser
in connection with a registration pursuant to this Agreement, including, but
not limited to, all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws, securities acts and fees and
disbursements of Company
7
<PAGE> 8
counsel and the Purchaser's counsel and of independent certified public
accountants of the Company (including the expenses of any special audit
required by or incident to such performance), shall be borne by the Company.
SECTION 8
CONCURRENT DELIVERIES
Concurrently herewith, the Company has delivered the following to the
Purchaser.
8.1 OPINION OF COMPANY'S COUNSEL. The legal opinion of Wilson.
Sonsini, Goodrich & Rosati, counsel for the Company, in the form attached as
Exhibit 8.1 with such firm's standard exceptions and qualifications.
8.2 LETTER AGREEMENT. The letter agreement from the Principal
Stockholder, attached as Exhibit 8.2.
SECTION 9
MISCELLANEOUS
9.1 NOTICES. Except as otherwise provided herein, all payments,
notices and other communications under this Agreement shall be in writing and
shall be personally delivered or delivered by registered or certified mail
(return receipt requested), postage prepaid, by overnight delivery service
(delivery charges prepaid) or by telecopy, mailgram or telex and shall be
deemed to be given upon delivery if delivered personally or 48 hours after
deposit in the mail or 24 hours after delivery by overnight delivery service,
telecopy, telegram or telex, addressed to the party to which such notice is
directed at the address determined as hereinafter set forth. Each notice and
other communication under this Agreement shall be addressed as follows or to
such other address as may be furnished to the other party in writing:
TO THE COMPANY: TO THE PURCHASER:
On Command Video Corporation Hilton Hotels Corporation
3301 Olcott Street
Santa Clara, California 95054
Telcopier: (408) 496-0688
Attention: Robert Snyder,
President
8
<PAGE> 9
9.2 AMENDMENTS AND WAIVERS. This Agreement may be amended or any
provision of this Agreement waived only with the written consent of the
Purchaser and the Company. The rights or remedies of the Purchaser and the
Company under this Agreement shall be cumulative and not exclusive of any
rights or remedies that the Purchaser or the Company would otherwise have and
no course Of dealing between the Company and the Purchaser nor any failure or
delay by the Purchaser or the Company in exercising any right shall operate as
a waiver of such right nor shall any single or partial exercise of any power or
right preclude its other or further exercise or the exercise of any other power
or right.
9.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof,
superseding all negotiations, prior discussions and preliminary agreements.
9.4 ASSIGNMENT. All of the provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
9.5 COUNTERPARTS. This Agreement and any amendments, waivers,
consents, or supplements may be executed in any number of counterparts, and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original but all such counterparts
together shall constitute but one and the same instrument.
9.6 HEADINGS. The headings in this Agreement are for purposes of
reference only and shall not affect the meaning or construction of any of the
provisions hereof.
9.7 SEVERABILITY. If any provision or obligation in or under this
Agreement is held to be invalid, illegal or unenforceable in any jurisdiction,
the validity, legality and enforceability of the remaining provisions, or of
such provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired.
9.8 GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of California, regardless of the law
that might be applied under conflicts of laws principles.
9.9 ATTORNEYS' FEES. The prevailing party in any controversy, claim
or dispute between the Company on the one hand and the Purchaser on the other
hand arising out of or relating to this Agreement or any of the documents
provided for herein, or the breach hereof or thereof, shall be entitled in
addition to any other appropriate relief to recover from the losing party
reasonable attorneys' fees, expenses and costs.
