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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 00-21315
ON COMMAND CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 77-04535194
(State of Incorporation) (IRS Employer Identification No.)
6331 SAN IGNACIO AVENUE, SAN JOSE, CALIFORNIA 95119
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code: (408) 360-4500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock NASDAQ National Market System
Series A Common Stock Purchase Warrants NASDAQ National Market System
Series B Common Stock Purchase Warrants NASDAQ National Market System
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 3, 1997, was $103,817,349 based
upon a price of $13.50 per share, which was the average of the bid and asked
prices of such stock on March 3, 1997, as reported on the NASDAQ National Market
Reporting System. As of March 3, 1997, there were 29,181,065 shares of the
Registrant's Common Stock issued and outstanding and 1,424,875 Series A
Warrants, 2,501,697 Series B Warrants, and 3,450,000 Series C Warrants (non-
registered) issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement with respect to its annual meeting
of stockholders is incorporated by reference herein.
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TABLE OF CONTENTS
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Operating and Growth Strategies . . . . . . . . . . . . . . . . . . . . . 3
Services and Products . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Installation and Service Operations . . . . . . . . . . . . . . . . . . . 5
Hotel Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Integrating Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Patents, Trademarks, and Copyrights . . . . . . . . . . . . . . . . . . . 8
International Markets . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Interactive and Other Services . . . . . . . . . . . . . . . . . . . . . . 9
Markets and Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 10
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 10. Directors and Officers of the Registrant . . . . . . . . . . . . . . . . 43
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . 43
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 43
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K . . . 43
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PART I
This Form 10-K may contain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which reflect On
Command Corporation's current judgment on those issues. Because such
statements apply to future events, they are subject to risks and uncertainties
that could cause the actual results to differ materially. Important results
which could cause actual results to differ materially are described in the
following paragraphs and are particularly noted under Business Risks on pages
19 through 22 and the Company's Amendment No. 3 to Form S-4 and the Company's
Report on Form 10-Q, as filed with the Securities and Exchange Commission.
ITEM 1. BUSINESS
INTRODUCTION
On Command Corporation (the "Company" or "OCC") is a Delaware
corporation formed by Ascent Entertainment Group, Inc. ("Ascent") for the
purpose of (i) effecting the merger (the "Merger") of On Command Video
Corporation ("OCV"), a majority-owned subsidiary of Ascent Entertainment
Group, Inc. ("Ascent"), with a wholly owned subsidiary of OCC, after which OCV
became a wholly-owned subsidiary of OCC, and (ii) effecting the acquisition
(the "Acquisition") of Spectradyne, Inc., a wholly-owned subsidiary of
SpectraVision, Inc. ("Oldco"). Following the Acquisition, Spectradyne, Inc.
changed its name to SpectraVision, Inc. ("SpectraVision"). Ascent is a
majority-owned subsidiary of Comsat Corporation ("COMSAT").
The Merger and Acquisition was effective on October 8, 1996. The
Merger has been accounted for using the historical book value of the assets,
liabilities, and stockholders' equity acquired from OCV in a manner similar to
a pooling of interests. The Acquisition was accounted for as a purchase using
the fair value of the assets acquired and liabilities assumed from
SpectraVision. Prior to the Merger and Acquisition (collectively hereafter, the
"Acquisition"), OCC had no significant operations.
As of the closing date of the Acquisition, the stockholders of OCV
received 21,750,000 shares of OCC Common Stock (72.5% of the initial OCC Common
Stock, of which Ascent received 17,149,766 shares.) In consideration for the
acquisition of the assets and properties of SpectraVision by OCC, OCC paid $4
million in cash and issued 8,041,618 shares of OCC Common Stock to the Oldco
bankruptcy estate for distribution to Oldco's creditors. Additionally, 208,382
shares were held in reserve pursuant to the Acquisition for potential
adjustments. Of these, 196,382 shares of reserve stock were subsequently
distributed to the Oldco bankruptcy estate for the benefit of Oldco's creditors
with the remaining 12,000 shares distributed to the OCV stockholders.
In connection with the Acquisition, OCC also issued warrants
representing the right to purchase a total of 7,500,000 shares of OCC Common
Stock (20% of the outstanding common stock of OCC after exercise of the
warrants). The warrants have a term of seven years and an exercise price of
$15.27 per share of OCC Common Stock. Series A warrants to purchase on a
cashless basis an aggregate of 1,425,000 shares of OCC Common Stock were issued
to the former OCV stockholders, of which Ascent received warrants to purchase
1,123,823 shares; Series B warrants to purchase for cash an aggregate of
2,625,000 shares of OCC Common Stock were issued to the Oldco bankruptcy
estate for distribution to creditors; and $4.0 million in cash was paid and
Series C warrants to purchase for cash an aggregate of 3,450,000 shares of OCC
Common Stock were issued to OCC's investment advisors in consideration for
certain banking and advisory services provided in connection with the
Acquisition.
Unless otherwise indicated, all references to "On Command
Corporation", "OCC" or the "Company" will include On Command Corporation and
its wholly-owned subsidiaries.
GENERAL
On Command Corporation, a newly-formed Delaware corporation, is a
holding company whose principal assets are OCV, SpectraVision, and On Command
Development Corporation, each of which operates as a separate, wholly-owned
subsidiary of On Command Corporation.
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On Command Video is the leading provider (by number of hotel rooms
served) of on-demand in-room video entertainment for the United States lodging
industry. The OCV system is a patented video selection and distribution system
that allows guests to select at any time, on a pay-per-view basis, from up to
50 motion pictures on computer controlled television sets located in their
rooms. OCV has experienced rapid growth in the past four years, increasing its
base of installed on-demand rooms from approximately 37,000 rooms at the end of
1992 to approximately 466,000 rooms at December 31, 1996. OCV also provides
in-room viewing of free-to-guest programming of select cable channels (such as
HBO, Showtime, the Disney Channel, 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.
At December 31, 1996, approximately 96% of OCV's installed 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 Corporation (formerly Pacific Pay Video
Limited), which is licensed to use OCV's system to provide on- demand in-room
entertainment in the Asia-Pacific region.
SpectraVision is a leading provider of interactive in-room video
entertainment services to the lodging industry. Founded in 1971,
SpectraVision's former parent, Oldco, originally developed and patented a
system which provides in-room television viewing of recently released major and
other motion pictures on a pay-per-view basis. SpectraVision subsequently
expanded its services to include providing pay-per-view motion pictures in an
on-demand format, delivering free-to-guest programming, and providing
interactive services that capitalized on SpectraVision's proprietary two-way
communications equipment. SpectraVision has been a major provider of these
services to the lodging industry since 1971 and, at December 31, 1996, provided
pay-per-view services to approximately 452,000 rooms in approximately 1,500
hotels. Like OCV, SpectraVision also provides in-room viewing of free-to-guest
programming of similar select cable channels and other interactive services.
SpectraVision provides its services under contracts to hotel chains including
Hyatt, Loews, Four Seasons, Wyndham, Stouffer, and Harvey Hotels; hotel
management companies; and individually owned and franchised hotel properties.
At December 31, 1996, approximately 78% of SpectraVision's installed
rooms were located in the United States, with the balance located in Canada,
Asia, Europe and Mexico.
On Command Development Corporation develops technologies to be used by
OCV and SpectraVision to support and enhance OCV's and SpectraVision's
operations and to develop new applications to be marketed by OCV and
SpectraVision. The operations of OCV and SpectraVision are being integrated as
of December 31, 1996, so in this document the reference to "OCC" or "On Command
Corporation" or the "Company" refers to the combined operations of these two
entities.
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 hotel guest
flexibility in choosing when to watch a movie. Typically, a guest would be
offered a choice of four to eight movies, each of which would be shown once
every two to four hours. The development of video switches (including OCV's
patented video switch) has enabled providers of pay-per-view services to offer
scheduling flexibility to the viewer. Changes in technology have also led to
the ability to provide a number of on-demand interactive services such as guest
folio review, automatic checkout, survey completion, guest messaging, and video
games. The market for in-room entertainment and information is characterized
as a highly-competitive environment among a few industry-dedicated companies,
as well as new entrants.
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OPERATING AND GROWTH STRATEGY
On Command Corporation's operating and growth strategy is to (i)
increase its installed hotel customer base by obtaining contracts with business
and luxury hotels and select mid-priced hotels without current service,
converting hotels currently served by other providers whose contracts are
expiring, and servicing hotels which are acquired or constructed by existing
customers, (ii) increase revenues and decrease costs in certain hotels acquired
in the SpectraVision acquisition by installing OCC technology offering greater
reliability, broader selection, and more viewing flexibility, (iii) create new
revenue sources through an expanding range of interactive and information
services offered to the lodging industry, and (iv) expand into foreign markets.
Prior to the Acquisition, OCV had experienced rapid growth in the past
three and one half years, increasing its base of installed rooms from
approximately 37,000 rooms in approximately 90 hotels at the end of 1992 to
approximately 466,000 rooms in approximately 1,675 hotels at December 1996.
Conversely, SpectraVision, as a result of financial constraints and its
bankruptcy filing in June 1995, had experienced deterioration in its room base.
SpectraVision's room base had decreased from approximately 1,059,000 installed
rooms in 2,543 hotels at December, 1992 to approximately 451,000 rooms in 1,469
hotels at December, 1996.
SERVICES AND PRODUCTS
Pay Per View
OCC provides scheduled and 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.
Depending on the type of system installed and the size of the hotel, guests can
choose among twenty (20) to fifty (50) different movies with an on demand system
or among eight (8) to twelve (12) movies with a scheduled system.
OCC obtains the non-exclusive rights to show recently released motion
pictures from major motion picture studios generally pursuant to a master
agreement with each studio. The license period and fee for each motion picture
are negotiated individually with each studio, which typically receives a
percentage of that picture's gross revenues generated by the pay-per-view
system. Negotiated fees are related to the popularity of the picture and the
volume of pictures licensed from a given studio. License fees typically
decline over the time the movie is played. Typically, OCC obtains rights to
exhibit major motion pictures during the "Hotel/Motel Pay-Per-View Window,"
which is the time period after initial theatrical release and before release
for home video distribution or cable television exhibition. OCC attempts to
license pictures as close as possible to a motion picture's theatrical release
date to benefit from the studios' advertising and promotional efforts. OCC
also obtains independent motion pictures, most of which are non-rated and are
intended for mature audiences, for a one-time flat fee that is nominal in
relation to the licensing fees paid for major motion pictures.
OCC provides service under contracts with hotels that generally run
for a term of five to seven years. Under these contracts, OCC installs its
system into the hotel at OCC's cost, and OCC retains ownership of all its
equipment used in providing the service. Traditionally, the hotel provides and
owns the televisions; however, based on certain economic evaluations, OCC may
provide televisions to certain hotels. OCC undertakes a significant investment
when it installs its system in a hotel property, sometimes rewiring part of the
hotel. Depending on the size of the hotel property 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, averages approximately from $400 to $700 per room, or approximately
$300 per room if the Video NOW(TM) system is used. OCC's contracts with hotels
provide that OCC will be the exclusive provider of in-room, pay-per-view
television entertainment services to the hotel and generally permit OCC 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 pay-per-view revenue
that varies depending upon the size and profitability of the system. Some
contracts also require OCC 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, OCC generally seeks to extend the
contract on terms substantially similar to the current terms.
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The revenue generated from OCC's pay-per-view 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 OCC and are set
based on the guest mix profile at each property and overall economic
conditions. Currently, OCC's movie prices typically are $8.95 for the first
purchase by the hotel guest and $4.95 for each subsequent purchase by the same
guest on the same day. The SpectraVision equipped hotels do not currently
discount second buys.
On Command Video(TM) On Demand System, the On Command Video System was
patented by OCV in 1992 and consists of a microprocessor controlling the
television in each room, a hand held remote control, and a central "head-end"
video rack and system computer located elsewhere in the hotel. Programming
signals originate from video cassette players located within the head-end rack
and are transmitted to individual rooms by way of OCV's proprietary video
switching technology. Movie starts are controlled automatically by the system
computer. The system computer also records the purchase by a guest of any
title and reports billing data to the hotel's accounting system, which posts
the charge to the guest's bill. Manual functions of the OCV equipment and
system are limited to changing video cassettes once a month, which is handled
by OCC's installation and service 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 include a list of all titles available
in the particular hotel, the list includes all movies available to the guest at
that particular time, thus eliminating the possibility of a guest being
disappointed when the guest's selection is not available. OCC markets the full
scale OCV video on demand systems to business and luxury hotels.
Video NOW(TM). 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.
SpectraVision hotels contain several products including: (i)
SpectraVision(TM), a scheduled tape-based play system; (ii) SpectraVision Guest
Theater(TM), a scheduled play system using 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(TM), the industry's only digital video
on-demand service.
Tape Based SpectraVisio(TM). SpectraVision originated a tape based
system which 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, SpectraVision typically
replaces a majority of the movies on each schedule with new features. At
December 31, 1996, SpectraVision had SpectraVision(TM) installed in 564 hotels
with a total of 161,892 rooms.
Guest Theater(TM). Guest Theater(TM) (originated by SpectraVision)
system using digital satellite delivery technology was introduced in 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
December 31, 1996, SpectraVision had Guest Theater(TM) installed in 970 hotels
with a total of 318,963 rooms.
Guest Choice(TM). In 1991, SpectraVision introduced Guest Choice(TM)
to provide hotel guests with on-demand viewing from a library of up to 200
videotapes per hotel. At December 31, 1996, Guest Choice(TM) was installed in
541 hotels with a total of 243,310 rooms, substantially all of which also offer
either SpectraVision(TM) or
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Guest Theater(TM) services. The on-demand capability significantly increases
usage of the pay-per-view service by hotel guests, and SpectraVision 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),
SpectraVision 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 uses a patented video rack designed and
manufactured by a third party.
Digital Guest Choice(TM). During 1994, SpectraVision introduced its
new digital video on-demand service, Digital Guest Choice(TM), that provides
on-demand viewing of digitally stored movies. Digital Guest Choice(TM) uses
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(TM) 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
December 31, 1996, SpectraVision had installed Digital Guest Choice(TM) in 102
hotels with a total of 56,707 rooms.
Free-To-Guest Services
OCC 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,
Showtime, CNN, ESPN, WTBS, and other cable networks. OCC provides hotels
free-to-guest services through a variety of arrangements including having the
hotel pay the company a fixed monthly fee per room for each programming channel
selected or having the price of such programming included in the Company's
other offerings.
SALES AND MARKETING
OCC's marketing efforts are focused on business and luxury hotels with
approximately 150 rooms or more, as management believes that such hotels
consistently generate the highest revenues per room in the lodging industry.
The Company also targets smaller business and luxury hotels and select
mid-priced hotels that meet its profitability criteria. On Command intends to
continue targeting established hotel chains, certain business and luxury hotel
management companies, and selected independent hotels.
INSTALLATION AND SERVICE OPERATIONS
At December 31, 1996, OCC's installation and service organization
consisted of approximately 400 installation and service personnel in the United
States and Canada. Company-employed installation and service personnel are
responsible for all of the hotel rooms served by On Command. Installation and
service personnel are responsible for system maintenance and distribution of
video cassettes. The Company's installation personnel prepare site surveys to
determine the type of equipment to be installed at each hotel, install systems,
train the hotel staff to operate the systems, and perform quality control tests.
The Company also uses local installation subcontractors supervised by full-time
Company personnel to install its systems.
OCC maintains a toll-free technical support hot line that is monitored
24 hours a day by trained support technicians. The on-line diagnostic
capability of the OCV and SpectraVision's systems enables the technician to
identify and resolve a majority of the reported system malfunctions from OCC's
service control center without visiting the hotel property. When a service
visit is required, the modular design of the OCV and SpectraVision systems
generally permits installation and service personnel to replace defective
components at the hotel site.
HOTEL CONTRACTS
On Command Corporation 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 expiration, OCC
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typically seeks to extend the term of the contract on terms competitive in the
market. At December 31, 1996, approximately 8.5% of the pay-per-view hotels
served by OCC have contracts that have expired and are on a month-to-month
basis. Approximately 9.5% of the pay-per-view hotels served by OCC have
contracts expiring in 1997.
TECHNOLOGY
OCC's product development philosophy is to design high quality
entertainment and information systems which incorporate features allowing the
Company to add system enhancements as they become commercially available and
economically viable. The high speed, two-way digital communications capability
of the OCV system enables the Company to provide advanced interactive features
such as video games in addition to basic interactive services such as video
checkout, room service ordering, and guest survey.
The Company's systems incorporate proprietary communications system
designs with commercially manufactured components and hardware such as video
cassette players, amplifiers, and computers. Because the Company's systems
generally use industry standard interfaces, OCC 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.
In 1993, SpectraVision, through its parent company Oldco, entered into
an 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(TM)
computer system which provides hotels with 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(TM). 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(TM) 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.
Upon completing the Acquisition, On Command Corporation entered into a
new agreement with EDS for the continued delivery of the satellite delivered
service for up to 45 months after the closing. After the loss of AT&T's
Telestar 401 satellite in January 1997, the satellite through which EDS
provided transmission services to SpectraVision, the Company entered into a
six-month agreement with Hughes Network Systems for transponder capacity on a
GE Americom Communications, Inc. satellite to resume the service interrupted by
the loss of Telestar 401. (See Note 14 - Subsequent Events - in the Notes
to Consolidated Financial Statements.)
SUPPLIERS
OCC contracts directly with various electronics firms for the
manufacture and assembly of its systems hardware, the design of which is
controlled by On Command Development Corporation. Historically, these
suppliers have been dependable and able to meet delivery schedules on time.
The Company believes that, in the event of a termination of any of its sources,
alternate suppliers could be located without incurring significant costs or
delays. However, certain electronic component parts used with the Company's
products are available from a limited number of suppliers and can be subject to
temporary shortages because of general economic conditions and the demand and
supply for such component parts. In addition, some of SpectraVision systems
currently installed in hotels require a high level of service and repair. As
these systems become older, sourcing replacement parts will become more
difficult. If the Company were to experience a shortage of any given electronic
part, the Company believes that alternative parts could be obtained or system
design changes could be made. In such event, the Company could experience a
temporary reduction in the rate of new installations and/or an increase in the
cost of such installations.
The head-end electronics are assembled at the Company's facilities for
testing prior to shipping. Following assembly and testing of equipment
designed specifically for a particular hotel, the system is shipped to each
location, where it is installed by OCC-employed and trained technicians,
typically assisted by independent contractors.
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<PAGE> 9
OCC, through its OCV and SpectraVision subsidiaries, maintains direct
contractual relations with various suppliers of pay-per-view and free-to-guest
programming, including the motion picture studios and programming networks.
OCC 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. [Supreme Court of the State of New York,
County of New York, Index No. 95-600849]. In addition, OCC is negotiating the
renewal of a contract with HBO which expired in June 1996, although OCC
continues to provide HBO programming under the expired contract.
INTEGRATING OPERATIONS
On Command Corporation is working towards the full integration of its
operations in support of the OCV and SpectraVision systems. Some of the work
had been completed by December 31, 1996, however, significant system
development and field support projects will continue throughout 1997, and
possibly into 1998, to complete the integration. In addition, OCC intends to
pursue the renewal or extension of hotel customers with SpectraVision equipment
by offering these customers the opportunity to obtain OCV on-demand pay-per-view
movie service and related services.
Certain of SpectraVision'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.
COMPETITION
There are several providers of in-room video entertainment to the
lodging industry, at least two of which provide on-demand pay-per-view and
free-to-guest programming and other interactive services by means of the
in-room television. Pay-per-view, the most profitable component of the
services offered, competes for a guest's time and entertainment resources with
broadcast television, free-to-guest programming, and cable television services.