9
<PAGE> 10
9.10 SPECIFIC PERFORMANCE. The Company and the Purchaser agree that
irreparable damage might occur if any of the covenants set forth in this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. Each of them accordingly agrees that the other shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof, in addition to any
other remedy to which it is entitled at law or in equity.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
ON COMMAND VIDEO CORPORATION
By /s/ ROBERT SNYDER
----------------------------
Its PRESIDENT
----------------------------
HILTON HOTELS CORPORATION
By /s/
---------------------------
Its
---------------------------
10
<PAGE> 1
EXHIBIT 10.7(b)
LETTER AGREEMENT
DECEMBER 8, 1995
We agree as follows:
1. JULY 1995 TRANSACTION. The transaction reflected in the
Constribution Agreement dated August 1, 1995 pursuant to which 1,905,882 shares
of the Common Stock of On Command Video Corporation ("OCV") were issued to
COMSAT Video Enterprises, Inc. ("CVE") will be reviewed in its entirety by an
independent investment banker, assisted to the extent it deems necessary or
appropriate by independent counsel selected by it, and reasonably acceptable to
all parties hereto, with respect to the value of the consideration received by
OCV in such transaction and the value of the OCV shares. The independent
investment banker will perform its review based upon information and
circumstances existing, or that with the exercise of additional reasonable
investigation could have existed, as of the time of the transaction, and will
make recommendations as to whether such transaction should be modified with
respect to the number of shares issued to CVE. It will be
instructed to discuss Allen & Company Incorporated's ("Allen") July 1995
fairness opinion with Allen. If any recommendations would result in a
reduction in the number of OCV shares issued to CVE in the transaction, CVE
shall have the election either to pay additional cash to OCV or the minority
stockholders of OCV, to return shares to OCV or to reallocate a portion of
CVE's shares to the minority stockholders of OCV. The independent investment
banker, and the scope of its engagement, must be acceptable to all parties to
this Agreement. In any event, the review by the investment banker must be
completed not later than February 10, 1996. All parties will give complete
cooperation to the investment banker and its counsel and provided to them all
information that they reasonably require. The conclusions of the independent
investment banker will be implemented by the parties and will be binding on all
of them. In no event, however, will the number of shares of OCV issued to CVE
be increased. The reasonable fees and expenses of such review will be borne by
OCV.
2. 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 will be subject to the fiduciary duties of CVE as a majority
stockholder of OCV, including, where necessary or appropriate based upon the
advice of independent counsel to OCV, the prior approval of independent
directors of OCV, acting with the advice of independent counsel and, to the
extent the independent directors and independent counsel deem necessary or
appropriate, independent financial experts.
3. LIQUIDITY. Allen or another investment banker selected by Hilton
Hotels Corporation ("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
<PAGE> 2
(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; provided, however,
that no sale may be made to any party that is a competitor of OVC in hotel
video services. If Ascent Entertainment Group, Inc.'s Registration Statement
on Form S-1 has not been declared effective by February 10, 1996, CVE will
negotiate in good faith with Hilton with respect to further facilitating
liquidity options with respect to Hilton's equity interest in OCV. If CVE
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.
4. Miscellaneous Provisions. This Agreement is specifically
enforceable, and Hilton agrees that its sole remedy with respect to the
financial and procedural fairness of the July transaction is enforcement of the
procedures set forth herein. This agreement is governed by California law,
without regard to conflicts of laws principles, but such election shall have no
effect on the law governing the fairness of the July transaction and other
transactions with OCV. No presumption will exist against the drafter of this
Agreement, and the provisions of statues 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. Except as expressly set forth herein,
no party is waiving or releasing any right of remedy.
HILTON HOTELS CORPORATION ASCENT ENTERTAINMENT GROUP, INC.
By: /s/ WILLIAM C. LEBOU, JR. By: /s/ ARTHUR M. AARON
---------------------------- --------------------------------
Name: William C. Lebou, Jr. Name: Arthur M. Aaron
Title: Senior Vice President and Title: V.P., Business and Legal
General Counsel Affairs
COMSAT CORPORATION COMSAT VIDEO ENTERPRISES, INC.
By: By: /s/ ARTHUR M. AARON
---------------------------- --------------------------------
Name: Name: Arthur M. Aaron
Title: Title: V.P., Business and Legal
Affairs
ON COMMAND VIDEO CORPORATION
By:
-------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 11.1
ON COMMAND CORPORATION
STATEMENT REGARDING COMPUTATION OF HISTORICAL AND
PRO FORMA PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------
1995 1994 1993 1996 1995
------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
On Command Video -- Historical:
Net Income.............................................. $ 4,902 $3,456 $1,358 $ 1,624 $2,508
------- ------ ------ ------- ------
Redeemable common stock accretion....................... (641) (600) (179) (323) (334)
------- ------ ------ ------- ------
Net income applicable to common stockholders............ $ 4,261 $2,856 $1,179 $ 1,301 $2,174
======= ====== ====== ======= ======
Weighted average common shares outstanding.............. 6,181 4,938 3,500 7,278 5,399
Weighted average common equivalent shares:
Redeemable common stock............................... 411 411 199 411 411
Warrants and options.................................. 241 222 197 214 205
Total shares used in per share calculations............. $ 6,833 $5,571 $3,896 $ 7,903 $6,015
======= ====== ====== ======= ======
Net income per common and equivalent share.............. $ 0.62 $ 0.51 $ 0.30 $ 0.16 $ 0.36
======= ====== ====== ======= ======
On Command Corporation -- Pro Forma:
Net loss................................................ $(26,638) -- -- $(8,839) --
======= ====== ====== ======= ======
Total shares used in per share calculations............. 30,000 -- -- 30,000 --
------- ------ ------ ------- ------
Net loss per common and equivalent share................ $ (.79) -- -- $ (.29) --
======= ====== ====== ======= ======
</TABLE>
<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. 2 to Registration Statement No.
333-10407 of On Command Corporation of our report dated September 25, 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
September 25, 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. 2 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
September 25, 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
September 23, 1996
<PAGE> 1
EXHIBIT 99.1
April 18, 1996
Board of Directors
On Command Video Corporation
3301 Olcott Street
Santa Clara, California 95054
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a
financial point of view, to the holders of the outstanding shares of common
stock of On Command Video Corporation, a Delaware corporation (the "Company" or
"OCV"), of the terms of the proposed business combination transaction referred
to in the following paragraph (the "Combination Transaction").
We have reviewed the April 4, 1996 draft Agreement (the
"Agreement") among Ascent Entertainment Group, Inc. ("Ascent"), OCV,
SpectraVision, Inc. ("SVN") and the Official Creditors' Committee of SVN (the
"Committee"). Pursuant to the terms and conditions of the Agreement, the
parties will enter into the Combination Transaction in which the assets,
leases, operations and business of each of OCV and SVN will, pursuant to a plan
of reorganization among Ascent, OCV, SVN and the Committee, be contributed to a
newly created entity ("Newco") that will issue its capital stock to OCV and the
creditors of SVN in exchange for such assets. We understand that as a result
of the Combination Transaction, and subject to certain adjustments in the
event SVN has a net negative working capital position, OCV stockholders would
receive approximately 72.5% of the equity of Newco and creditors of SVN would
receive approximately 27.5% of the equity of Newco.
<PAGE> 2
Board of Directors
On Command Video Corporation
April 18, 1996
Page 2
We understand that all approvals required for the consummation
of the Combination Transaction have been or, prior to consummation of the
Combination Transaction, are expected to be obtained. We also understand that
the Board of Directors of the Company has requested this opinion to assist it
in its evaluation of the Combination Transaction, which was the subject of
consideration at a Board meeting held on April 18, 1996.
As you know, pursuant to the terms of the engagement letter
dated April 18, 1996 between Allen & Company Incorporated ("Allen") and Ascent,
Allen has, at the request and for the account of the Company, provided Ascent
and the Company with advice, consultation and assistance with respect to
analyzing the Combination Transaction.
In arriving at our opinion as set forth herein, we have among
other things:
(i) reviewed the terms and conditions of the
Agreement and related documentation
(excluding exhibits and schedules, which have
not been provided to us as of the date
hereof);
(ii) reviewed certain reports prepared by
management and Gary Wilson Partners,
financial advisor to Ascent and OCV ("GWP")
regarding the projected financial performance
and budgetary information for OCV and the
combined entity;
(iii) analyzed certain historical business and
financial information relating to Ascent and
OCV including non-public financial and
<PAGE> 3
Board of Directors
On Command Video Corporation
April 18, 1996
Page 3
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 SVN;
(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 GWP 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 GWP;
(vii) reviewed information regarding SVN's
relationship with Electronic Data Systems,
including certain financial and operating
assumptions supplied to us by management and
GWP, and we have been informed by management
and GWP that they believe such arrangements
are achievable;
(viii) reviewed financial information relating to
SVN including forecasts prepared by Salomon
Brothers Inc on behalf of SVN;
(ix) reviewed and analyzed publicly available
financial and transaction information of
<PAGE> 4
Board of Directors
On Command Video Corporation
April 18, 1996
Page 4
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
Newco based on management's forecasts; and
(xii) conducted such other financial analyses and
investigations as we deemed necessary or
appropriate for the purposes of the opinion
expressed herein.