In addition, there are a number of potential competitors that could use 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 SpectraVision, is the leading
provider of in-room video entertainment services and the leading provider of
in-room on-demand video entertainment services to the United States lodging
industry. OCC competes 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, OCC estimates
that, at December 31, 1996, LodgeNet served approximately 400,000 pay-per-view
rooms, of which approximately 359,000 are equipped with on-demand service. At
December 31, 1996, OCC served approximately 918,000 rooms, of which
approximately 709,000 are on-demand rooms.
Competition with respect to new pay-per-view 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 compared to outside competitors.
On Command Corporation believes its competitive advantages include (i)
technological leadership represented by its superior on-demand capability and
range of services offered, and (ii) system reliability and high quality service.
OCC believes that its growth (including OCV's growth over the previous three
years) reflects the strong competitive position of its products and services.
The OCC system offers an expansive library of on-demand movies and will allow
OCC to upgrade and add new features to the OCC system during the terms of the
pay-per-view contracts.
7
<PAGE> 10
On Command Corporation anticipates substantial competition in
obtaining new contracts with major hotel chains. The Company believes that
hotels view the provision of in-room on-demand entertainment 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, OCC believes that certain major
hotel chains have awarded contracts based primarily on the level and nature of
financial and other incentives offered by the pay-per-view service provider.
While the Company believes its competitive advantages will enable OCC to
continue to offer financial arrangements that are attractive to hotels, its
competitors may attempt to maintain or gain market share at the expense of
profitability. OCC may not always be willing to match incentives provided by
its competitors.
The communications industry is subject to rapid technological change.
New technological developments could adversely effect On Command Corporation's
operations unless it is able to provide equivalent services at competitive
prices.
REGULATION
The Federal Communications Commission (the "FCC") has broad
jurisdiction over electronic communications. The FCC does not directly
regulate On Command Corporation's pay-per-view or free-to-guest services.
However, the FCC's jurisdiction does encompass certain aspects of On Command
Corporation's operations as they relate to the offering of satellite-delivered
pay-per-view movies.
The FCC's jurisdiction also encompasses certain aspects of On Command
Corporation's operations as they relate to its use of the radio frequency
spectrum in certain hotels acquired in connection with SpectraVision.
SpectraVision had obtained optional licenses from the FCC for a number of its
downlink, television receive-only satellite receivers, which are used to
receive transmissions from communications satellites in connection with its
free-to-guest services. SpectraVision had also 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 has and will continue to alter federal,
state, and local laws and regulations for telecommunications providers and
services, and may affect On Command Corporation. 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.
PATENTS, TRADEMARKS, AND COPYRIGHTS
OCV and SpectraVision own a number of patents and patent licenses
covering various aspects of its pay-per-view and interactive systems. Although
OCV and SpectraVision maintain these patents, On Command Corporation believes
that the design, innovation, and quality of OCV's and SpectraVision's products
and their relations with their customers are at least as important, if not more
so, to the maintenance and growth of the Company. OCV and SpectraVision also own
various trade names, trademarks, service marks, and logos used in their
businesses, which OCC intends to actively protect.
INTERNATIONAL MARKETS
In addition to its operations in the United States, On Command
Corporation offers its services in Canada, Mexico, Puerto Rico, the U.S. Virgin
Islands, Hong Kong, Singapore, Thailand, Australia, the Bahamas, and certain
European countries. SpectraVision has been a leading provider of in-room video
entertainment in the Asia-Pacific region and Australia.
The Company generally experiences higher revenues and operating cash
flow per room than in the United States because of higher prices, higher buy
rate, and the lack of programming alternatives. At December 31, 1996, the
Company serviced 451 hotels with a total of 121,918 rooms located outside the
United States.
The competition to provide pay-per-view services to hotels is even more
dispersed in international markets than in the United States. Expansion of
OCC's operations into foreign markets involves certain risks that are not
8
<PAGE> 11
associated with further expansion in the United States including availability
of programming, government regulation, currency fluctuations, language
barriers, differences in signal transmission formats, local economic and
political conditions, and restriction on foreign ownership and investment.
Consequently, these risks may hinder OCC's efforts to grow its base of hotel
rooms in foreign markets.
INTERACTIVE AND OTHER SERVICES
In addition to entertainment services, OCC provides interactive
services to the lodging industry. These services generate revenues and cash
flows which are independent of viewing levels. These services use two-way
interactive communications capability of the Company's equipment 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 foreign languages. In most cases, the
interactive services are made a part of the contract for pay-per-view services
which typically runs for a term of five to seven years.
In addition to installing systems in hotels served by OCC, OCC sells
systems to certain other providers of in-room entertainment including MagiNet
Corporation (formerly Pacific Pay Video Limited), which is licensed to use
OCC's system to provide on-demand in-room entertainment in the Asia Pacific
region and at December 31, 1996, provided service to approximately 63,000 rooms.
MARKETS AND CUSTOMERS
On Command currently provides pay-per-view services to hotels that are
part of chains including Marriott, Hilton, Wyndham, Doubletree, Fairmont,
Embassy Suites, Holiday Inn, Westin, and Sheraton. SpectraVision's chain
customers include Hyatt, Loew's, Four Seasons, Wyndham, Stouffer, and Harvey
Hotels. Together, OCC serves majors chains and selected other hotels
throughout the United States, Canada, Mexico, Australia, and the Asia-Pacific
region. The following table sets forth certain information regarding the
number of hotels and rooms served by OCC as of December 31, 1996 and served by
OCV and SpectraVision combined as of December 31, 1995:
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Hotels Served:
U.S. 2,706 2,661
Non-U.S. 438 451
Rooms Served: 801,952 789,200
U.S. 115,653 121,918
Non-U.S
Revenue per Equipped $20.87/month $20.28/month
Room (RER)*
</TABLE>
- ----------------
* Average for the full year assuming both OCV and SpectraVision combined
operations.
EMPLOYEES
As of December 31, 1996, OCC employed a total of 808 persons,
including 63 in engineering, 433 in installation and service, 167 in
manufacturing, 17 in sales and 128 in management, administration and finance.
During fiscal year 1996, the vast majority of research and development efforts
have been performed by the Company's employees rather than outside consultants.
None of the Company's employees is represented by a labor union. The Company
has experienced no work stoppages and believes employee relations are good.
9
<PAGE> 12
ITEM 2. PROPERTIES
On Command Corporation currently leases its headquarters located in
San Jose, California. The headquarters contain approximately 131,000 square
feet of office, light manufacturing, and storage space. In connection with the
acquisition of SpectraVision, On Command Corporation acquired the SpectraVision
headquarters building in Richardson, Texas which contains approximately 84,000
square feet of office, light manufacturing, and storage space. It also
acquired other leased space throughout the United States, Canada, Mexico,
Puerto Rico, Hong Kong, and Australia which housed SpectraVision's customer
support operations. The Company's properties are suitable and adequate for the
Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
On Command Corporation, or its operating entities, is a defendant and
may be a potential defendant, in lawsuits and claims arising in the ordinary
course of business. While the outcomes of such claims, lawsuits, or other
proceedings cannot be predicted with certainty, management expects that such
liability, to the extent not provided for by insurance or otherwise, will not
have a material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G to the Annual Report on Form
10-K, included herein is the following table, which sets forth the names, ages,
at March 1, 1997, and titles of executive officers of the Company, and
biographical information with respect to such officers.
<TABLE>
<CAPTION>
Name Age Position
----------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Robert M. Kavner . . . . . . . . . . . . 53 President, Chief Executive Officer, and Director
Brian A.C. Steel . . . . . . . . . . . . 37 Executive Vice President, Chief Financial Officer,
Chief Operating Officer, and Director
Robert Snyder . . . . . . . . . . . . . . 60 Vice Chairman (not a director)
Richard C. Fenwick, Jr. . . . . . . . . . 39 Senior Vice President, Engineering
Ronald D. Lessack . . . . . . . . . . . . 49 Senior Vice President, Operations
Paul J. Milley . . . . . . . . . . . . . 43 Senior Vice President, Finance
Jill E. Fishbein . . . . . . . . . . . . 35 Senior Vice President, Legal, General Counsel,
and Secretary
Jean A. deVera . . . . . . . . . . . . . 47 Vice President, National Accounts
Edward B. Neumann . . . . . . . . . . . . 60 Vice President, Finance
Richard A. Swift . . . . . . . . . . . . 45 Vice President, Sales
</TABLE>
Robert M. Kavner has been President, Chief Executive Officer, and
Director of On Command Corporation since 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
10
<PAGE> 13
Vice President of AT&T Corp. ("AT&T") and Chief Executive Officer of AT&T's
Multimedia Products and Services Group. He was also a member of AT&T's
Management Executive Committee. From 1992 to 1994, Mr. Kavner was Group
Executive for Communications Products Group of AT&T. From 1988 to 1991, Mr.
Kavner was President of AT&T's Data Systems Group. Mr. Kavner is also a
director of the Fleet Financial Corp. and Tandem Computers, Incorporated.
Brian A.C. Steel has been Executive Vice President, Chief Financial
Officer, and Chief Operating Officer of On Command Corporation since September
1996 and a Director of On Command Corporation since October 1996. Prior
thereto, Mr. Steel was Executive Vice President, Strategic Development, and
Chief Financial Officer for TELE-TV since August 1995. Prior to joining
TELE-TV, Mr. Steel was Vice President, Strategic Development of Pacific Telesis
Enhanced Services, General Manager of Pacific Telesis Electronic Publishing
Services, and Executive Director, Corporate Development of Pacific Telesis
Group from January 1994 to July 1995. Prior to joining Pacific Telesis, Mr.
Steel was a principal in Conversion Management Associates from January 1993 to
December 1993. From June 1986 to December 1992, Mr. Steel was employed by
Shearson Lehman Brothers Inc. as Senior Vice President, Real Estate Merchant
Banking Group and First Vice President, E.F. Hutton Properties.
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 was
President and a Director of OCV from 1987 to October 1996 and Chief Executive
Officer of OCV from July 1995 to October 1996.
Richard C. Fenwick, Jr. has been Senior Vice President of Engineering
since December 1996 and was named Vice President, Engineering of On Command
Corporation in September 1996. Mr. Fenwick had 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 D. Lessack has been Senior Vice President, Operations since
December 1996 and was named Vice President, Operations of On Command
Corporation in 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.
Paul J. Milley has been Senior Vice President, Finance since December,
1996. Prior thereto, Mr. Milley was Vice President and Chief Financial Officer
of the 3DO company where he worked since October 1993. Prior to joining the
3DO company, Mr. Milley was Senior Vice President and Chief Financial Officer
of Computerland Corporation where he worked from July 1989 to September 1993.
Jill E. Fishbein has been Senior Vice President, Legal, General Counsel
and Secretary since December 1996. Ms. Fishbein was Vice President, General
Counsel, and Secretary of Network General Corporation at which she worked from
October 1994 through December 1996. Prior to joining Network General
Corporation, Ms. Fishbein was Legal Counsel at Electronic Arts Inc. from April
1992 to September 1994. From October 1989 to March 1992, Ms. Fishbein was an
Associate at the law firm of Fenwick & West.
Jean A. 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. From
1977 through December 1993, Ms. deVera held various positions at COMSAT Video
Enterprises, the last of which was Director of Sales Administration.
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. Mr. Neumann retired from OCC on February 28, 1996 and
currently serves in a consulting capacity.
Richard A. 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.
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On Command Corporation's Common Stock and Series A and B Warrants are
traded on the NASDAQ National Market System under the symbols ONCO, ONCOW, and
ONCOZ respectively. Series C Warrants were given to an advisor to the
Acquisition transaction but were not registered for public trading. The high
and low closing prices for On Command Corporation's securities during the
period October 8 through December 31, 1996 are as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Common Stock $25 1/4 $15 5/8
Series A Warrants $10 1/2 $ 7 1/8
Series B Warrants $ 6 3/4 $ 6 3/4
</TABLE>
As of March 3, 1997 there were 29,181,065 shares of Common Stock,
1,424,875 Series A Warrants, 2,501,697 Series B Warrants, and 3,450,000 Series
C Warrants issued and outstanding. The Company's Transfer Agent and Registrar
is the Bank of New York located at 101 Barclay Street, New York, New York.
Concurrent with the Acquisition transaction, the Company paid a dividend in the
amount of $10.7 million to stockholders of record as of September 18, 1996.
This dividend was distributed through the assignment to Ascent of a $8.9
million promissory note received from Hilton Hotels Corporation and cash of
$1.8 million paid to the minority stockholders. The Company had not paid cash
dividends prior to the transaction, and any payment of such dividends in the
future will depend upon the earnings and financial position of the Company, its
capital needs, and such other factors as the Board of Directors deem
appropriate.
12
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The financial data set forth below, except hotel, room and installation
backlog data, was derived from the audited consolidated financial statements of
the Company and should be read in connection with the Consolidated Financial
Statements and related Notes included elsewhere herein. References herein are to
the financial statements and footnotes included in Part II, Item 8 "Financial
Statements and Supplementary Data".
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1996(1) 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues.................................. $147,469 $102,059 $ 81,609 $ 30,204 $ 8,595
Total direct costs of revenues.................. 71,019 48,417 47,786 12,912 5,461
Total operating expenses........................ 87,770 45,091 27,976 14,955 2,780
Income (loss) from operations................... (11,320) 8,551 5,847 2,337 354
Net income (loss)(3)............................ (14,739) 4,902 3,456 1,358 168
Net income (loss) applicable to nonredeemable
common stock................................. (15,222) 4,261 2,856 1,179 168
Net income (loss per common and equivalent
share........................................ (0.67) 0.22 0.18 0.11 0.03
Shares used in per share calculations (in
thousands).................................. 22,625 19,406 15,822 11,065 6,683
CASH FLOW DATA
Net cash povided by operating activities........ 42,784 41,374 20,051 11,760 3,384
Net cash used in investing activities........... (80,505) (63,693) (64,110) (56,123) (16,128)
Net cash provided by financing activities....... 42,521 14,952 47,285 47,541 9,161
OTHER DATA:
EBITDA (2)...................................... $ 41,960 $ 37,288 $ 23,381 $ 10,517 $ 2,257
Cash dividends per share........................ $ 0.49 -- -- -- --
Rooms served at end of period................... 917,000 361,000 248,000 124,000 37,000
On Demand rooms at period end................. 709,000 361,000 248,000 124,000 37,000
Scheduled rooms at period end................. 208,000 -- -- -- --
Hotels served at end of period.................. 3,144 1,221 751 272 89
Capital expenditures............................ 70,545 63,693 64,110 56,153 16,628
Installation backlog (4)........................ 58,000 113,000 128,000 137,000 27,000
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.................................... $396,538 $211,005 $138,884 $ 92,363 $48,646
Total debt...................................... 98,000 15,942 1,025 1,842 2,634
Redeemable common stock......................... -- 11,684 11,043 10,443 --
Total stockholder's equity...................... 250,917 169,804 108,949 67,817 40,675
</TABLE>
- ---------------
(1) 1996 data reflects the acquisition of SpectraVision which was recorded
using the purchase method of accounting as defined by generally
accepted accounting principles. As such, all revenues, expenses and
capital expenditures of SpectraVision for the period October 8 through
December 31, 1996, are included herein. Also included are the room and
hotel counts, installation backlog, and the assets, liabilities and
stockholders equity of SpectraVision at December 31, 1996.
(2) EBITDA represents earnings before interest, income taxes, depreciation
and amortization. The most significant difference between EBITDA and
cash provided from operations is changes in working capital. EBITDA is
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<PAGE> 16
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. In addition, management believes
EBITDA provides an important additional perspective on the Company's
operating results and the Company's ability to service its long-
term debt and fund the Company's continuing growth. EBITDA is not
intended to represent cash flows for the period, or to depict funds
available for dividends, reinvestment or other discretionary uses.
EBITDA has not been presented as an alternative to operating income or
as an indicator of operating performance and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles, which are
presented in the financial statements in Item 8 and discussed in Item 7
under Liquidity and Capital Resources. See the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this document
(3) 1996 data also includes $8.7 million of charges which management
believes are one-time in nature which consist of asset write-downs,
reserves, and expense accruals related to the Acquisition and
integration of SpectraVision; re-alignment of the Company's operating
practices; and the establishment of On Command Corporation as a new
public company. Of the non-recurring charges, $6.7 million effected
EBITDA (see note 2). Excluding non-recurring charges, the net loss
applicable to nonredeemable common stock for 1996 would have been $6.5
million, net loss per common and equivalent share would have been
$0.29, and EBITDA would have been $48.7 million.
(4) OCC backlog represents the approximate number of hotel rooms under
contract with OCC which are awaiting installation of OCV systems. The
vast majority of such hotel rooms in the December 31, 1996 backlog
represent SpectraVision system hotel rooms which are to be converted to
OCV systems.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis addresses results of
operations for the calendar years ended December 31, 1996, 1995, and 1994.
CURRENT FINANCIAL CONDITION
On Command Corporation generated improved earnings before
interest, income taxes, depreciation, and amortization (EBITDA) in 1996 of
$42.0 million compared to $37.3 million in 1995, however depreciation and
amortization expense resulting from new installations and the acquisition of
SpectraVision contributed to producing a current year net loss of $14.7 million
compared to net income of $4.9 million in 1995.
On Command Corporation's reported results for 1996 include
charges management believes are non-recurring in nature. These charges,
totaling $8.7 million (includes $2 million which was an adjustment to
depreciation expense) and recorded in the fourth quarter, result from asset
write-downs, reserves, and expense accruals associated with the acquisition and
integration of SpectraVision; the re-alignment of the Company's operating
practices; and the establishment of On Command Corporation as a new public
company. If these non-recurring charges were excluded from 1996 reported
results, the Company would have reported a net loss of $6.0 million and EBITDA
of $48.7 million in 1996.
On Command Corporation grew its business in 1996 through
internal growth and the acquisition of SpectraVision. Total revenues grew by
44.5% to $147.5 million in 1996 compared to $102.1 million in 1995. The
acquisition of SpectraVision was effective on October 8, 1996 and contributed
revenues of $21.4 million from October 8, 1996 to December 31, 1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased to $147.5 million in 1996 from $102.1
million in 1995, reflecting an increase of $45.4 million or 44.5%. Movie
revenues increased to $134.4 million in 1996 from $75 million in 1995. The
increase was primarily due to the acquisition of SpectraVision ($21.4 million);
increased net movie revenues
14
<PAGE> 17
resulting from an increase in the number of OCV's installed on-demand rooms to
approximately 466,000 in 1996 compared to 361,000 in 1995; and, to a lesser
extent, as a result of selected price increases by OCV. Video system sales
decreased to $13.1 million in 1996 from $22.9 million in 1995, reflecting a
decrease of $9.8 million or 42.8%. The decrease was primarily the result of the
elimination of low margin video system sales to Ascent following Ascent's
contribution to OCV of Ascent's hotel video assets (the "Contribution") pursuant
to the Contribution Agreement (see Note 10 to the consolidated financial
statements). The Contribution also resulted in the elimination of the revenue
from video management services which totaled $4.2 million in 1995.
Movie revenue direct costs increased to $59.6 million in 1996
from $24.1 million in 1995, an increase of $35.5 million or 147%. On an
absolute basis the increase can be attributed to the acquisition of
SpectraVision ($9.9 million ) and increased rooms serviced by OCV. Movie
revenue direct costs as a percentage of movie revenue increased to 44.4% in 1996
from 32.1% in 1995. This increase is due to lower margins in SpectraVision
rooms, increased free-to-guest costs, increased property tax expense and
slightly declining revenue on a per room basis at OCV.
Video system sales direct costs decreased to $11.4 million in
1996 from $20.0 million in 1995, reflecting a decrease of $8.6 million or
43.0%. The decrease is a result of the elimination of video system sales to
Ascent described in Total Revenues above. Direct costs declined slightly as a
percent of video system sales revenue from 87.6% in 1995 to 86.8% in 1996.
Video management services direct costs were zero in 1996 due
to the Contribution as described in Total Revenues above. Video management
services totaled $4.24 million in 1995.
Depreciation and amortization expense increased to $53.3
million in 1996 from $28.7 million in 1995, an increase of $24.6 million or
85.7%. The increase is primarily due to capital investments associated with
installing on-demand service in hotel rooms ($13.4 million), the acquisition of
assets in 1995 from Ascent under the Contribution Agreement ($5.7 million), and
the acquisition of SpectraVision ($5.2 million).
Field service costs increased to $15.9 million in 1996 from
$9.1 million in 1995, an increase of $6.8 million or 74.7%. The increase is
primarily due to the additional labor and material necessary to maintain the
growing volume of installed on-demand equipment, and the acquisition of
SpectraVision ($3.2 million). Field service expenses as a percentage of movie
revenue decreased to 11.8% in 1996 from 12.1% in 1995 as a result of operating
efficiencies from the larger installed base of rooms and greater management
focus.
Research and development expenses increased to $4.6 million in
1996 from $2.6 million in 1995, an increase of $2.0 million or 76.9%. The
increase is a result of the Company's continued commitment to maintain and
enhance current products, develop new products, and create commonality with
SpectraVision's video systems.
Selling, general, and administrative expenses increased to
$14.0 million in 1996 from $3.1 million in 1995, an increase of $10.9 million.
The increase is primarily due to higher levels of business activity; increased
facility costs resulting from the addition of the former SpectraVision
headquarters in Richardson, Texas; non-recurring costs including transaction
and integration costs associated with the acquisition of SpectraVision,
employee relocation and severance costs (including former SpectraVision
employees), and the relocation of Company headquarters to San Jose, California.
Non-recurring costs account for approximately $3.2 million of the increase.
Interest expense increased to $3.3 million in 1996 from
$413,000 in 1995, an increase of $2.9 million. The increase is due to the
Company's greater reliance on debt financing to continue the expansion of its
installed customer base, and debt used to complete the acquisition of
SpectraVision.
Provision for income taxes decreased to $174,000 in 1996 from
$3.3 million in 1995, a decrease of $3.1 million or 93.9%. The decrease is
primarily due to the current year loss offset by higher foreign taxes resulting
from the acquisition of SpectraVision. The Company has not recorded a tax
benefit in 1996 from the net operating losses generated in that year because it
has established a valuation allowance against its otherwise recognizable net
deferred tax asset at December 31, 1996 due to the uncertainty surrounding the
realizability of these benefits in future tax returns.
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Redeemable common stock accretion decreased to $483,000 in 1996
from $641,000 in 1995, reflecting a decrease of $158,000 or 24.6%. Concurrent
with the Merger and Acquisition, the Redeemable Common Stock was converted to
common stock of the Company. Therefore, accretion was recorded for a partial
year in 1996 compared to a full year in 1995.
EBITDA increased to $42.0 million in 1996 from $37.3 million in
1995, reflecting an increase of $4.7 million or 12.6%. EBITDA, as a percentage
of total revenue, decreased to 28.5% in 1996 from 36.5% in 1995. Eliminating
non-recurring adjustments, EBITDA totaled $48.7 million in 1996 or 33% of total
revenues. The reduced percentage is primarily due to the higher operating costs
currently associated with the SpectraVision business, higher free-to-guest
costs, and higher administrative expense necessary to operate as a public
company.
Net income (loss) decreased to a net loss of $14.7 million in
1996 from net income of $4.9 million in 1995 due to the factors described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased by $20.5 million or 25.1% to $102.1
million in 1995, as compared to total net revenues of $81.6 million in 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 in 1995, compared to $47.8 million, or 58.6% of total net
revenues in 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.
Depreciation and amortization expense was $28.7 million or
38.3% of net movie revenues in 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 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 (see Note 10 to the Consolidated Financial Statements).
Field service costs, which consist primarily of labor and
material expense required to maintain the existing on-demand equipment, were
$9.1 million in 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 increases in personnel, travel,
facility, and spare equipment purchase and repair costs.
Research and development expenses in 1995 were $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 $700,000.
Selling, general, and administrative expenses decreased to
$3.1 million in 1995, as compared to $3.4 million in 1994, primarily due to
reduced legal expenses in 1995.
Settlement of litigation expense of $1.5 million was recorded
in 1995 resulting from a charge of wrongful termination of a former employee of
OCV.
Interest expense increased to $413,000 in 1995, as compared to
$256,000 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.
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<PAGE> 19
Provision for income taxes increased to $3.3 million in 1995
from $2.3 million in 1994, an increase of $1.0 million or 43.5%. The increase
was primarily due to increased earnings.
Redeemable common stock accretion increased to $641,000 in
1995 from $600,000 in 1994, reflecting an increase of $41,000 or 6.8%. The
price at which the shares can be put to the company escalates based upon the
average one year U.S. Treasure Bill rate compounded annually. As such, the
amount of accretion recorded by the Company fluctuates based upon the movement
of interest rates. (See Note 10 to the Consolidated Financial Statements.)
EBIDTA increased to $37.3 million in 1995 from $23.4 million
in 1994 or an increase of 59.4%. As a percent of revenue, EBITDA increased from
28.7% in 1994 to 36.5% in 1995. The major factor in this improvement was the
reduction in direct cost percentage, explained above.
Net Income increased to $4.9 million in 1995 from $3.5 million
in 1994 due to the factors described above.
SEASONALITY
The Company's business is expected to be seasonal with higher
revenues realized during the summer months and lower revenues realized during
the winter months. This seasonality reflects recognized business and vacation
travel patterns.
LIQUIDITY AND CAPITAL RESOURCES
In 1995, OCV entered into a promissory note agreement with
Ascent to supplement OCV's ongoing financing needs. At December 31, 1995,
borrowings under the note payable were $15.7 million. In connection with the
Merger and Acquisition transaction, the promissory note was repaid in October
1996.
The primary sources of cash during 1996 were cash from
operations of $42.8 million consisting primarily of a net loss of $14.7 million
offset by $53.3 million in depreciation and amortization, short-term borrowings
from Ascent of $22.5 million, and $97.6 million of borrowings under a $125
million bank revolving credit facility. Primary expenditures of cash included
capital expenditures of $70.5 million for the installation of on-demand
systems, cash expended for the acquisition of SpectraVision of $49.6 million
including repayment of debt assumed in the transaction, and $38.5 million
repayment of borrowings from Ascent.
REVOLVING CREDIT FACILITY
In conjunction with the acquisition of SpectraVision, On
Command Corporation entered into a $125 million credit facility (the "OCC
Credit Facility") with NationsBank of Texas, N.A. ("NationsBank"). The OCC
Credit Facility consists of: (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 under the five year
facility will reduce the amount available under the 364-day facility. On March
23, 1997 the OCC Credit Facility was increased to $150 million. (See Note 14
to Consolidated Financial Statements.)
The OCC Credit Facility contains customary covenants and
agreements, including, among other things, compliance by On Command Corporation
with certain financial covenants. At December 31, 1996, OCC was in compliance
with these covenants. The OCC Credit Facility also limits OCC's ability to incur
additional indebtedness and pay dividends, but does not preclude OCC from paying
cash dividends on its common stock.
Revolving loans extended under the OCC Credit Facility
generally will bear interest at either the London InterBank Offering Rate
("LIBOR") plus a spread that may range from 0.375% to 0.625% depending upon On
Command Corporation's consolidated ratio of total debt to EBITDA (calculated in
accordance with the OCC Credit Facility) or the greater of the prime rate or the
federal funds rate plus 0.50%. Upon the closing of the SpectraVision
acquisition, OCC borrowed $92.0 million under its credit facility to (i) pay off
debt obligations of SpectraVision of approximately $40.0 million, (ii) pay off
intercompany obligations of OCV to Ascent and other OCC obligations of
approximately $43.6 million, and (iii) to pay certain administrative claims and
other bankruptcy costs of
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<PAGE> 20
SpectraVision and its affiliated debtors of approximately $8.4 million. As a
result of the March 23, 1997 amendment to the OCC Credit Facility, and the
borrowings outstanding, as of March 23, 1997, OCC had $47 million available,
subject to certain covenant restrictions, under the OCC Credit Facility.
On Command Corporation's principal cash requirements are
expected to include continued installation of on-demand systems including
installations for new customers and the upgrade of hotels currently under
contract and receiving only scheduled service. These installations and
upgrades will be completed as cash is available.
LIMITATIONS ON ADDITIONAL DEBT FINANCING
On Command Corporation and Ascent entered into a Corporate
Agreement (the "Corporate Agreement"), pursuant to which OCC has agreed 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 an agreement between
Ascent and COMSAT (the "COMSAT Agreement"), Ascent has agreed not to incur any
indebtedness, other than under Ascent's existing credit facility (and
refinancings thereof) and indebtedness incurred in the ordinary course of
business, which together shall not exceed $175 million in the aggregate,
without COMSAT's consent. In contemplation of the closing of the Merger and
the Acquisition, COMSAT consented to permit Ascent to incur consolidated
indebtedness (including indebtedness of OCC) of up to $216 million in the
aggregate provided that: (i) no more than $50 million of such indebtedness may
constitute long-term debt; and (ii) indebtness in excess of $175 million could
only be incurred to satisfy funding requirements for 1996. At that time,
COMSAT also consented to Ascent entering into a new credit facility with
aggregate available borrowings of up to $200 million, and OCC entering into a
$125 million credit facility, as discussed above.
In November 1996, COMSAT consented to increase the limitation
on consolidated indebtedness which Ascent may incur pursuant to the COMSAT
Agreement to $236 million; provided that: (i) no more than $50 million of such
indebtedness may constitute long term debt; and (ii) indebtedness in excess of
Ascent's indebtedness existing at December 31, 1996 may only be used to satisfy
Ascent's consolidated funding requirements through June 30, 1997, as approved by
the Ascent Board of Directors.
A primary purpose of both the Corporate Agreement and the
COMSAT Agreement is to require Ascent and On Command Corporation to coordinate
their capital requirements with COMSAT so that COMSAT can monitor its compliance
with the regulations of the Federal Communications Commission (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 the existing FCC guidelines, COMSAT is subject
to a limit of $200 million in short-term debt, a maximum long-term debt to total
capital ratio of 45%, and interest coverage ratio of not less than 2.3 to 1.
The latter two guidelines are measured at year end. In October 1996, the FCC
approved a temporary decrease in the interest coverage ratio of 1.9 to 1.0, and
an increase in the short-term debt limit to $325 million for the 1996 plan year
and until the FCC acts on COMSAT's 1997 capital plan. COMSAT has informed OCC
that COMSAT was in compliance with the FCC guidelines, as modified, at December
31, 1996.
As part of Ascent's 1997 operating and capital planning process, Ascent
management requested that COMSAT increase its debt limit beginning in January
1997, which resulted in the increase described herein. On March 21, 1997,
COMSAT consented to increase the limitation on aggregate consolidated
indebtedness which Ascent may incur pursuant to the COMSAT Agreement to $270.0
million for the remainder of 1997; provided that (i) no more than $50 million of
such indebtedness may constitute long term debt; and (ii) indebtedness
subordinated to indebtedness under Ascent's existing credit facility could only
be incurred on terms which did not adversely affect COMSAT's proposed tax-free
distribution of its interest in Ascent to COMSAT stockholders. In connection
with COMSAT's consent under the COMSAT Agreement, Ascent consented under the OCC
Corporate Agreement to increase OCC's limitation on indebtedness to a total of
not more than $116 million by June 30, 1997 and not more than $130 million by
December 31, 1997; provided, however that (i) no more than $50 million of such
indebtedness may constitute long term debt; and (ii) indebtedness may only be
incurred in compliance with the financial covenants in the OCC Credit Facility,
with any amendments to such covenants subject to the written consent of Ascent.
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<PAGE> 21
A number of factors could cause the funding requirements of OCC to
differ materially from those projected, including, but not limited to, the
performance of the OCV and SpectraVision business, unanticipated costs
associated with the integration of SpectraVision's and OCV's businesses, and
general market conditions.
Finally on October 18, 1996 COMSAT announced that it intends to divest
its 80.67 percent ownership interest in Ascent through a sale, spin-off or
other transaction. COMSAT has engaged Morgan Stanley & Co. Incorporated to act
as its financial advisor for the divestiture. On March 24, 1997, COMSAT
announced that in January 1997 it had filed for a ruling with the Internal
Revenue Service to allow the spin-off of Ascent as a tax-free dividend to its
shareholders, and that it expects to receive the ruling by May 1997. Pending
the ruling, COMSAT will continue efforts to identify a purchaser for its
interest in Ascent.
FOREIGN EXCHANGE
On Command Corporation believes the risks of foreign exchange
rate fluctuations on its present operations are not material to the Company's
overall financial condition. However, should the Company's international
operations continue to grow, OCC will consider using foreign currency
contracts, swap arrangements, or other financial instruments designed to limit
exposure to foreign exchange rate fluctuations.
INTEREST RATES AND INFLATION
Fluctuations in interest rates and inflation have not had a
material effect on the operations of On Command Corporation to date. However,
if management believes the direction of future interest rates pose a
significant risk to the operations of the Company, it will consider using
interest rate contracts, swap arrangements, or other financial instruments
designed to limit exposure to interest rate fluctuations.
BUSINESS RISKS
CONTROL BY ASCENT
Ascent owned approximately 57.2% of the outstanding OCC Common Stock
at December 31, 1996. 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. In turn, COMSAT owns 80.7% of Ascent outstanding Common Stock.
RESTRICTIONS ON DEBT FINANCINGS
Pursuant to the Corporate Agreement entered into between Ascent and On
Command Corporation, On Command Corporation has agreed, among other things, not
to incur any indebtedness without Ascent's prior written consent, other than
indebtedness under the OCC Credit Facility entered into by On Command
Corporation in connection with the Transactions and indebtedness incurred in the
ordinary course of operations, which together shall not exceed $100 million in
the aggregate. 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. In addition, pursuant to the COMSAT Agreement between
Ascent and COMSAT, Ascent has agreed not to incur any indebtedness, other than
under Ascent's existing credit facility (and refinancings thereof) and
indebtedness incurred in the ordinary course of business, which together shall
not exceed $175 million in the aggregate, without COMSAT's consent. In March
1997, COMSAT consented to increase the limitation on Ascent's consolidated
indebtedness to $270 million through December 31, 1997; provided that (i) no
more than $50 million of such indebtedness may constitute long term debt; and
(ii) indebtedness subordinated to indebtedness under Ascent's existing credit
facility could only be incurred on terms which did not adversely affect COMSAT's
proposed tax-free distribution of its interest in Ascent to COMSAT stockholders.
In connection with COMSAT's consent under the COMSAT Agreement, Ascent consented
under the Corporate Agreement to increase OCC's limitation of indebtedness to
$116 million through June 30, 1997, and to $130 million through December 31,
1997; provided, however, that (i) no more than $50 million of such indebtedness
may constitute long term debt, and (ii) indebtedness may only be incurred in
compliance with the financial covenants contained in OCC's existing $150 million
credit facility, with any amendments to such covenants subject to the written
consent of Ascent. A number of
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factors could cause the funding requirements of COMSAT, Ascent and On Command
Corporation to differ materially from those projected, including, but not
limited to, the performance of their respective operating subsidiaries,
unanticipated costs associated with the consummation of the Acquisition and
integration of SpectraVision's and OCV's businesses and market conditions. In
the event that On Command requires additional debt to service its existing
business or to support growth, there can be no assurance, however, that COMSAT
will approve any increase in Ascent's or OCC's debt limits. 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.
INTEGRATION OF OCV AND SPECTRAVISION BUSINESSES
The integration of the OCV and SpectraVision businesses 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, throughout 1997 and potentially beyond, particularly in
light of SpectraVision's status prior to the Acquisition as an entity operating
under the protection of Chapter 11 of the U.S. Bankruptcy Code. In addition,
successfully integrating the businesses of OCV and SpectraVision may require
additional capital. See "Dependence on Additional Capital for Growth." There
can be no assurance that the businesses of OCV and SpectraVision can be
successfully integrated. The inability to successfully integrate the
businesses of OCV and SpectraVision could have a material adverse effect on the
financial condition or results of operations of On Command Corporation.
THINLY TRADED STOCK IN THE PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
As approximately 42.8% of the outstanding On Command Common Stock, is
traded on the Nasdaq National Market as of March 3, 1997, the public market for
the OCC Common Stock and the On Command Corporation Warrants may not be subject
to an active public market which can be sustained. Further, the stock markets
may experience volatility that affects the market prices of 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
SpectraVision when
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those contracts expire. The loss by On Command Corporation of one or
more of the major hotel chain customers, such as Marriott, Hyatt, Holiday Inn
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.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Marriott, Hilton and Holiday Inn accounted for approximately 25%, 13%
and 14%, respectively, of On Command Corporation's revenues for the year ended
December 31, 1996. 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.
However, these customers represent both chain-owned/managed hotels, as well as
franchisees. The Company often has different contracts on different terms with
the chain-owned/managed hotels, on the one hand, and with the franchisees (or
groups of franchisees), on the other.
DEPENDENCE ON PERFORMANCE OF LODGING INDUSTRY
The business of each of On Command is closely linked to the
performance of the hotel industry which has been at a recent nearly all-time
high. 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.
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 technological
developments, and there can be no assurance that On Command Corporation will
have the financial or technological resources to be successful in doing so.
DEPENDENCE ON KEY PERSONNEL
On Command Corporation's success will be dependent upon the
contributions of its executive officers, especially Robert M. Kavner, its
President and Chief Executive Officer, Brian A.C. Steel, its Executive Vice
President, Chief Financial Officer and Chief Operating Officer, and Robert
Snyder, its Vice Chairman. The loss of the services of such executive officers
could have a material adverse effect on On Command Corporation. On Command
Corporation's success also depends on its continued ability to attract and
retain highly skilled and qualified personnel. There can be no assurance that
On Command Corporation or its subsidiaries will be successful in attracting and
retaining such personnel. Messrs. Kavner and Steel have entered into
employment agreements with On Command Corporation, and Mr. Snyder has entered
into an employment agreement with OCV.
SEASONALITY
The business of On Command Corporation is seasonal, with higher
revenues per room realized during the summer months and lower revenues per room
realized during the winter months due to business and vacation travel patterns.
ANTI-TAKEOVER PROTECTIONS
Following the consummation of the SpectraVision acquisition, Ascent
owns approximately 57.2% of the OCC Common Stock and before giving effect to any
Reserved Stock and the exercise of any Warrants. Accordingly, On Command
Corporation will not be able to engage in any strategic transactions without the
approval of Ascent.
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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.
SATELLITE REPLACEMENT
The Company has an agreement with Hughes Network Systems for
transponder capacity on a GE Americom Communications satellite which delivers
SpectraVision programming services to 810 hotels. (The company previously
serviced approximately 950 hotels via a satellite transmission service.
One-hundred and forty (140) of those hotels are now served by terrestrial-based
technology.) Satellite service is expected to expire in July 1997, at which
time the Company anticipates providing programming service to such hotels via
terrestrial-based systems or alternative satellite service. However, there can
be no assurance that the Company will have the capital to provide for such
transition, or will be able to find such alternative satellite capacity, or that
any transition to alternative terrestrial-based technology will be successful.
PROGRAMMING
The cost to the Company to license feature movies from major
movie studios is subject to change as the major movie studios continue to
negotiate for higher royalty rates as well as higher minimum payments by the
Company. Such changes may have adverse impacts on the Company's earnings. In
addition the Company has, and may continue, to experience a decline in the
buy-rate for independent movies for mature audiences.