<PAGE> 5
Board of Directors
On Command Video Corporation
April 18, 1996
Page 5
In rendering our opinion, we have assumed and relied upon the
accuracy and completeness of the financial and other information provided by
Ascent, OCV, GWP, and SVN to us and the representations contained in the
Agreement as well as certain information relating to the strategic objectives
of Ascent, OCV, and SVN as well as their existing business relationships,
prospects and opportunities, including without limitation SVN's relationship
with Electronic Data Systems, and we have not assumed any responsibility for
any independent verification of such information or any independent valuation
or appraisal of any of the assets of Ascent, OCV or SVN, nor have we
independently assessed the creditors' claims in the reorganization of SVN.
With respect to the financial forecasts and budgetary information referred to
above, we have assumed that they have been reasonably prepared on a basis
reflecting the best currently available information and judgments of the
management of Ascent, OCV, GWP and SVN as to the future financial performance
of Ascent, OCV and SVN.
In addition to our review and analysis of the specific
information set forth above, our opinion herein reflects and gives effect to
our assessment of general economic, monetary and market conditions existing as
of the date hereof as they may affect the business and prospects of Ascent,
OCV, SVN and Newco, as well as the conditions and trends prevailing within
their industries.
In connection with the preparation of this opinion, we have
been engaged solely for the purpose of (i) advising the Board of Directors of
Ascent and OCV with respect to its analysis of the Combination Transaction and
(ii) delivering an opinion to the Board of Directors of Ascent and OCV as to
the fairness, from a financial point of view, to stockholders of Ascent and OCV
of the consideration to be received pursuant to the terms of the Agreement. We
have assumed that the Combination Transaction would be consummated on the terms
and conditions contained in the
<PAGE> 6
Board of Directors
On Command Video Corporation
April 18, 1996
Page 6
Agreement. Although the scope of our engagement does not include an analysis
of the transaction costs that may be incurred in connection with the
Combination Transaction, including the reorganization of SVN, we have addressed
such costs in our opinion in a limited manner. We understand that the Company
has previously retained GWP as its financial advisor in the Combination
Transaction, and while our analysis included the terms of GWP's engagement as a
cost of the Combination Transaction, we have not passed upon any other aspect
of the engagement of GWP. With respect to warrants to purchase stock in Newco
issuable in the Combination Transaction, for the purpose of this opinion we
have accepted verbal representations of the Company as to how such warrants are
to be allocated among the parties to the Combination Transaction. Our opinion
reflects our familiarity with the business of Ascent, OCV and the markets for
their products and services, as well as information relating to Ascent's and
OCV's strategic objectives developed over the course of representing the
Company.
This opinion does not constitute a recommendation of the
Combination Transaction or a recommendation of any particular course of action.
Furthermore, our engagement and the opinion expressed herein are solely for the
benefit of the Board of Directors of the Company and are not intended to confer
rights or remedies upon any other person or entity.
<PAGE> 7
Board of Directors
On Command Video Corporation
April 18, 1996
Page 7
Based on and subject to the foregoing, we are of the opinion
that as of the date hereof the consideration to be received by the holders of
OCV's common stock pursuant to the terms of the Combination Transaction as set
forth in the Agreement is fair from a financial point of view to the holders of
OCV's common stock.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ Paul A. Gould
-------------------------
Paul A. Gould
Managing Director
<PAGE> 1
EXHIBIT 99.2
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 Delaware Code Section 262 (1995)
Section 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section
228 of this title shall be entitled to an appraisal by the Court of Chancery of
the fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share"
mean and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of Section 251), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to vote
at the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held of
record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its approval
the vote of the stockholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation pursuant
to Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a national market
system security on
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an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder electing
to demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section, provided
that, if the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the
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surviving or resulting corporation to all such holders of any class or series
of stock of a constituent corporation that are entitled to appraisal rights.
Such notice may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights may,
within twenty days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holders shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to
receive either notice, each constituent corporation may fix, in advance, a
record date that shall be not more than 10 days prior to the date the notice is
given; provided that, if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective date. If
no record date is fixed and the notice is given prior to the effective date,
the record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the requirements
of subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after his written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly
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verified list. The Register in Chancery, if so ordered by the Court, shall give
notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective
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date of the merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in subsection (e) of
this section, or if such stockholder shall deliver to the surviving or
resulting corporation a written withdrawal of his demand for an appraisal and
an acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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