While the Company intends to address such trends, there can be no assurance that
the Company's efforts will prove effective.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996,
1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995, and 1994
Notes to the Consolidated Financial Statements
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of On Command Corporation:
We have audited the accompanying consolidated balance sheets of On Command
Corporation (a majority-owned subsidiary of Ascent Entertainment Group, Inc.)
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of On Command Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, 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.
DELOITTE & TOUCHE L.L.P.
San Jose, California
January 27, 1997
(March 27, 1997 as to Note 14)
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ON COMMAND CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (in thousands, except par value amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,733 $ 956
Accounts receivable (less allowances for doubtful accounts of $629 in 1996
and $100 in 1995) 25,328 9,853
Other current assets 4,283 831
Deferred income taxes 1,593 1,163
-------- --------
Total current assets 36,937 12,803
VIDEO SYSTEMS, Net 250,600 188,910
PROPERTY AND EQUIPMENT, Net 11,037 2,971
GOODWILL, Net 89,503 --
OTHER ASSETS, Net 8,461 6,321
-------- --------
TOTAL $396,538 $211,005
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,823 $ 6,187
Accounts payable to stockholder 21 206
Accrued compensation 4,931 1,726
Other accrued liabilities 7,557 740
Income taxes payable 5,692 1,813
Other taxes payable 8,807 --
Deferred revenues 232 803
Current portion of revolving credit facility 48,000 --
Current portion of stockholders' ??? payable -- 15,942
-------- --------
Total current liabilities 92,063 27,417
OTHER ACCRUED LIABILITIES 1,700 1,841
LONG-TERM PORTION OF REVOLVING CREDIT FACILITY 50,000 --
DEFERRED INCOME TAXES 1,858 259
-------- --------
Total liabilities 145,621 29,517
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE COMMON STOCK, $.01 par value; shares issued and
outstanding: none in 1996 and 1,166 in 1995 -- 11,684
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; shares authorized - 10,000; none outstanding -- --
Common stock, $0.01 par value; shares authorized - 50,000 in 1996 and
25,560 in 1995; shares issued and outstanding, 29,087 in 1996 and 20,669 in 1995;
shares subscribed - 960 in 1996 and none in 1995 300 207
Additional paid-in capital 249,164 165,521
Common stock warrants 31,450 840
Cumulative translation adjustments (260) --
Retained earnings (deficit) (29,737) 3,236
-------- --------
Total stockholders' equity 250,917 169,804
-------- --------
TOTAL $396,538 $211,005
======== ========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 27
ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands, except PER SHARE amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUE:
Movie revenues .................................................. $134,351 $ 75,009 $45,931
Video system sales............................................... 13,118 22,852 31,698
Video management services ..................................... -- 4,198 3,980
-------- -------- -------
Total revenues (see Note 10 for related party revenues).... 147,469 102,059 81,609
-------- -------- -------
DIRECT COSTS OF REVENUES:
Movie revenues................................................... 59,628 24,052 16,593
Video systems sales.............................................. 11,391 20,015 27,600
Video management services........................................ -- 4,350 3,593
-------- -------- -------
Total direct costs of revenues............................. 71,019 48,417 47,786
-------- -------- -------
OPERATING EXPENSES:
Depreciation and amortization.................................... 53,280 28,737 17,534
Field service.................................................... 15,870 9,054 5,274
Research and development......................................... 4,628 2,642 1,771
Marketing, general and administrative............................ 13,992 3,118 3,397
Settlement of litigation......................................... -- 1,540 --
-------- -------- -------
Total operating expenses................................... 87,770 45,091 27,976
-------- -------- -------
INCOME (LOSS) FROM OPERATIONS..................................... (11,320) 8,551 5,847
INTEREST INCOME................................................... 104 61 178
INTEREST EXPENSE.................................................. (3,349) (413) (256)
-------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES................................. (14,565) 8,199 5,769
PROVISION FOR INCOME TAXES........................................ 174 3,297 2,313
------- ------- -------
NET INCOME (LOSS)................................................. (14,739) 4,902 3,456
REDEEMABLE COMMON STOCK ACCRETION................................. (483) (641) (600)
-------- -------- -------
NET INCOME (LOSS) APPLICABLE TO NONREDEEMABLE
COMMON STOCK.................................................... $(15,222) $ 4,261 $ 2,856
======== ======== =======
NET INCOME (LOSS) PER COMMON AND EQUIVALENT
SHARE........................................................... $ (0.67) $ 0.22 $ 0.18
======== ======== =======
SHARES USED IN PER SHARE COMPUTATIONS............................. 22,625 19,406 15,822
======= ======== =======
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 28
ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Common Cumulative Retained Total
--------------- Paid-In Stock Translations Earnings Stockholders'
Shares Amount Capital Warrants Adjustments (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1994 12,099 $121 $ 70,737 $ 840 $ - $ (3,881) $ 67,817
Sale of common stock to investors 3,053 30 37,470 37,500
Exercise of stock options 174 2 600 602
Income tax benefit of stock option
transactions 174 174
Accretion of redeemable common stock (600) (600)
Net income 3,456 3,456
------ ---- -------- -------- ----- -------- --------
BALANCES, December 31, 1994 15,326 153 108,981 840 - (1,025) 108,949
Common stock issued in connection with
contribution agreement with
Comsat (see Note 10) 5,337 53 56,486 56,539
Exercise of stock options 6 1 34 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 20,669 207 165,521 840 - 3,236 169,804
Issuance of common stock and
warrants in connection with
the acquisition of SpectraVision 8,250 82 57,627 24,353 82,062
Exercise of stock options and
warrants 1,298 13 12,319 (840) 11,492
Income tax benefit of stock option
transactions 143 143
Dividends 7,097 (17,751) (10,654)
Accretion of redeemable common stock (483) (483)
Conversion of redeemable common stock 1,166 11 12,156 12,167
Cancellation of common stock issued
and additional contribution
of assets by Comsat (see Note 10) (1,336) (13) 1,398 1,385
Translation adjustments (260) (260)
Net loss (14,739) (14,739)
------ ---- -------- -------- ----- -------- --------
BALANCES, December 31, 1996 30,047 $300 $249,164 $31,450 $(260) $(29,737) $250,917
====== ==== ======== ======== ===== ======== ========
See notes to consolidated financial statements
</TABLE>
26
<PAGE> 29
ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(14,739) $ 4,902 $ 3,456
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 53,280 28,737 17,534
Deferred income taxes, net 195 4,506 (383)
Loss on disposal of fixed assets 64 232 -
Changes in assets and liabilities net of effects from acquired operations:
Accounts receivable (962) 3,959 (2,711)
Accounts receivable from stockholder - 4,500 (3,100)
Other current assets (1,024) (499) (192)
Accounts payable (5,542) (3,235) 482
Accounts payable to stockholder (185) (2,900) 4,000
Accrued compensation 1,950 (355) 838
Other accrued liabilities (2,771) 159 1,054
Income taxes payable 4,282 1,746 (1,120)
Other taxes payable 8,807 - -
Deferred revenue (571) (378) 193
-------- -------- --------
Net cash provided by operating activities 42,784 41,374 20,051
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in acquisition of SpectraVision (9,572) - -
Capital expenditures (70,545) (63,693) (64,110)
Proceeds from sale of property and equipment 46 - -
Other assets (434) - -
-------- -------- --------
Net cash used in investing activities (80,505) (63,693) (64,110)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholders' notes payable 22,526 15,734 -
Proceeds from revolving credit facility 97,625 - -
Payment of SpectraVision debt (40,000) - -
Principal payments on stockholders' notes payable (38,468) (817) (817)
Proceeds from issuance of common stock 2,587 35 38,102
Collection of note receivable from stockholder - - 10,000
Dividends paid (1,749) - -
-------- -------- --------
Net cash provided by financing activities 42,521 14,952 47,285
-------- -------- --------
Effect of exchange rate changes on cash (23) - -
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,777 (7,367) 3,226
CASH AND CASH EQUIVALENTS, Beginning of year 956 8,323 5,097
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of year $ 5,733 $ 956 $ 8,323
======== ======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ - $ 1,426 $ 3,762
======== ======== ========
Cash paid for interest $ 2,702 $ 413 $ 256
======== ======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net assets acquired from contribution agreement with Comsat $ 1,385 $ 56,539 $ -
======== ======== ========
Common stock issued for note receivable $ 8,905 $ - $ -
======== ======== ========
Dividends paid through issuance of note and common stock warrants $ 16,002 $ - $ -
======== ======== ========
Acquisition of SpectraVision:
Fair value of assets acquired (including intangibles of $92,636) $158,916 $ - $ -
Liabilities assumed (67,282) - -
Acquisition costs paid (5,829) - -
Net cash paid (3,743) - -
-------- -------- --------
Common stock and warrants issued $ 82,062 $ - $ -
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 30
ON COMMAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On Command Corporation (the "Company" or "OCC") is a Delaware
corporation formed by Ascent Entertainment Group, Inc. ("Ascent") for
the purpose of effecting (i) the merger (the "Merger") of On Command
Video Corporation ("OCV"), a majority-owned subsidiary of Ascent, with
a wholly-owned subsidiary of OCC, after which OCV became a
wholly-owned subsidiary of OCC, and (ii) the acquisition (the
"Acquisition") of Spectradyne, Inc., a wholly-owned subsidiary of
SpectraVision, Inc. ("Oldco"). Following the Acquisition,
Spectradyne, Inc. changed its name to SpectraVision, Inc.
("SpectraVision"). Ascent is a majority-owned subsidiary of Comsat
Corporation ("Comsat"). Effective October 8, 1996, the Merger and
Acquisition were consummated. The Merger has been accounted for using
the historical book value of the assets, liabilities and stockholders'
equity acquired from OCV in a manner similar to a pooling of interests
and the Acquisition was accounted for as a purchase using the fair
value of the assets acquired and liabilities assumed from Oldco.
Accordingly, the consolidated financial statements of the Company
include the historical statements of financial position and the
results of operations and cash flows of OCV as well as the acquired
operations of SpectraVision subsequent to the date of acquisition.
Per share amounts and number of shares have been restated to reflect
the 2.84 shares of OCC common stock received for every share of OCV
common stock previously held. Prior to the Merger and Acquisition,
OCC had no significant operations. (See Note 3 for additional
discussion of the business combination.)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business - The Company designs, develops,
manufactures and installs proprietary video systems. OCV's video
system is a patented video selection and distribution system that
allows hotel guests to select motion pictures on computer-controlled
television sets located in their hotel 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 has operating
subsidiaries in the United States, Canada, Mexico, Hong Kong,
Singapore, Thailand and Australia. All significant intercompany
accounts and transactions have been eliminated.
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.
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 three to twenty years, or lease terms.
28
<PAGE> 31
Effective October 1, 1994, the Company changed the estimated useful
life of certain installed video systems costs from five years to the
term of the contract, generally 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
$.03, respectively.
OTHER ASSETS - Other assets consist primarily of 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 include an
investment of $1,265,000 in MagiNet Corporation accounted for at cost,
as well as approximately $2,000,000 at December 31, 1996 for
technology acquired in the SpectraVision Acquisition (amortized on a
straight-line basis over five years).
GOODWILL - Goodwill resulted from the SpectraVision Acquisition, as
described in Note 3, and represents the excess of the aggregate
purchase price over the fair value of net assets acquired. The goodwill
is being amortized over 20 years using the straight-line method.
Amortization expense for 1996 was $1,133,000.
EVALUATION OF LONG-LIVED ASSETS - The Company evaluates the potential
impairment of long-lived assets and long-lived assets to be disposed
of in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS No. 121). SFAS No. 121
establishes procedures for review of recoverability, and measurement
of impairment if necessary, of long-lived assets and certain
identifiable intangibles held and used by an entity. SFAS No. 121
requires that those assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be fully recoverable. SFAS No. 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed
of be reported at the lower of carrying amount or fair value less
estimated selling costs. As of January 1, 1996 and December 31, 1996,
management believes that there was not any impairment of the Company's
long-lived assets or other identifiable intangibles.
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.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees.
NET INCOME (LOSS) 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.
Net loss per share is calculated by dividing net loss applicable to
nonredeemable common stock by the weighted average number of common
shares outstanding as including common stock equivalents would be
antidilutive.
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.
29
<PAGE> 32
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable
approximate fair value because of the short-term maturity of these
instruments. The fair value of the revolving credit facility
approximates its carrying amount based on the current rate offered to
the Company for debt of the same remaining maturities. It is not
practicable to determine the fair value of notes payable to
stockholder due to the related party relationship.
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' equity. Balances of international
subsidiaries denominated in currencies other than the functional
currency are restated at the rate of exchange at year end and any
resulting gains or losses are included in the results of operations.
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, property and equipment and intangible assets, including
goodwill, 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;
disruption of satellite service; ability to retain senior management
and key employees; and risks of technological obsolescence.
RECENTLY ISSUED ACCOUNTING STANDARD - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standard No. 128, "Earnings Per Share." This Statement establishes
standards for computing and presenting earnings per share. This
Statement is effective for financial statements issued in periods
ending after December 15, 1997, including interim periods; early
application is not permitted. The Company will adopt this Statement
in the fourth quarter of 1997 and will restate all prior period
earnings per share data presented as required. The Company has not
yet determined the impact of adopting this Statement on its reported
net income (loss) per share.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform to the current year presentation. These reclassifications
had no effect on net income or total stockholders' equity.
3. BUSINESS COMBINATION
Effective October 8, 1996 (the "Closing Date"), the Company consummated
the Acquisition of the assets and properties (including, but not
limited to, copyrights, patents, personal property, real property,
equipment and records) and certain liabilities of Oldco. The
Acquisition was consummated pursuant to an acquisition agreement dated
August 13, 1996, among Ascent, OCC, Oldco and the other parties named
therein (the "Acquisition Agreement"). Pursuant to the
30
<PAGE> 33
Acquisition Agreement, OCC acquired all of the outstanding capital
stock of SpectraVision, the primary operating subsidiary of Oldco,
together with certain other assets of Oldco and its affiliates.
Immediately prior to the Closing Date, OCV was merged into a subsidiary
of OCC and became a wholly-owned subsidiary of OCC pursuant to an
agreement and plan of merger (the "Merger Agreement") by and among OCC,
OCV and On Command Merger Corporation dated August 13, 1996. The
Acquisition Agreement and the Merger Agreement were entered into to
effect the terms of the Agreement dated April 19, 1996 entered into
among Ascent, OCV and the other parties named therein and to effectuate
the transaction contemplated thereby. In accordance with Emerging
Issues Task Force Issue No. 95-19, "Determination of the Measurement
Date for the Market Price of Securities Issued in a Purchase Business
Combination," the fair value of the Acquisition was determined as of
April 19, 1996 based on an independent appraisal of the net assets
acquired.
As of the Closing Date, the stockholders of OCV received 21,750,000
shares of OCC common stock (72.5% of the initial OCC common stock). In
consideration for the acquisition of the net assets and properties of
SpectraVision by OCC, OCC paid $4 million in cash and issued 8,041,618
shares of OCC common stock to the Oldco bankruptcy estate for
distribution to Oldco's creditors. Additionally, 208,382 shares were
held in reserve pursuant to the Acquisition for potential adjustments.
Of these, 196,382 shares of reserved stock were subsequently
distributed to the Oldco bankruptcy estate for the benefit of Oldco's
creditors with the remaining 12,000 shares distributed to the OCV
stockholders. Ascent owned approximately 57.2% of the outstanding
common stock of OCC at December 31, 1996.
In connection with the Acquisition and Merger, OCC also issued warrants
representing the right to purchase a total of 7,500,000 shares of OCC
common stock (20% of the outstanding common stock of OCC after exercise
of the warrants). The warrants have a term of seven years and an
exercise price of $15.27 per share of OCC common stock. Series A
warrants to purchase on a cashless basis an aggregate of 1,425,000
shares of OCC common stock were issued to the former OCV stockholders,
of which Ascent received warrants to purchase 1,124,325 shares; Series
B warrants to purchase for cash an aggregate of 2,625,000 shares of OCC
common stock were issued to the Oldco bankruptcy estate for
distribution to creditors; and $4,000,000 in cash was paid and Series C
warrants were issued to OCC's investment advisor to purchase for cash
an aggregate of 3,450,000 shares of OCC common stock in consideration
for certain banking and advisory services provided in connection with
the transactions. The fair value of the Series A warrants has been
recognized as a dividend to the former OCV stockholders while the fair
value of Series B and Series C warrants has been accounted for as a
cost of the Acquisition. Subsequent to the Acquisition, OCC's
investment advisor obtained a seat on the Company's Board of Directors.
The Acquisition was accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was
allocated to the net assets acquired based on their estimated fair
values. The fair value of tangible assets acquired and liabilities
assumed was $66 million and $67 million, respectively. In addition,
$2 million of the purchase price was allocated to purchased
technology. The balance of the purchase price, $90.6 million, was
recorded as goodwill and is being amortized over twenty years on a
straight-line basis. The accompanying financial statements reflect
the preliminary allocation of the purchase price as the purchase price
allocation has not been finalized.
The reported results of operations of the Company for the year ended
December 31, 1996 includes the operating results of SpectraVision since
the date of the Acquisition. Unaudited pro forma results of operations
as if the Acquisition had occurred at the beginning of fiscal year 1995
and 1996 are as follows (in thousands except per share amounts):
31
<PAGE> 34
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Total revenues $232,817 $226,045
Net loss $(25,683) $(17,504)
Net loss per common and equivalent share $ (0.83) $ (0.62)
</TABLE>
The pro forma combination of the companies is for presentation purposes
only and is not necessarily indicative of the actual results of
operations had the Acquisition occurred on the above dates.
4. VIDEO SYSTEMS
Video systems at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Installed video systems $320,294 $210,335
Construction in progress 29,768 31,805
-------- --------
350,062 242,140
Accumulated depreciation (99,462) (53,230)
-------- --------
Video systems, net $250,600 $188,910
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 2,000 $ -
Buildings and leasehold improvements 2,372 319
Furniture, fixtures, machinery and equipment 10,061 4,362
-------- --------
14,433 4,681
Accumulated depreciation and amortization (3,396) (1,710)
-------- --------
Property and equipment, net $ 11,037 $ 2,971
======== ========
</TABLE>
32
<PAGE> 35
6. NOTES PAYABLE
Notes payable at December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1986 1985
<S> <C> <C>
Revolving credit facility $ 98,000 $ --
Stockholders' notes payable - Ascent -- 15,734
Stockholders' notes payable - Other stockholders -- 208
-------- --------
98,000 15,942
Less current portion (48,000) (15,942)
-------- --------
Long-term (due in 2001) $ 50,000 $ --
======== ========
</TABLE>
In conjunction with the SpectraVision Acquisition, the Company obtained a
$125 million credit facility with a bank (the "Credit Facility"), dated as
of October 8, 1996. The Credit Facility consists of (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 facility; provided, however,
that any amounts borrowed under the five-year facility will reduce the
amount available under the 364-day facility. At December 31, 1996,
$50,000,000 was outstanding as a long-term revolving loan and is repayable
in 2001, while $48,000,000 is considered a short-term borrowing. Revolving
loans extended under the Credit Facility generally will bear interest at
the London Interbank Offering Rate ("LIBOR") plus a spread that may range
from 0.375% to 0.625% depending on certain operating ratios of the
Company. At December 31, 1996, the weighted average interest rate on the
Credit Facility was 6.17%. The Credit Facility limits the Company's
ability to incur indebtedness or pay dividends, but does not preclude the
Company from paying cash dividends on its common stock. The Credit
Facility contains customary covenants, including, among other things,
compliance by the Company with certain financial covenants. The Company
was in compliance with such covenants at December 31, 1996. (See
additional discussion in Note 14).
In 1995, the Company entered into a promissory note agreement with Ascent
which was payable upon demand. Interest on principal up to $12,500,000
bore interest at the prime rate, and principal in excess of $12,500,000
bore interest at the prime rate plus 0.5% per annum. In 1990 and 1991,
the Company entered into promissory note agreements, which bore interest
at 14% per annum, with certain of its stockholders. The amounts
outstanding under these agreements were repaid in 1996, using proceeds
from the Credit Facility.
As a consolidated subsidiary of Ascent, and in turn, COMSAT, the Company
is subject to restrictions on its debt structure as a result of Federal
Communications Commission regulations applicable to COMSAT (see Note 10).
7. COMMITMENTS
Operating Leases
The Company leases its principal facilities from a stockholder under a
noncancelable operating lease which expires in December 2003. In
addition to lease payments, the Company is responsible for taxes,
insurance and maintenance of the leased premises. The Company also
leases certain other office space and equipment. These operating leases
expire at dates ranging from 1997 to 2000.
33
<PAGE> 36
Rental payments to a related party were approximately $538,000 in each of
the years ended December 31, 1996, 1995 and 1994. Rental expense under
all operating leases was approximately $3,892,000, $616,000 and $572,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum annual payments under noncancelable operating leases at
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997 $13,285
1998 12,204
1999 11,541
2000 6,328
2001 1,327
Thereafter 2,775
-------
Total $47,460
=======
</TABLE>
Purchase Commitments
Noncancelable commitments for the purchase of video systems and office
equipment amounted to approximately $6,500,000 at December 31, 1996.
8. STOCKHOLDERS' EQUITY
Common Stock Subscribed
As of December 31, 1996, there were approximately 960,000 shares of common
stock and related warrants that had not been issued as certain of the
former OCV and SpectraVision shareholders had not yet tendered their
shares in connection with the Merger and Acquisition. Such shares are
considered to be subscribed common stock at December 31, 1996 and have
been included in the earnings per share computations.
Dividends
In August 1996, OCV declared a dividend equal to the proceeds from the
exercise of the Hilton Warrants (see Note 10) to be paid to stockholders
of record as of September 18, 1996. The dividend was contingent upon the
exercise of Hilton Warrants. Accordingly, on October 7, 1996, when
Hilton exercised its warrants, a dividend was distributed to the OCV
stockholders through the assignment to Ascent of the $8.9 million
promissory note received from Hilton and cash of $1.8 million was paid to
the minority stockholders.
As stated in Note 3, the fair value of the Series A warrants issued to
the former OCV stockholders has been recorded as a dividend in 1996.
Stock Option Plan
The Company adopted a stock option plan (the 1996 Plan), expiring in 2006,
under which employees may be granted incentive or nonstatutory stock
options for the purchase of common stock of the Company. In addition,
restricted stock purchases, performance awards, dividend equivalents,
stock payment or appreciation rights or deferred stock may be granted
under the plan. A total of 3,000,000 shares were reserved for the plan.
34
<PAGE> 37
The exercise price is set by the Board of Directors. Incentive stock
options are granted at no less than fair market value on the date of
grant. Options generally expire in ten years, vest over a five-year
period and are exercisable in installments of 20% one year from the date
of grant and 5% quarterly thereafter. Unvested options are canceled upon
termination of employment.
Under employment agreements with certain officers, 1,426,874 options were
granted with a three-year vesting period. The shares become exercisable
as follows: 25% one year from date of grant, 25% after two years and 50%
after three years.
Upon the merger of OCV with a wholly-owned subsidiary of OCC, outstanding
options under OCV's stock option plan were assumed by OCC. The number
and price of the assumed options was adjusted by the exchange ratio of
2.84 to reflect the equivalent OCC per share value (see Note 1). These
options retained their original terms and are exercisable in installments
of 20% one year from the date of grant and 1.67% per month thereafter.
The following table reflects the adjusted option activity for 1994, 1995
and 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
OPTIONS WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
<S> <C> <C> <C>
Balances, January 1, 1994 311,832 584,901 $ 5.76
Granted (56,800) 56,800 11.44
Exercised -- (173,141) 3.48
Canceled 8,761 (8,761) 7.04
---------- ---------
Balances, December 31, 1994 (191,892 exercisable
at a weighted-average price of $6.42) 263,793 459,799 7.29
Exercised -- (6,390) 5.52
---------- ---------
Balances, December 31, 1995 (280,500 exercisable
at a weighted-average price of $6.72) 263,793 453,409 7.31
Additional shares authorized 2,288,478 -- --
Granted (weighted-average fair value of $7.33) (1,781,074) 1,781,074 15.60
Exercised -- (52,918) 4.62
---------- ---------
Balances, December 31, 1996 771,197 2,181,565 $14.14
========== =========
</TABLE>
35
<PAGE> 38
Additional information regarding options outstanding as of December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 2.64 - 4.72 99,829 4.9 $ 4.62 96,989 $ 4.62
$ 5.92 - 8.80 243,862 6.2 $ 8.04 185,169 $ 7.98
$11.44 - 16.40 1,837,874 9.9 $15.47 32,187 $11.44
--------- -------
2,181,565 9.3 $14.14 314,345 $ 7.30
========= =======
</TABLE>
As discussed in Note 2, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees", and its related
interpretations. Accordingly, no compensation expense has been recognized in
the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", (SFAS No. 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted-average assumptions for 1996: expected life, 5.2 years; stock
volatility, 43%; risk free interest rates, 6%; and no dividends during the
expected term. The Company's calculations are based on a single option
valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net loss applicable to nonredeemable
common stock would have been $16,056,000 ($0.71 per share) in 1996. As no
awards were granted in 1995, pro forma net loss applicable to nonredeemable
common stock and net loss per share amounts do not differ from the reported
amounts in 1995. However, the impact of outstanding nonvested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1996 and 1995 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
Warrants
In 1991, the Company issued warrants to two stockholders to purchase 79,418
shares of common stock at $7.08 per share. The warrants were exercised in 1996
(see additional discussion regarding other warrants at Notes 3 and 10).
36
<PAGE> 39
Shares Reserved for Future Issuance
Common stock reserved for future issuance at December 31, 1996 are as
follows:
Option plan 2,952,762
Warrants 7,500,000
----------
Total 10,452,762
==========
9. INCOME TAXES
As a result of the Contribution Agreement discussed in Note 10, on August
1, 1995 Comsat's ownership in the Company exceeded 80% and the Company
became a member of Comsat's consolidated tax group for income tax
purposes. However, as a result of the exercise of the Hilton Warrants on
October 7, 1996 (see Note 10), Comsat's ownership in the Company fell
below 80% and, accordingly, the Company dropped out of Comsat's
consolidated tax group. The Company has prepared its 1995 and 1996
income tax provisions based on inclusion in Comsat's consolidated returns
for the respective periods. 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.
In connection with the SpectraVision Acquisition, the Company has until
July 15, 1997 to determine whether it will elect under Internal Revenue
Code Section 338(h)(10) to treat the transaction as a purchase of assets
for tax purposes. The computation of deferred taxes has been made on the
assumption that the Company will make this election. However, management
will continue to evaluate the alternative tax treatment for the
Acquisition and may choose to treat it as a taxable stock purchase
whereby the Company would assume carryover basis in SpectraVision's
assets, including net operating losses.
The provision for income taxes for the years ended December 31 consists
of the following (in thousands):
1996 1995 1994
Current:
Federal $(776) $ (714) $2,525
State 257 48 171
Foreign 498 - -
----- ------ ------
(21) (666) 2,696
Deferred:
Federal 354 3,572 (508)
State (159) 391 125
----- ------ ------
195 3,963 (383)
----- ------ ------
Total $ 174 $3,297 $2,313
===== ====== ======
37
<PAGE> 40
The provision for income taxes differs from the amount obtained by applying the
federal statutory rate (35%) to income (loss) before income taxes for the years
ended December 31 as follows (in thousands):
1996 1995 1994
Tax computed at federal statutory rate $(5,097) $2,870 $2,019
State taxes net of federal benefit (580) 439 296
Other 20 (12) (2)
Foreign 498 - -
Valuation allowance 5,333 - -
------- ------ ------
Provision for income taxes $ 174 $3,297 $2,313
------- ------ ------
Income (loss) before income taxes for the years ended December 31 consists of
the following (in thousands):
1996 1995 1994
Domestic $(14,387) $8,199 $5,769
Foreign (178) - -
-------- ------ ------
Total $(14,565) $8,199 $5,769
======== ====== ======
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):
1996 1995
Deferred tax assets:
Tax net operating loss and credit
carryforwards $ 4,991 $ 1,856
Accruals not recognized for
tax purposes 5,536 839
Deferred revenue 72 322
Other 646 120
Tax basis in excess of book basis
(338 election) 52,397 -
Valuation allowance (56,885) -
------- -------
Total deferred tax assets 6,757 3,137
Deferred tax liabilities:
Depreciation and amortization (6,860) (2,233)
Other (162) -
------- -------
Total deferred tax liabilities (7,022) (2,233)
------- -------
Net deferred tax asset (liability) $ (265) $ 904
======= =======
The Company has placed a valuation allowance of $56,885,000 at December 31, 1996
(none at December 31, 1995) against its otherwise recognizable net deferred tax
assets due to the uncertainty surrounding the realizability of these benefits in
future tax returns.
38
<PAGE> 41
The Company has federal net operating loss carryforwards of approximately
$6,100,000, which expire beginning in 2012. In addition, the Company has
state net operating loss carryforwards of approximately $15,000,000 which
expire beginning in 2000 and may be subject to limitation in the event of
certain defined changes in stock ownership. Alternative minimum tax
credit carryforwards of approximately $1,700,000 and $250,000 are
available to offset future regular federal and state tax liabilities,
respectively. State research and development tax credit carryforwards of
approximately $165,000 are available to offset future liabilities.
10. RELATED PARTY TRANSACTIONS
ASCENT/COMSAT
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
approximately 5,337,000 shares of common stock of the Company. During
1996, in connection with the aforementioned Contribution Agreement,
Ascent contributed additional assets and liabilities with a net book
value of $1,385,000 to the Company. Both of these transfers of net
assets and shares between companies under common control have been
accounted for at historical cost.
The Company sold video systems and provided video management services to
Ascent totaling approximately $18,900,000 and $28,100,000 which accounted
for 18% and 34% of total revenues in 1995 and 1994, respectively (none in
1996). The Company had approximately $21,000 and $206,000 in payables to
Ascent at December 31, 1996 and 1995. The Company had approximately
$645,000 and $312,000 in payables to Comsat at December 31, 1996 and
1995. Marketing, general and administrative expenses in the accompanying
financial statements are net of $732,000 and $1,316,000 in 1995 and 1994,
respectively, paid by Ascent based on a percentage of video system sales
to Ascent (none in 1996). Research and development expenses in the
accompanying financial statements are net of $436,000 and $742,000 in
1995 and 1994, respectively, paid by Ascent based on a percentage of
video system sales to Ascent (none in 1996).
During 1996, the Company and Ascent entered into a Corporate Agreement,
pursuant to which the Company has agreed with Ascent not to incur any
indebtedness without Ascent's prior consent, other than indebtedness under
the Company's Credit Facility (see Note 6), 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 an
agreement between Ascent and Comsat (the "Comsat Agreement"), Ascent has
agreed not to incur any indebtedness, other than under Ascent's existing
credit facility (and refinancings thereof) and indebtedness incurred in
the ordinary course of business, which together shall not exceed $236
million in the aggregate, without Comsat's consent. (See additional
discussion in Note 14.)
Effective October 8, 1996, the Company entered into an "Intercompany
Management Services Agreement" with Ascent under which Ascent will provide
certain management services to OCC through December 31, 1999. Services to
be provided include insurance administration, coordination and advisory
services regarding corporate financing, employee benefits administration,
public relations, and various other general corporate functions. Fees for
management services are $100,000 per month. The Company paid in cash a
total of $100,000 in management service fees to Ascent in 1996.
39
<PAGE> 42
Finally, on October 18, 1996, Comsat announced that it intends to divest
its 80.67% ownership interest in Ascent through a sale, spin-off or other
transaction.
In July 1993, pursuant to a stock purchase agreement with
Hilton, the Company sold 1,165,993 shares of redeemable common stock at
$8.80 per share. The stock purchase agreement provided that, until May
1998 or until the Company became a publicly traded entity, 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. Upon consummation of the SpectraVision
Acquisition, the Company became publicly traded; therefore, the redemption
feature expired. Accordingly, the carrying value of the redeemable common
stock was reclassified to permanent equity.
In July 1993, in connection with the signing of a contract to provide
services, the Company issued Hilton warrants (the "Hilton Warrants") to
purchase 1,165,993 shares of common stock at $9.68 per share through May
1996, increasing to $10.65 per share in June 1996 and $11.72 per share in
June 1997, subject to anti-dilution. The original value ascribed to the
Hilton 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 1996, 1995 and 1994.
In August 1996, OCV, Ascent and Hilton entered into a letter of agreement
(the "Letter Agreement") providing for the cancellation of approximately
1,336,000 shares of OCV common stock issued to Ascent pursuant to the
Contribution Agreement discussed above. The Letter Agreement also
provided for an extension of the effective date of the increase in the
exercise price of the Hilton Warrants from June 1, 1996 to 90 days after
the closing of the Acquisition of SpectraVision. On October 7, 1996,
Hilton exercised its warrants and the Company received proceeds of $1.8
million in cash and $8.9 million in the form of a promissory note.
The Letter Agreement also provided Hilton the right to put to Ascent all,
but not less than all, of the shares acquired from exercise of the Hilton
Warrants and still held by Hilton on the date 90 days after the closing
of the SpectraVision Acquisition at the same exercise price at which
Hilton exercised its warrants. On January 5, 1997, this put right
expired unexercised.
The Company earned revenues of approximately $18,900,000, $15,000,000 and
$12,400,000, which accounted for 13%, 15% and 15%, of total revenues in
1996, 1995 and 1994, respectively, from Hilton and its affiliates.
Accounts receivable from Hilton and its affiliates at December 31, 1996
was approximately $1.7 million.
MAGINET CORPORATION
The Company also earned video system sales of approximately $4,420,000
and $3,000,000 and movie revenues of approximately $524,000 and $362,000
in 1996 and 1995 from MagiNet Corporation which is a related party by
virtue of the Company's preferred stock investment in this company.
Accounts receivable from MagiNet at December 31, 1996 was approximately
$1 million.
Interest expense to related parties was approximately $1,800,000,
$400,000 and $200,000 in 1996, 1995 and 1994, respectively.
40
<PAGE> 43
11. 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, Canada, Mexico and the Far East. 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.
Marriott Corporation and its affiliates accounted for 25%, 35% and 29% of
revenues in 1996, 1995 and 1994, respectively, while a second customer
accounted for 14% of revenues in 1996. No customers other than Ascent
and Hilton, as described in Note 10 to the Notes to Financial Statements
accounted for more than 10% of revenues during 1996, 1995 or 1994.
12. 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 $1,014,000, $351,000 and $227,000 in 1996,
1995 and 1994, respectively.
13. 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.
In 1995, the Company filed suit against a competitor alleging patent
infringement and seeking unspecified damages. In 1996, the competitor
filed a countersuit against the Company alleging patent infringement and
seeking unspecified damages. The Company intends to contest the
countersuit 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.
14. SUBSEQUENT EVENTS
On January 11, 1997, SpectraVision experienced an interruption in service
caused by the loss of communication with a satellite used to deliver
pay-per-view programming to 950 of OCC's approximately 3,100 hotels. Of
the hotels affected, approximately 410 hotels continued to provide limited
pay-per-view services through alternate disk or tape-based systems. By
February 9, 1997, OCC was able to obtain alternate satellite service and
had restored full service to all the hotels affected. The Company
believes the loss of service will result in approximately $4,000,000 of
decreased revenues and incremental expenses in the first quarter of 1997.
41
<PAGE> 44
On March 21, 1997, COMSAT consented to increase the limitation on
aggregate consolidated indebtedness which Ascent may incur pursuant to the
COMSAT Agreement to $270.0 million for the remainder of 1997; provided
that (i) no more than $50 million of such indebtedness may constitute long
term debt; and (ii) indebtedness subordinated to indebtedness under
Ascent's existing credit facility could only be incurred on terms which
did not adversely affect COMSAT's proposed tax-free distribution of its
interest in Ascent to COMSAT stockholders. In connection with COMSAT's
consent under the COMSAT Agreement, Ascent consented under the OCC
Corporate Agreement to increase OCC's limitation on indebtedness to a
total of not more than $116 million by June 30, 1997 and not more than
$130 million by December 31, 1997; provided, however that (i) no more than
$50 million of such indebtedness may constitute long term debt; and (ii)
indebtedness may only be incurred in compliance with the financial
covenants contained in the OCC's existing $150 million credit facility,
with any amendments to such covenants subject to the written consent
of Ascent.
On March 23, 1997 OCC entered into an amendment to the Credit Facility
(the "OCC Amendment"). Under the OCC Amendment, the amount available
under the OCC Credit Facility was increased from $125 million to $150
million, and certain other terms were amended to clarify such terms.
* * * * *
42
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Except for the portion of Item 10 relating to Executive Officers which
is included in Part I of this Report, the information called for by Items 10
through 13 is incorporated by reference from the On Command Corporation 1997
Annual Meeting of Stockholders - Notice and Proxy Statement - (the "Proxy
Statement") (to be filed pursuant to Regulation 14A not later than 120 days
after the close of the fiscal year ended December 31, 1996) which meeting
involves election of directors, in accordance with General Instruction G to the
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is hereby incorporated by reference
to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is hereby incorporated by reference
to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is hereby incorporated by
reference to the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of On Command
Corporation are included in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995, and 1994
Notes to the Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of On Command
Corporation is included:
43
<PAGE> 46
Schedule II -- Valuation Accounts
Information required by the other schedules has been presented in the
Notes to the Consolidated Financial Statement or such schedule is not
applicable and, therefore, has been omitted.
44
<PAGE> 47
(A)(3) EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of August 13, 1996, which is
incorporated by reference to Amendment to No.3 to Form S-4 ("Form
S-4), 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, which is
incorporated by reference to Form S-4, by and among On Command
Corporation, Ascent Entertainment Group, Inc., the Official Creditors'
Committee for Spectra Vision, Inc. and certain of its subsidiaries,
Spectra Vision, Inc., Spectradyne, Inc. and the other Debtors named
therein
3.1 Certificate of Amended and Restated Certificate of Incorporation of On
Command Corporation, which is incorporated by reference to Form S-4
3.2 Form of Certificate of Merger of On Command Merger Corporation with and
into On Command Video Corporation, which is incorporated by reference
to Form S-4
3.3 Bylaws of On Command Corporation, which is incorporated by reference to
Form S-4
4.1 Registration Rights Agreement by and among On Command Corporation and
the other parties named therein, which is incorporated by reference to
Form S-4
4.2 Warrant Agreement by and among On Command Corporation and the other
parties named therein, which is incorporated by reference to Form S-4
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 granted), which is
incorporated by reference to Form S-4, (Incorporated by reference to
Exhibit 10.6 of the Registration statement on form S-1 (File No.
33-98502) of Ascent Entertainment Group, Inc.)
10.2 Amended and Restated Spectra Vision and Interactive Services National
Agreement, by and between Hyatt Corporation and Spectradyne, Inc.,
which is incorporated by reference to Form S-4, (confidential
treatment granted)
10.3 Amended and Restated SpectraMax National Agreement, dated August 31,
1993, by and between Hyatt Corporation and Spectradyne, Inc., which is
incorporated by reference to Form S-4, (confidential treatment
granted)
10.4 Hilton Hotels Corporation-On Command Video Agreement, dated April 27,
1993, by and between Hilton Hotels Corporation and On Command Video
Corporation, which is incorporated by reference to Form S-4
(confidential treatment granted)
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, which is incorporated by
reference to Form S-4
10.6* Form of Employment Agreement between On Command Corporation and Robert
Kavner, which is incorporated by reference to Form S-4
10.7 Credit Agreement dated as of October 8, 1996 among On Command
Corporation, the Lender named therein and NationsBank of Texas, N.A.
(Incorporated by reference to Exhibit 10.19 of the Annual Report on
Form 10-K for the year ended December 31, 1996 of Ascent Entertainment
Group, Inc. (Commission File No. 0-27192).
10.7(a) First Amendment to Credit Agreement and related documents, dated March,
1997, between NationsBank of Texas, N.A. and On Command Corporation.
(Incorporated by reference to Exhibit 10.19(a) of the Annual Report on
Form 10-K for the year ended December 31, 1996 at Ascent Entertainment
Group, Inc. (Commission File No. 0-27192)).
10.8* Form of Employment Agreement between On Command Corporation and Brian
Steel, which is incorporated by reference to Form S-4
10.9* Employment and Consulting Agreement, dated November 20, 1991, between
Robert Snyder and On Command Video Corporation which is incorporated
by reference to Form S-4
10.10 Standard Lease, dated June, 1996, between Berg & Berg Developers, and On
Command Video Corporation
10.11 Sublease Agreement, dated January, 1997, between On Command Corporation
and Hughes Network Systems, Inc.
45
<PAGE> 48
10.12 Corporate Agreement dated as of October 8, 1996, between On Command
Corporation and Ascent Entertainment Group, Inc. (Incorporated
by reference to Exhibit 10.22 of the Annual Report on Form 10-K
for the year ended December 31, 1996 at Ascent Entertainment
Group, Inc. (Commission File No. 0-27192)).
10.13* 1996 Key Employee Stock Plan
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of On Command Corporation.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
* Indicates compensatory plan or arrangement.
- ---------------
(B) REPORTS
1. The Registrant filed with the Commission on October 25, 1996 a Form 8-K
describing the acquisition of the assets and certain liabilities of
SpectraVision, Inc. by On Command Corporation. Financial Statements
included in this Form 8-K are as follows:
(1) The following financial statements of SpectraVision, Inc. were
incorporated by reference from Amendment No. 3 to the On Command
Corporation Registration Statement on Form S-4, Commission file
No. 333-10407, filed with the Commission on October 7, 1996:
Audited Financial Statements for the years ended December 31, 1995,
1994 and 1993 including:
Independent Auditor's Report
Consolidated Balance Sheets at December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
Unaudited Interim Financial Statements for the six months ended
June 30, 1996 and 1995
Condensed Balance Sheets at June 30, 1996 and December 31, 1995
Condensed Statements of Operations for the six months ended June 30,
1996 and 1995
Condensed Statements of Cash Flows for the six months ended June 30,
1996 and 1995
Notes to Condensed Financial Statements
(2) The following financial statements of OCV, were incorporated by
reference from Amendment No. 3 to On Command Corporation registration
Statement on Form S-4, Commission file No. 333-10407, filed with the
Commission on October 7, 1996:
Audited Financial Statements for the years ended December 31, 1995, 1994
and 1993 including:
46
<PAGE> 49
Report of Deloitte & Touche LLP
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets at December 31, 1995 and 1994
Statements of Income for the years ended December 31, 1995, 1994, and
1993
Statements of Stockholders' Equity for the years ended December 31,
1995, 1994, and 1993
Statements of Cash Flows for the years ended December 31, 1995, 1994,
and 1993 Notes to Financial Statements
Unaudited Interim Financial Statements for the six months ended
June 30, 1996 and 1995
Condensed Balance Sheets at June 30, 1996 and December 31, 1995
Condensed Statements of Income for the six months ended June 30, 1996
and 1995
Condensed Statements of Cash Flows for the six months ended June 30,
1996 and 1995
Notes to Condensed Financial Statements
47
<PAGE> 50
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY SAN
JOSE, STATE OF CALIFORNIA ON MARCH 31, 1997.
On Command Corporation
By: /s/ ROBERT M. KAVNER
Robert M. Kavner
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ ROBERT M. KAVNER President, Chief Executive Officer, March 31, 1997
- -------------------------------------
Robert M. Kavner and Director
(Principal Executive Officer)
/s/ BRIAN A. C. STEEL Executive Vice President, March 31,1997
- -----------------------------------------
Brian A. C. Steel Chief Financial Officer,
Chief Operating Officer, and
Director
(Principal Financial Officer)
/s/ PAUL J. MILLEY Senior Vice President, Finance March 31, 1997
- -------------------------------------------
Paul J. Milley (Principal Accounting Officer)
/s/ JAMES A. CRONIN,III Director March 31, 1997
- ---------------------------------------
James A. Cronin, III
/s/ CHARLES LYONS Chairman of the Board March 31, 1997
- --------------------------------------
Charles Lyons
/s/ GARY L. WILSON Director March 31, 1997
- -----------------------------------------
Gary L. Wilson
/s/ WARREN Y. ZEGER Director March 31, 1997
- ---------------------------------------
Warren Y. Zeger
</TABLE>
48
<PAGE> 51
ON COMMAND CORPORATION
Schedule II
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
--------------
Balance at
Beginning of Acquired with Charged to Costs Balance at
Description Period Spectra Vision and Expenses Deduction End of Period
----------- ------------ -------------- ---------------- --------- -------------
<S> <C> <C> <C> <C> <C>
From January 1, 1996 to December 31, 1996
Deferred tax asset valuation allowance $52,397,000 $5,333,000 $845,000 $56,885,000
Bad debt allowance 100,000 100,000 450,000 21,000 629,000
Tax receivable reserve
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
</TABLE>
49
<PAGE> 52
Officers
Robert M. Kavner
President, Chief Executive Officer and Director
Brian A.C. Steel
Executive Vice President, Chief Financial Officer,
Chief Operating Officer and Director
Robert Snyder
Vice Chairman
Richard C. Fenwick, Jr.
Senior Vice President, Engineering
Ronald D. Lessack
Senior Vice President, Operations
Paul J. Milley
Senior Vice President, Finance
Jill E. Fishbein
General Counsel and Secretary, Senior Vice President,
Legal
Jean A. deVera
Vice President, National Accounts
Edward B. Neumann
Vice President, Finance
Richard A. Swift
Vice President, Sales
Directors
Charles Lyons, Chairman
President and Chief Executive Officer, Ascent
Entertainment Group, Inc.
Robert M. Kavner
President, Chief Executive Officer
Brian A.C. Steel
Executive Vice President, Chief Financial Officer,
Chief Operating Officer
James A. Cronin, III
Chief Operating Officer and Executive Vice President
of Finance, Ascent Entertainment Group, Inc.
Gary L. Wilson
Co-chairman, Northwest Airlines, Inc.
Warran Y. Zeger
Vice President, General Counsel, Secretary,
Comsat Corporation
Robert Snyder
Vice Chairman
COMMON STOCK
The Company's common stock commenced trading on October 8, 1996, and is listed
on the NASDAQ National Market under the symbol ONCO.
SERIES A COMMON STOCK PURCHASE WARRANTS
The Series A Warrants commenced trading on October 8, 1996, and are listed on
the NASDAQ National Market under the ticker symbol ONCOW.
SERIES B COMMON STOCK PURCHASE WARRANTS
The Series B Warrants commenced trading on January 10, 1997, and are listed on
the NASDAQ National Market under the ticker symbol ONCOZ.
FORM 10-K AND OTHER INVESTOR INFORMATION
A copy of our Form 10-K, filed with the Securities and Exchange Commission
(SEC), is included in this report. Additional copies are available upon request.
To have your name placed on a mailing list for copies of press releases and
periodic reports to the SEC, please call or fax our corporation headquarters.
AUDITORS
Deloitte & Touche LLP
60 S. Market Street, Suite 800
San Jose, California 95113
TRANSFER AGENT
Bank of New York
101 Barclay Street (22W)
New York, New York 10286
SHAREHOLDER SERVICES AGENT
If you have questions concerning your ownership or records, please write to
On Command Corporation
c/o The Bank of New York
Church Street Station
PO Box 11258
New York, New York 10286-1258
50
<PAGE> 1
EXHIBIT 10.10
- --------------------------------------------------------------------------------
STANDARD FORM LEASE
- --------------------------------------------------------------------------------
PARTIES: This Lease, executed in duplicate at Cupertino, California on June __,
1996, by and between Berg & Berg Developers, a California General Partnership,
and On Command Video, a California Corporation, hereinafter called respectively
Lessor and Lessee, without regard to number or gender.
USE: Witnesseth: That Lessor hereby leases to Lessee, and Lessee hires from
Lessor, for the purpose of conducting therein office, research and development,
light manufacturing, and warehouse activities, and any other legal activity;
and for no other purpose without obtaining the prior written consent of Lessor.
PREMISES: The real property with appurtenances as shown on Exhibit A (the
"Premises") situated in the City of San Jose, County of Santa Clara, State of
California, and more particularly described as follows:
95,000 square feet of building (the "Building"), including all
improvements thereto, as shown on Exhibit A, including the right to
use up to 378 unreserved parking spaces and 36,000 square foot of
warehouse space to be constructed on the Premises as shown on Exhibit
A.3. The address for the Premises is 6331 San Ignacio, San Jose,
California. Lessee's pro-rata share of the Building is 100%.
TERM: The term shall be for eighty-four (84) months unless extended pursuant
to Section 35 of this Lease (the "Lease Term"), commencing on the 1st day of
September, 1996 (the "Commencement Date"), and ending on the 31st day of
August, 2003.
RENT: Base rent shall be payable in monthly installments as follows:
Base rent Estimated CAC* Total
--------- -------------- -----
Months 1 through 12 $98,250 $16,471* $114,721
Monthly base rent to increase by 3% on the anniversary of the Commencement Date
each year during the Lease Term over the prior year's rent.
* CAC charges to be adjusted per Common Area Charges Section below.
COMMON AREA CHARGES: Lessee shall pay to Lessor, as additional Rent, an amount
equal to its pro rata share of the total common area charges of the Project and
one hundred percent (100%) of the total common area charges for the Building
(the common area charges for the Project and the common area charges for the
building collectively referred to herein as ("CAC")). Lessee shall pay to
Lessor as Rent, on or before the first day of each calendar month during the
Lease Term, subject to adjustment and reconciliation as provided hereinbelow,
the sum of Sixteen Thousand Five Hundred Dollars ($16,500), said sum
representing Lessee's estimated monthly payment of Lessee's percentage share of
CAC. It is understood and agreed that Lessee's obligation under this paragraph
shall be prorated to reflect the Commencement Date and the end of the Lease
Term. Upon execution of this Lease, Lessee shall deposit with Lessor the first
month's estimated CAC.
Lessee's estimated monthly payment of CAC payable by Lessee during the calendar
year in which the Lease commences is set forth above. At or prior to the
commencement of each succeeding calendar year term (or as soon as practical
thereafter), Lessor shall provide Lessee with Lessee's estimated monthly
payment for CAC which Lessee shall pay to Lessor as Rent. Within 120 days of
the end of the calendar year and the end of the Lease Term, Lessor shall
provide Lessee a statement of actual CAC incurred including capital reserves
for the preceding year or other applicable period in the case of a termination
year. If such statement shows that Lessee has paid less than its actual
percentage, then Lessee shall on demand pay to Lessor the amount of
<PAGE> 2
such deficiency. If such statement shows that Lessee has paid more than its
actual percentage, then Lessor shall, at its option, promptly refund such
excess to Lessee or credit the amount thereof to the Rent next becoming due
from Lessee. Lessor reserves the right to revise any estimate of CAC if the
actual or projected CAC show an increase or decrease in excess of 10% from an
earlier estimate for the same period. In such event, Lessor shall provide a
revised estimate to Lessee, together with an explanation of the reasons
therefor, and Lessee shall revise its monthly payments accordingly. Lessor's
and Lessee's obligation with respect to adjustments at the end of the Lease
Term or earlier expiration of this Lease shall survive the Lease Term or
earlier expiration.
As used in this Lease, CAC shall include but are not limited to, (i) items
specified as CAC items in Paragraphs 5(b), 6, 9, 16 and 31; (ii) utility costs
related to the common areas of the Project (the "Project" is shown on Exhibit
A.2) (iii) all costs and expenses including but not limited to supplies,
materials, equipment and tools used or required in connection with the
operation and maintenance of the Project; (iv) licenses, permits and inspection
fees; (v) all other costs incurred by Lessor in maintaining and operating the
Project; (vi) all reserves for capital replacements; and (vii) an amount equal
to two and one-half percent (2.5%) of the aggregate of all CAC, as
compensation for Lessor's accounting and processing services. Lessee shall
have the right to review the CAC applicable to this Lease annually.
SECURITY DEPOSIT: Lessee shall deposit with Lessor the sum of One Hundred
Fourteen Thousand Seven Hundred Twenty-One Dollars ($114,721) (the "Security
Deposit"). The Security Deposit shall be held by Lessor as security for the
faithful performance by Lessee of all of the terms, covenants, and conditions
of this Lease applicable to Lessee. If Lessee commits a default as provided
for herein, including but not limited to a default with respect to the
provisions contained herein relating to the condition of the Premises, Lessor
may (but shall not be required to) use, apply or retain all or any part of the
Security Deposit for the payment of any amount which Lessor may spend by reason
of default by Lessee. If any portion of the Security Deposit is so used or
applied, Lessee shall, within ten days after written demand therefor, deposit
cash with Lessor in an amount sufficient to restore the Security Deposit to its
original amount. Lessee's failure to do so shall be a default by Lessee. Any
attempt by Lessee to transfer or encumber its interest in the Security Deposit
shall be null and void. Upon execution of this Lease, Lessee shall deposit
with Lessor the Security Deposit. Notwithstanding the above, Lessor agrees to
waive the requirement for Lessee to make a security deposit provided Lessee's
shareholder's equity exceeds $25 million. If at any time during this Lease,
Lessee's shareholder's equity is less than $25 million, Lessee shall deposit
with Lessor the Security Deposit referenced above within ten days after the
issuance of Lessee's financial statements indicating the reduction in
shareholder's equity below $25 million. If Lessee fails to make the Security
Deposit as required, Lessee shall be deemed to be in default per Section 14.1
(a) of this Lease.
LATE CHARGES: Lessee hereby acknowledges that a late payment made by Lessee to
Lessor of Rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges, which may be imposed on Lessor
according to the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of Rent or any other sum due from Lessee is not
received by Lessor or Lessor's designee within ten (10) days after such amount
is due, Lessee shall pay to Lessor a late charge equal to five (5%) percent of
such overdue amount. The parties hereby agree that such late charge represents
a fair and reasonable estimate of the costs Lessor will incur by reason of late
payments made by Lessee. Acceptance of such late charges by Lessor shall in no
event constitute a waiver of Lessee's default
Page 2
<PAGE> 3
with respect to such overdue amount, nor shall it prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
QUIET ENJOYMENT: Lessor covenants and agrees with Lessee that upon Lessee
paying Rent and performing its covenants and conditions under this Lease,
Lessee shall and may peaceably and quietly have, hold and enjoy the Premises
for the Lease Term, subject, however, to the rights reserved by Lessor
hereunder.
COMMENCEMENT DATE MEMORANDUM: When the actual Commencement Date is determined,
the parties shall execute a Commencement Date Memorandum setting forth the
Commencement Date, the expiration date of the Lease Term and the actual square
footage of the Warehouse and any required adjustments to base rent and CAC, but
failure to do so shall not affect the continuing validity and enforceability of
this Lease, which shall remain in full force and effect.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
1. POSSESSION: Possession shall be deemed tendered and the Lease Term shall
commence upon the first to occur of the following (the "Commencement Date"):
(i) the Premises are Substantially Complete or (ii) Lessee occupies the
Premises and commences to conduct business operations or (iii) if Lessor is
prevented from or delayed in completing its work under Section 2 of this Lease
due to Lessee Delays, such work shall be deemed Substantially Complete as of
the date on which it would have been Substantially Complete had it not been for
such Lessee Delays. It is the intention of Lessee and Lessor that September 1,
1996 shall be the Commencement Date.
"Substantially Complete" shall mean that: (i) Lessor has tendered possession of
Premises to Lessee, (ii) Lessor has met all legal requirements for occupancy,
(iii) The Lessee Interior Improvements are materially complete per the approved
plans, exclusive of telephone or other communication systems, punchlist items
and there remains no incomplete or defective items of work which would
materially adversely affect Lessee's intended use of the Premises and (iv) said
interior of the building is in a "broom clean" condition.
2. LESSEE'S IMPROVEMENTS: The "Lessee Interior Improvements" shall be defined
as all items as shown on attached Exhibit B and shall be constructed by
independent contractors to be employed by and under the supervision of Lessor,
in accordance with complete plans and specifications prepared by Lessor for
submission to the City of San Jose ("Lessee Improvement Plans"), complete with
all mechanical and electrical design, approved by Lessee, and then to be
attached hereto as Exhibit B.1. Lessee and its designated representatives,
shall at all times during the construction of the Lessee Interior Improvements
have access to the Premises to monitor the progress of construction and
Lessor's compliance with its obligation hereunder; provided however, that such
access shall not unreasonably interfere with the activities of Lessor or its
contractors.
The "Warehouse" shall be defined as the improvements shown on attached Exhibit
C and shall be constructed by independent contractors to be employed by and
under the supervision of Lessor, in accordance with complete plans and
specifications prepared by Lessor for submission to the City of San Jose
("Warehouse Plans"), complete with all mechanical and electrical design,
approved by Lessee, and then to be attached hereto as Exhibit C.1.
Page 3
<PAGE> 4
Lessor shall be responsible for ensuring that the Lessee Interior Improvements
and Warehouse conform to the approved plans and all applicable statutes, rules,
regulations, ordinances, and San Jose Building Department interpretations
necessary for occupancy.
Lessor shall be responsible for and shall pay the cost of the Lessee Interior
Improvements up to the amount shown on Exhibit B of One Million Two Hundred
Thousand Dollars ($1,200,000) (the "TI Allowance"). In the event the cost of
the Lessee Interior Improvements is more than the TI Allowance, the monthly
base rent under the Lease shall be increased by $16.60 per month for every
$1,000 dollars the costs exceed the TI Allowance up to a maximum of $250,000.
Costs in excess of the TI Allowance and $250,000 overage, if any, will not be
incurred without advance approval of Lessee. Any approved cost over the TI
Allowance and $250,000 overage shall be paid for by Lessee in cash within
fifteen (15) days after Lessor has provided Lessee with evidence that the work
approved is complete. Lessor shall be entitled to a construction management
fee covering its overhead and profit on the TI Allowance and $250,000 overage
of six percent (6%). All costs for Lessee Interior Improvements shall be
documented and subject to verification by Lessee.
Lessor shall be responsible for and shall pay the cost of the Warehouse as a
turnkey project as defined on attached Exhibit C. In the event the scope of
the Warehouse improvements increases beyond that shown on Exhibit C, the
monthly base rent under the Lease shall be increased by $16.60 per month for
every $1,000 dollars of Warehouse improvements in addition to the turnkey
improvements described on Exhibit C, up to a maximum of One Hundred Fifty
Thousand Dollars ($150,000). Warehouse improvements in additon to the turnkey
improvements shown on Exhibit C with a cost exceeding the $150,000 overage, if
any, will not be incurred without advance approval of Lessee. Any approved
cost in addition to the turnkey Warehouse improvements described on Exhibit C
and the $150,000 overage shall be paid for by Lessee in cash within fifteen
(15) days after Lessor has provided Lessee with evidence that the work approved
is complete. Lessor shall be entitled to a construction management fee
covering its overhead and profit on the Warehouse improvements and the $150,000
overage of six percent (6%). All costs for the Warehouse improvements shall be
documented and subject to verification by Lessee.
Lessor shall use its best efforts to cause the Commencement Date of the initial
term to occur not later than September 1, 1996. If the Commencement Date has
not occurred by October 1, 1996, Lessee shall receive one day of base rent
abatement for each day after October 1, 1996 until the Commencement Date.
Lessor and Lessee agree that having a Commencement Date after October 1, 1996
will cause Lessee and Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Accordingly,
the parties hereby agree that Lessee's right to the abatement of base rent
specified herein represents a fair and reasonable settlement for both parties
and neither party shall have further liability to the other for any damages.
If the Commencement Date has not occurred by November 1, 1996, Lessee may at
its sole option, by written notice to Lessor, have the right to terminate this
Lease at any time after November 1, 1996 until the Commencement Date.
Notwithstanding anything to the contrary herein, all dates stated herein shall
be extended for the number of days Lessor is unable to Substantially Complete
the Premises as a result of delays (i) due to governmental actions (other than
governmental action of refusing to approve work which fails to comply with the
law or the building permit) which occurs after receipt of normal building
permits, (ii) due to acts of God, (iii) due to circumstances beyond Lessor's
control, (iv) after thirty (30) days that the City of San Jose requires to
issue a building permit after plan submittal by Lessor, and (v) due to Lessee
Delays. "Lessee Delays" means a delay in Substantial Completion resulting from
(a) Lessee's failure to meet Lessee's deadlines for approval as shown on
Exhibit E, (b) delays due to change orders, (c) delays due to Lessee's failure
to meet the deadlines for approving any plans or change orders, and (d) delays
because of the inability to obtain any product, materials, design, color,
Page 4
<PAGE> 5
fitting, or finish pursuant to this Section 2. Lessee shall have a minimum of
3 business days to approve or disapprove any preliminary plans or change orders
and a minimum of 10 business days to approve or disapprove any final plans. If
Lessee does not disapprove any plans or change orders within the time period
set forth herein in writing, Lessor may proceed on the basis that the plans or
change orders are approved by Lessee. If plans or change orders are
disapproved, Lessee shall state the reason for disapproval and Lessor and
Lessee shall act in good faith to resolve any issues. Lessor shall charge
Lessee $250 per change order after the fifth (5th) change order for processing.
2.1 ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: Lessor represents that
the Premises shall be in good order and repair, and shall comply with all
requirements for occupancy as of the Commencement Date. Lessee agrees on the
last day of the Lease Term, or on the sooner termination of this Lease, to
surrender the Premises to Lessor in Good Condition and Repair. Good Condition
and Repair ("Good Condition and Repair") shall not mean original condition, but
shall mean that the Premises are in a commercially acceptable condition
suitable for occupancy by a reasonable lessee. The interior walls of all
office and warehouse areas, the floors of all office and warehouse areas, all
suspended ceilings and any carpeting are to be cleaned and in Good Condition
and Repair. Lessee also agrees to surrender unto Lessor all alterations,
additions, and improvements which may have been made in, to, or on the Premises
by Lessee, except that Lessee shall ascertain from Lessor, within (30) days
before the end of the Lease Term or earlier termination of this Lease, whether
Lessor desires to have the Premises or any part or parts thereof restored to
their condition as of the Commencement Date of this Lease; if Lessor shall so
desire, then Lessee shall restore said Premises or such part or parts thereof
before the end of the Lease Term or earlier termination of this Lease at
Lessee's sole cost and expense. Lessee, on or before the end of the Lease Term
or sooner termination of this Lease, shall remove all its personal property and
trade fixtures from the Premises, and all such property not so removed shall be
deemed to be abandoned by Lessee. Lessee shall reimburse Lessor for all
disposition costs incurred by Lessor relative to Lessee's abandoned property.
If the Premises are not surrendered at the end of the Lease Term or earlier
termination of this Lease, Lessee shall indemnify Lessor against loss or
liability resulting from any delay caused by Lessee in surrendering the
Premises including, without limitation, any claims made by any succeeding
Lessee founded on such delay.
3. USES PROHIBITED: Lessee shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the buildings in
which the subject Premises are located or allow any sale by auction upon the
Premises, or allow the Premises to be used for any improper, immoral, unlawful
or objectionable purpose, or place any loads upon the floor, walls, or ceiling
which may endanger the structure, or use any machinery or apparatus which will
in any manner vibrate or shake the Premises or the building of which it is a
part, or place any harmful liquids in the drainage system of the building. No
waste materials or refuse shall be dumped upon or permitted to remain upon any
part of the Premises outside of the building proper. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain on any
portion of the Premises outside of the building structure, unless approved by
the local, state federal or other applicable governing authority. Lessor
consents to Lessee's use of materials which are incidental to the normal,
day-to-day operations of any office user, such as copier fluids, cleaning
materials, etc., but this does not relieve Lessee of any of its obligations not
to contaminate the Premises or related real property or violated any Hazardous
Materials Laws.
4. ALTERATIONS AND ADDITIONS: Lessee shall not make, or suffer to be made, any
alteration or addition to said Premises, or any part thereof, without the
express, advance written consent of Lessor. Any addition or alteration to said
Premises, except movable furniture and trade fixtures, shall become at once a
part of the realty and belong to Lessor at the end of the Lease
Page 5
<PAGE> 6
Term or earlier termination of this Lease. Alterations and additions which are
not deemed as trade fixtures shall include HVAC systems, lighting systems,
electrical systems, partitioning, carpeting, or any other installation which
has become an integral part of the Premises. Lessee agrees that it will not
proceed to make such alterations or additions until all required government
permits have been obtained and after having obtained consent from Lessor to do
so, until five (5) days from the receipt of such consent, so that Lessor may
post appropriate notices to avoid any liability to contractors or material
suppliers for payment for Lessee's improvements. Lessee shall at all times
permit such notices to be posted and to remain posted until the completion of
work. At the end of the Lease Term or earlier termination of this Lease,
Lessee shall remove and shall be required to remove its special tenant
improvements and all related equipment installed by Lessee at or during the
Lease Term and Lessee shall return the Premises to the condition that existed
before the installation of the special tenant improvements. Notwithstanding
the above, Lessor agrees to allow any reasonable alterations and improvements
and will use its best efforts to notify Lessee at the time of approval if such
improvements or alterations are to be removed at the end of the Lease Term or
earlier termination of this Lease.
5. MAINTENANCE OF PREMISES:
(a) Lessee shall at its sole cost and expense keep and maintain the
interior of the Premises, including, but not limited to, all lighting
systems, temperature control systems and plumbing systems, in Good
Condition and Repair, including any required replacements. Lessee shall
maintain all wall surfaces and floor coverings in Good Condition and
Repair, free of holes, gouges, or defacements.
(b) Lessor shall keep and maintain in Good Condition and Repair including
replacements, at Lessee's expense, based on a pro-rata share of cost based
on square footage or costs directly related to Lessee's use of the Premises
the following, which shall be included in the monthly CAC:
1. The exterior of the building, any appurtenances and every part
thereof, including but not limited to, glazing, sidewalks, parking
areas, electrical systems, HVAC systems, roof membrane, and painting
of exterior walls.
2. The HVAC by a service contract with a licensed air conditioning and
heating contractor which contract shall provide for a minimum of
quarterly maintenance of all air conditioning and heating equipment at
the Premises including HVAC repairs or replacements which are either
excluded from such service contract or any existing equipment
warranties.
3. The landscaping by a landscape contractor to water, maintain, trim
and replace, when necessary, any shrubbery and landscaping at the
Premises.
4. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of
semi-annual maintenance, cleaning of storm gutters, drains, removing
of debris and trimming overhanging trees, repair of the roof and
application of a finish coat every five years at the Premises.
5. Extermination services.
6. Fire monitoring services.
(c) Lessee hereby waives any and all rights to make repairs at the expense
of Lessor as provided in Section 1942 of the Civil Code of the State of
California, and all rights provided for by Section 1941 of said Civil Code.
Page 6
<PAGE> 7
(d) Lessor shall be responsible for the repair of any structural defects in
the Premises including the roof structure (not membrane), exterior walls
and foundation during the Lease Term.
6. HAZARD INSURANCE: Lessee shall not use, or permit said Premises, or any part
thereof, to be used, for any purpose other than that for which said Premises
are hereby leased; and no use shall be made or permitted to be made of the
Premises, nor acts done, which may cause a cancellation of any insurance policy
covering said building, or any part thereof, nor shall Lessee sell or permit to
be kept, used or sold, in or about said Premises, any article which may be
prohibited by a standard form fire insurance policy. Lessee shall, at its sole
cost and expense, comply with any and all requirements, pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and general liability insurance, covering said
building and appurtenances. Lessor agrees to purchase and keep in force fire
and extended coverage insurance covering loss or damage to the Premises in
amounts not to exceed the full replacement cost of said Premises as determined
by Lessor, with proceeds payable to Lessor. Lessee acknowledges that the
insurance referenced above does not include coverage for Lessee's personal
property. In the event of a loss per the insurance provisions of this
paragraph, Lessee shall be responsible for deductibles up to a maximum of
$5,000 per occurrence. Lessee agrees to pay to the Lessor as additional Rent,
on demand, the full cost of said insurance as evidenced by insurance billings
to the Lessor which shall be included in Lessee's monthly CAC.. If said
insurance billings cover the Premises, and Lessee does not occupy the entire
Premises, the insurance premiums and deductibles shall be allocated to the
portion of the Premises occupied by Lessee on a pro-rata square footage or
other equitable basis, as determined by Lessor. It is understood and agreed
that Lessee's obligation under this paragraph will be prorated to reflect the
Commencement Date and the end of the Lease Term.
Lessor and Lessee hereby waive any rights each may have against the other
related to any loss or damage caused to Lessor or Lessee as the case may be, or
to the Premises or its contents, and which may arise from any risk generally
covered by fire and extended coverage insurance. The parties shall provide
that their respective insurance policies insuring the property or the personal
property include a waiver of any right of subrogation which said insurance
company may have against Lessor or Lessee, as the case may be. Lessor shall
maintain in full force and effect, a policy of rental loss insurance, in an
amount equal to the amount of Rent payable by Lessee commencing on the date of
loss during the next ensuing one (1) year, as reasonably determined by Lessor
with proceeds payable to Lessor ("Loss of Rents Insurance"). Lessee shall
reimburse Lessor for the full cost of said rental loss insurance coverage.
7. ABANDONMENT: Lessee shall not vacate or abandon the Premises at any time
during the Lease Term; and if Lessee shall abandon, vacate or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor. Notwithstanding the above, the Premises
shall not be considered vacated or abandoned if Lessee maintains the Premises
in Good Condition and Repair, provides security and is not in default.
8. FREE FROM LIENS: Lessee shall keep the subject Premises and the property in
which the subject Premises are situated, free from any and all liens including
but not limited to liens arising out of any work performed, materials
furnished, or obligations incurred by Lessee. However, the Lessor shall allow
Lessee to contest a lien claim, so long as the claim is discharged prior to any
foreclosure proceeding being initiated against the property and provided Lessee
provides Lessor a bond if the lien exceeds $5,000.
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9. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Lessee shall, at its sole cost and
expense, comply with all of the requirements of all local, municipal, state and
federal authorities now in force, or which may hereafter be in force,
pertaining to Lessee's use and occupancy of the said Premises, and shall
faithfully observe in the use of the Premises all local and municipal
ordinances and state and federal statutes now in force or which may hereafter
be in force. Except as stated above, Lessee shall not be required to pay for
the construction of any single improvement required under this paragraph in
excess of Twenty-Five Thousand Dollars ($25,000), unless such improvement is
required to comply with Lessee's particular use of the Premises or as a result
of Lessee requested permits or changes made by Lessee. If such improvement is
not required due to Lessee's particular use of the Premises or as a result of
Lessee requested permits or changes made by Lessee and such improvement cost
exceeds Twenty-Five Thousand Dollars ($25,000), such improvement cost shall be
amortized over the estimated useful life of the improvement, not to exceed 10
years at Wells Fargo prime rate plus one percent (1%). Lessee shall pay to
Lessor the amortized costs of such improvement on a monthly basis over the
remaining lease term and any extensions thereof, which shall be included in
Lessee's monthly CAC.
10. LESSEE'S INSURANCE: Lessee, as a material part of the consideration to be
rendered to Lessor, hereby waives all claims against Lessor and Lessor's Agents
for damages to goods, wares and merchandise, and all other personal property
in, upon or about said Premises, and for injuries to persons in, upon or about
said Premises, from any cause arising at any time, and Lessee will hold Lessor
and Lessor's Agents exempt and harmless from any damage or injury to any
person, or to the goods, wares and merchandise and all other personal property
of any person, arising from the use or occupancy of the Premises by Lessee, or
from the failure of Lessee to keep the Premises in good condition and repair,
as herein provided. Lessee shall secure and keep in force a standard policy of
commercial general liability insurance and property damage policy covering the
Premises, including parking areas, insuring the Lessee. A certificate of said
policy naming Lessor as an additional insured shall be delivered to Lessor and
will have a combined single limit for both bodily injury, death and property
damage in an amount not less than five million dollars ($5,000,000.00). The
limits of said insurance shall not, however, limit the liability of Lessee
hereunder. Lessee shall obtain a written obligation on the part of the insurer
to notify Lessor 30 days in advance in writing before any cancellation thereof.
Lessee shall obtain, at Lessee's sole cost and expense, a policy of fire and
extended coverage insurance including coverage for direct physical loss special
form, and a sprinkler leakage endorsement insuring the personal property of
Lessee. The proceeds from any personal property damage policy shall be payable
to Lessee. Lessee shall, at its sole cost and expense, comply with all of the
insurance requirements of all local, municipal, state and federal authorities
now in force, or which may hereafter be in force, pertaining to Lessee's use
and occupancy of the said Premises.
11. ADVERTISEMENTS AND SIGNS: Lessee shall not place or permit to be placed,
in, upon or about the Premises any unusual or extraordinary signs, or any signs
not approved by the city, local, state, federal or other applicable governing
authority. Lessee shall not place, or permit to be placed upon the Premises,
any signs, advertisements or notices without the written consent of the Lessor,
and such consent shall not be unreasonably withheld. A sign so placed on the
Premises shall be so placed upon the understanding and agreement that Lessee
will remove same at the end of the Lease Term or earlier termination of this
Lease and repair any damage or injury to the Premises caused thereby, and if
not so removed by Lessee, then Lessor may have the same removed at Lessee's
expense.
12. UTILITIES: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to the Premises. Any charges for sewer
usage or related fees shall be the obligation of Lessee and paid for by Lessee.
If any such services are not separately metered to Lessee, Lessee shall pay a
reasonable proportion of all charges which are jointly metered, the
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determination to be made by Lessor acting reasonably and on any equitable
basis. Lessor shall not be liable to Lessee for any disruption in any of the
utility services to the Premises.
13. ATTORNEY'S FEES: In case suit should be brought for the possession of the
Premises, for the recovery of any sum due hereunder, or because of the breach
of any other covenant herein, the losing party shall pay to the prevailing
party reasonable attorney's fee which shall be deemed to have accrued on the
commencement of such action and shall be enforceable whether or not such action
is prosecuted to judgment.
14.1 DEFAULT: The occurrence of any of the following shall constitute a default
and breach of this Lease by Lessee: a) Any failure by Lessee to pay Rent or to
make any other payment required to be made by Lessee hereunder when due if not
cured within ten (10) days after written notice thereof by Lessor to Lessee; b)
The abandonment or vacation of the Premises by Lessee except as provided in
Section 7; c) A failure by Lessee to observe and perform any other provision of
this Lease to be observed or performed by Lessee, where such failure continues
for thirty days after written notice thereof by Lessor to Lessee; provided,
however, that if the nature of such default is such that the same cannot be
reasonably cured within such thirty (30) day period, Lessee shall not be deemed
to be in default if Lessee shall, within such period, commence such cure and
thereafter diligently prosecute the same to completion; d) The making by Lessee
of any general assignment for the benefit of creditors; the filing by or
against Lessee of a petition to have Lessee adjudged a bankrupt or of a
petition for reorganization or arrangement under any law relating to
bankruptcy; e) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets or Lessee's interest in this Lease, or the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease.
14.2 SURRENDER OF LEASE: In the event of any such default by Lessee, then in
addition to any other remedies available to Lessor at law or in equity, Lessor
shall have the immediate option to terminate this Lease before the end of the
Lease Term and all rights of Lessee hereunder, by giving written notice of such
intention to terminate. In the event that Lessor terminates this Lease due to
a default of Lessee, then Lessor may recover from Lessee: a) the worth at the
time of award of any unpaid Rent which had been earned at the time of such
termination; plus b) the worth at the time of award of unpaid Rent which would
have been earned after termination until the time of award exceeding the amount
of such rental loss that the Lessee proves could have been reasonably avoided;
plus c) the worth at the time of award of the amount by which the unpaid Rent
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided;
plus d) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessee's failure to perform his obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom; and e) at Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
California law. As used in (a) and (b) above, the "worth at the time of award"
is computed by allowing interest at the rate of Wells Fargo's prime rate plus
two percent (2%) per annum. As used in (c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
14.3 RIGHT OF ENTRY AND REMOVAL: In the event of any such default by Lessee,
Lessor shall also have the right, with or without terminating this Lease, to
re-enter the Premises and remove all persons and property from the Premises;
such property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Lessee.
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14.4 ABANDONMENT: In the event of the vacation or abandonment, except as
provided in Section 7, of the Premises by Lessee or in the event that Lessor
shall elect to re-enter as provided in paragraph 14.3 above or shall take
possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law, and Lessor does not elect to terminate this Lease as
provided in paragraph 14.2 above, then Lessor may from time to time, without
terminating this Lease, either recover all Rent as it becomes due or relet the
Premises or any part thereof for such term or terms and at such rental rates
and upon such other terms and conditions as Lessor, in its sole discretion, may
deem advisable with the right to make alterations and repairs to the Premises.
In the event that Lessor elects to relet the Premises, then Rent received by
Lessor from such reletting shall be applied; first, to the payment of any
indebtedness other than Rent due hereunder from Lessee to Lessor; second, to
the payment of any cost of such reletting; third, to the payment of the cost of
any alterations and repairs to the Premises; fourth, to the payment of Rent due
and unpaid hereunder; and the residue, if any, shall be held by Lessor and
applied to the payment of future Rent as the same may become due and payable
hereunder. Should that portion of such Rent received from such reletting
during any month, which is applied by the payment of Rent hereunder according
to the application procedure outlined above, be less than the Rent payable
during that month by Lessee hereunder, then Lessee shall pay such deficiency to
Lessor immediately upon demand therefor by Lessor. Such deficiency shall be
calculated and paid monthly. Lessee shall also pay to Lessor, as soon as
ascertained, any costs and expenses incurred by Lessor in such reletting or in
making such alterations and repairs not covered by the rentals received from
such reletting.
14.5 NO IMPLIED TERMINATION: No re-entry or taking possession of the Premises
by Lessor pursuant to 14.3 or 14.4 of this Article 14 shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given to Lessee or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Lessor because of any default by Lessee, Lessor may at any time after such
reletting elect to terminate this Lease for any such default.
15. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of Lessor, terminate all or any existing subleases or sub
tenancies, or may, at the option of Lessor, operate as an assignment to him of
any or all such subleases or sub tenancies.
16. TAXES: Lessee shall pay and discharge punctually and when the same shall
become due and payable without penalty, all real estate taxes, personal
property taxes, taxes based on vehicles utilizing parking areas in the
Premises, taxes computed or based on rental income (other than federal, state
and municipal net income taxes), environmental surcharges, privilege taxes,
excise taxes, business and occupation taxes, school fees or surcharges, gross
receipts taxes, sales and/or use taxes, employee taxes, occupational license
taxes, water and sewer taxes, assessments (including, but not limited to,
assessments for public improvements or benefit), assessments for local
improvement and maintenance districts, and all other governmental impositions
and charges of every kind and nature whatsoever, regardless of whether now
customary or within the contemplation of the parties hereto and regardless of
whether resulting from increased rate and/or valuation, or whether
extraordinary or ordinary, general or special, unforeseen or foreseen, or
similar or dissimilar to any of the foregoing (all of the foregoing being
hereinafter collectively called "Tax" or "Taxes") which, at any time during the
Lease Term, shall be applicable or against the Premises, or shall become due
and payable and a lien or charge upon the Premises under or by virtue of any
present or future laws, statutes, ordinances, regulations, or other
requirements of any governmental authority whatsoever. The term "Environmental
Surcharge" shall include any and all expenses, taxes, charges or penalties
imposed by the Federal Department of Energy, Federal Environmental Protection
Agency, the Federal Clean Air Act, or any regulations promulgated thereunder,
or
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any other local, state or federal governmental agency or entity now or
hereafter vested with the power to impose taxes, assessments or other types of
surcharges as a means of controlling or abating environmental pollution or the
use of energy in regard to the use, operation or occupancy of the Premises.
The term "Tax" shall include, without limitation, all taxes, assessments,
levies, fees, impositions or charges levied, imposed, assessed, measured, or
based in any manner whatsoever (i) in whole or in part on the Rent payable by
Lessee under this Lease, (ii) upon or with respect to the use, possession,
occupancy, leasing, operation or management of the Premises, (iii) upon this
transaction or any document to which Lessee is a party creating or transferring
an interest or an estate in the Premises, (iv) upon Lessee's business
operations conducted at the Premises, (v) upon, measured by or reasonably
attributable to the cost or value of Lessee's equipment, furniture, fixtures
and other personal property located on the Premises or the cost or value of any
leasehold improvements made in or to the Premises by or for Lessee, regardless
of whether title to such improvements shall be in Lessor or Lessee, or (vi) in
lieu of or equivalent to any Tax set forth in this Section 16. In the event
any such Taxes are payable by Lessor and it shall not be lawful for Lessee to
reimburse Lessor for such Taxes, then the Rent payable thereunder shall be
increased to net Lessor the same net rent after imposition of any such Tax upon
Lessor as would have been payable to Lessor prior to the imposition of any such
Tax. It is the intention of the parties that Lessor shall be free from all
such Taxes and all other governmental impositions and charges of every kind
and nature whatsoever. However, nothing contained in this Section 16 shall
require Lessee to pay any Federal or State income, franchise, estate,
inheritance, succession, transfer or excess profits tax imposed upon Lessor.
If any general or special assessment is levied and assessed against the
Premises, Lessor agrees to use its best reasonable efforts to cause the
assessment to become a lien on the Premises securing repayment of a bond sold
to finance the improvements to which the assessment relates which is payable in
installments of principal and interest over the maximum term allowed by law.
It is understood and agreed that Lessee's obligation under this paragraph will
be prorated to reflect the Commencement Date and the end of the Lease Term. It
is further understood that if Taxes cover the Premises and Lessee does not
occupy the entire Premises, the Taxes will be allocated to the portion of the
Premises occupied by Lessee based on a pro-rata square footage or other
equitable basis. Taxes billed by Lessor to Lessee shall be included in the
monthly CAC.
Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now or hereafter covering or affecting the Premises, Lessee shall
have the right to contest or review the amount or validity of any Tax by
appropriate legal proceedings but which is not to be deemed or construed in any
way as relieving, modifying or extending Lessee's covenant to pay such Tax at
the time and in the manner as provided in this Section 16. However, as a
condition of Lessee's right to contest, if such contested Tax is not paid
before such contest and if the legal proceedings shall not operate to prevent
or stay the collection of the Tax so contested, Lessee shall, before
instituting any such proceeding, protect the Premises and the interest of
Lessor and of the beneficiary of a deed of trust or the mortgagee of a mortgage
affecting the Premises against any lien upon the Premises by a surety bond,
issued by an insurance company acceptable to Lessor and in an amount equal to
one and one-half (1 1/2) times the amount contested or, at Lessor's option, the
amount of the contested Tax and the interest and penalties in connection
therewith. Any contest as to the validity or amount of any Tax, whether before
or after payment, shall be made by Lessee in Lessee's own name, or if required
by law, in the name of Lessor or both Lessor and Lessee. Lessee shall defend,
indemnify and hold harmless Lessor from and against any and all costs or
expenses, including attorneys' fees, in connection with any such proceedings
brought by Lessee, whether in its own name or not. Lessee shall be entitled to
retain any refund of any such contested Tax and penalties or interest thereon
which have been paid by Lessee. Nothing contained herein shall be construed as
affecting or limiting Lessor's right to contest any Tax at Lessor's expense.
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17. NOTICES: Unless otherwise provided for in this Lease, any and all written
notices or other communication (the "Communication") to be given in connection
with this Lease shall be given in writing and shall be given by personal
delivery, facsimile transmission or by mailing by registered or certified mail
with postage thereon or recognized overnight courier, fully prepaid, in a
sealed envelope addressed to the intended recipient as follows:
(a) to the Lessor at: 10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Fax No: (408) 725-1626
(b) to the Lessee at: 6331 San Ignacio
San Jose, California
Attention: Ron Lessack
Fax No:
or such other addresses, facsimile number or individual as may be designated by
a Communication given by a party to the other parties as aforesaid. Any
Communication given by personal delivery shall be conclusively deemed to have
been given and received on a date it is so delivered at such address provided
that such date is a business day, otherwise on the first business day following
its receipt, and if given by registered or certified mail, on the day on which
delivery is made or refused or if given by recognized overnight courier, on the
first business day following deposit with such overnight courier and if given
by facsimile transmission, on the day on which it was transmitted provided such
day is a business day, failing which, on the next business day thereafter.
18. ENTRY BY LESSOR: Lessee shall permit Lessor and its agents to enter into
and upon said Premises at all reasonable times using the minimum amount of
interference and inconvenience to Lessee and Lessee's business, subject to any
security regulations of Lessee, for the purpose of inspecting the same or for
the purpose of maintaining the building in which said Premises are situated, or
for the purpose of making repairs, alterations or additions to any other
portion of said building, including the erection and maintenance of such
scaffolding, canopies, fences and props as may be required, without any rebate
of Rent and without any liability to Lessee for any loss of occupation or quiet
enjoyment of the Premises; and shall permit Lessor and his agents, at any time
within ninety (90) days prior to the end of the Lease Term, to place upon said
Premises any usual or ordinary "For Sale" or "For Lease" signs and exhibit the
Premises to prospective tenants at reasonable hours.
19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the said
Premises during the Lease Term from any cause which is covered by Lessor's
property insurance, Lessor shall forthwith repair the same, provided such
repairs can be made within ninety (90) days under the laws and regulations of
State, Federal, County, or Municipal authorities, but such partial destruction
shall in no way annul or void this Lease, except that Lessee shall be entitled
to a proportionate reduction of Rent while such repairs are being made to the
extent of payments received by Lessor under its Loss of Rents Insurance
coverage. With respect to any partial destruction which Lessor is obligated to
repair or may elect to repair under the terms of this paragraph, the provision
of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the
Civil Code of the State of California are waived by Lessee. In the event that
the building in which the subject Premises may be situated is destroyed to an
extent greater than thirty-three and one-third (33 1/3%) of the replacement
cost thereof, Lessor may, at its sole option, elect
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to terminate this Lease, whether the subject Premises is insured or not. A
total destruction of the building in which the subject Premises are situated
shall terminate this Lease. Notwithstanding the above, Lessor is only
obligated to repair or rebuild to the extent of available insurance proceeds
including any deductible amount. Should Lessor determine that insufficient or
no insurance proceeds are available for repair or reconstruction of Premises,
Lessor, at its sole option, may terminate the Lease. Lessee shall have the
option of continuing this Lease by agreeing to pay all repair costs to the
subject Premises.
20. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet the said Premises or any part thereof,
or any right or privilege appurtenant thereto, or cause any other person or
entity (a bona fide subsidiary or affiliate of Lessee excepted) to occupy or
use the Premises, or any portion thereof, without the advance written consent
of Lessor. Any such assignment or subletting without such consent shall be
void, and shall, at the option of the Lessor, terminate this Lease. This Lease
shall not, or shall any interest therein, be assignable, as to the interest of
Lessee, by operation of law, without the written consent of Lessor.
Notwithstanding Lessor's obligation to provide reasonable approval, Lessor
reserves the right to withhold its consent for any proposed sublessee or
assignee of Lessee if the proposed sublessee or assignee is a user or generator
of Hazardous Materials. Notwithstanding the foregoing, Lessee may assign this
Lease to a successor in interest, whether by merger or acquisition, provided
there is no substantial reduction in the net worth of the resulting entity and
the resulting entity is not a user or generator of Hazardous Materials.
Whether or not Lessor's consent to a sublease or assignment is required, in the
event of any sublease or assignment, Lessee shall be and shall remain primarily
liable for the performance of all conditions, covenants, and obligations of
Lessee hereunder and, in the event of a default by an assignee or sublessee,
Lessor may proceed directly against the original Lessee hereunder and/or any
other predecessor of such assignee or sublessee without the necessity of
exhausting remedies against said assignee or sublessee.
21. CONDEMNATION: If any part of the Premises shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and a part thereof remains which is susceptible of
occupation hereunder, this Lease shall as to the part so taken, terminate as of
the date title vests in the condemnor or purchaser, and the Rent payable
hereunder shall be adjusted so that the Lessee shall be required to pay for the
remainder of the Lease Term only that portion of Rent as the value of the part
remaining. The rental adjustment resulting will be computed at the same Rental
rate for the remaining part not taken; however, Lessor shall have the option to
terminate this Lease as of the date when title to the part so taken vests in
the condemnor or purchaser. If all of the Premises, or such part thereof be
taken so that there does not remain a portion susceptible for occupation
hereunder, this Lease shall thereupon terminate. If a part or all of the
Premises be taken, all compensation awarded upon such taking shall be payable
to the Lessor. Lessee may file a separate claim and be entitled to any award
granted to Lessee.
22. EFFECTS OF CONVEYANCE: The term "Lessor" as used in this Lease, means only
the owner for the time being of the land and building constituting the
Premises, so that, in the event of any sale of said land or building, or in the
event of a Lease of said building, Lessor shall be and hereby is entirely freed
and relieved of all covenants and obligations of Lessor hereunder, and it shall
be deemed and construed, without further agreement between the parties and the
purchaser of any such sale, or the Lessor of the building, that the purchaser
or lessor of the building has assumed and agreed to carry out any and all
covenants and obligations of the Lessor hereunder. If any security is given by
Lessee to secure the faithful performance of all or any of the covenants of
this Lease on the part of Lessee, Lessor may transfer and deliver the security,
as such, to the purchaser at any such sale of the building, and thereupon the
Lessor shall be discharged from any further liability.
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23. SUBORDINATION: This Lease, in the event Lessor notifies Lessee in writing,
shall be subordinate to any ground lease, deed of trust, or other hypothecation
for security now or hereafter placed upon the real property at which the
Premises are a part and to any and all advances made on the security thereof
and to renewals, modifications, replacements and extensions thereof. Lessee
agrees to promptly execute any documents which may be required to effectuate
such subordination. Notwithstanding such subordination, if Lessee is not in
default and so long as Lessee shall pay the Rent and observe and perform all of
the provisions and covenants required under this Lease, Lessee's right to quiet
possession of the Premises shall not be disturbed or effected by any
subordination.
24. WAIVER: The waiver by Lessor of any breach of any term, covenant or
condition, herein contained shall not be construed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition therein contained. The subsequent acceptance of Rent
hereunder by Lessor shall not be deemed to be a waiver of Lessee's breach of
any term, covenant, or condition of the Lease.
25. HOLDING OVER: Any holding over after the end of the Lease Term requires
Lessor's written approval prior to the end of the Lease Term, which,
notwithstanding any other provisions of this Lease, Lessor may withhold and
shall be construed to be a tenancy at sufferance from month to month. Lessee
shall pay to Lessor monthly base rent equal to one and one-half (1.5) times the
monthly base rent installment due in the last month of the Lease Term and all
other additional rent and all other terms and conditions of the Lease shall
apply, so far as applicable. Holding over by Lessee without written approval
of Lessor shall subject Lessee to the liabilities and obligations provided for
in this Lease and by law, including, but not limited to those in Section 2.1 of
this Lease. Lessee shall indemnify and hold Lessor harmless against any loss
or liability resulting from any delay caused by Lessee in surrendering the
Premises, including without limitation, any claims made or penalties incurred
by any succeeding lessee or by Lessor. No holding over shall be deemed or
construed to exercise any option to extend or renew this Lease in lieu of full
and timely exercise of any such option as required hereunder.
26. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
27. ESTOPPEL CERTIFICATES: Lessee shall at any time during the Lease Term, upon
not less than ten (10) days prior written notice from Lessor, execute and
deliver to Lessor a statement in writing certifying that, this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification) and the dates to which the Rent and other charges have been
paid in advance, if any, and acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder or specifying
such defaults if they are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Lessee's failure to deliver such a statement within such time shall be
conclusive upon the Lessee that (a) this Lease is in full force and effect,
without modification except as may be represented by Lessor; (b) there are no
uncured defaults in Lessor's performance.
28. TIME: Time is of the essence of the Lease.
29. CAPTIONS: The headings on titles to the paragraphs of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof. This instrument contains all of the
agreements and conditions made
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between the parties hereto and may not be modified orally or in any other
manner than by an agreement in writing signed by all of the parties hereto or
their respective successors in interest.
30. PARTY NAMES: Landlord and Tenant may be used in various places in this
Lease as a substitute for Lessor and Lessee respectively.
31. EARTHQUAKE INSURANCE: As a condition of Lessor agreeing to waive the
requirement for earthquake insurance, Lessee agrees that it will pay, as
additional Rent, which shall be included in the monthly CAC, an amount not to
exceed fifty thousand dollars ($50,000) per year for earthquake insurance if
Lessor desires to obtain some form of earthquake insurance in the future, if
and when available, on terms acceptable to Lessor.
32. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in
Section 14 herein, Lessor and Lessee agree that if Lessee shall have defaulted
in the payment of Rent for three or more times during any twelve month period
during the Lease Term, then such conduct shall, at the option of the Lessor,
represent a separate event of default which cannot be cured by Lessee. Lessee
acknowledges that the purpose of this provision is to prevent repetitive
defaults by the Lessee under the Lease, which constitute a hardship to the
Lessor and deprive the Lessor of the timely performance by the Lessee
hereunder.
33. HAZARDOUS MATERIALS
33.1 DEFINITIONS: As used in this Lease, the following terms shall have the
following meaning:
a. The term "Hazardous Materials" shall mean (i) polychlorinated
biphenyls; (ii) radioactive materials and (iii) any chemical, material
or substance now or hereafter defined as or included in the
definitions of "hazardous substance" "hazardous water", "hazardous
material", "extremely hazardous waste", "restricted hazardous waste"
under Section 25115, 25117 or 15122.7, or listed pursuant to Section
25140 of the California Health and Safety Code, Division 20, Chapter
6.5 (Hazardous Waste Control Law), (ii) defined as "hazardous
substance" under Section 25316 of the California Health and Safety
Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous
Substances Account Act), (iii) defined as "hazardous material",
"hazardous substance", or "hazardous waste" under Section 25501 of the
California Health and Safety Code, Division 20, Chapter 6.95
(Hazardous Materials Release, Response, Plans and Inventory), (iv)
defined as a "hazardous substance" under Section 25181 of the
California Health and Safety Code, Division 20l, Chapter 6.7
(Underground Storage of Hazardous Substances), (v) petroleum, (vi)
asbestos, (vii) listed under Article 9 or defined as "hazardous" or
"extremely hazardous" pursuant to Article II of Title 22 of the
California Administrative Code, Division 4, Chapter 20, (viii) defined
as "hazardous substance" pursuant to Section 311 of the Federal Water
Pollution Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to
Section 1004 of the Federal Water Pollution Control Act (33 U.S.C.
1317), (ix) defined as a "hazardous waste", pursuant to Section 1004
of the Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901
et seq., (x) defined as "hazardous substance" pursuant to Section 101
of the Comprehensive Environmental Responsibility Compensations, and
Liability Act, 42 U.S.C. 9601 et seq., or (xi) regulated under the
Toxic Substances Control Act, 156 U.S.C. 2601 et seq.
b. The term "Hazardous Materials Laws" shall mean any local, state and
federal laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation,
release, discharge, storage or disposal of Hazardous Material.
Page 15
<PAGE> 16
c. The term "Lessor's Agents" shall mean Lessor's agents,
representatives, employees, contractors, subcontractors, directors,
officers and partners.
d. The term "Lessee's Agents" shall mean Lessee's agents,
representatives, employees, contractors, subcontractors, directors,
officers, partners, invitees or any other person in or about the
Premises.
33.2 LESSEE'S RIGHT TO INVESTIGATE: Lessee shall be entitled to cause such
inspection, soils and ground water tests, and other evaluations to be made of
the Premises as Lessee deems necessary regarding (i) the presence and use of
Hazardous Materials in or about the Premises, and (ii) the potential for
exposure to Lessee's employees and other persons to any Hazardous Materials
used and stored by previous occupants in or about the Premises. Lessee shall
provide Lessor with copies of all inspections, tests and evaluations. Lessee
shall indemnify, defend and hold Lessor harmless from any cost, claim or
expense arising from such entry by Lessee or from the performance of any such
investigation by such Lessee.
33.3 LESSOR'S REPRESENTATIONS: Lessor hereby represents and warrants to the
best of Lessor's knowledge that the Premises are, as of the date of this Lease,
in compliance with all Hazardous Material Laws.
33.4 LESSEE'S OBLIGATION TO INDEMNIFY: Lessee, at its sole cost and expense,
shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless
from and against any and all cost or expenses, including those described under
subparagraphs i, ii and iii herein below set forth, arising from or caused in
whole or in part, directly or indirectly by:
a. Lessee's or Lessee's Agents' use, analysis, storage,
transportation, disposal, release, threatened release, discharge or
generation of Hazardous Material to, in, on, under, about or from the
Premises; or
b. Lessee's or Lessee's Agents failure to comply with Hazardous
Material laws; or
c. Any release of Hazardous Material to, in, on, under, about, from or
onto the Premises caused by Lessee or Lessee's Agents or occurring
during the Lease Term, except ground water contamination from other
parcels where the source is from off the Premises not arising from or
caused by Lessee or Lessee's Agents.
The cost and expenses indemnified against include, but are not limited to the
following:
i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive
damages, cost or expenses;
ii. Any claim, action, suit or proceeding for personal injury
(including sickness, disease, or death), tangible or intangible
property damage, compensation for lost wages, business income, profits
or other economic loss, damage to the natural resources of the
environment, nuisance, pollution, contamination, leaks, spills,
release or other adverse effects on the environment;
iii. The cost of any repair, clean-up, treatment or detoxification of
the Premises necessary to bring the Premises into compliance with all
Hazardous Material Laws, including the preparation and implementation
of any closure, disposal, remedial action, or other actions with
regard to the Premises, and expenses (including, without limitation,
reasonable attorney's fees and consultants fees, investigation and
laboratory fees, court cost and litigation expenses).
33.5 LESSEE'S OBLIGATION TO REMEDIATE CONTAMINATION: Lessee shall, at its sole
cost and expense, promptly take any and all action necessary to remediate
contamination of the Premises by Hazardous Materials during the Lease Term
arising or caused by Lessee or Lessee's Agents.
Page 16
<PAGE> 17
33.6 OBLIGATION TO NOTIFY: Lessor and Lessee shall each give written notice to
the other as soon as reasonably practical of (i) any communication received
from any governmental authority concerning Hazardous Material which related to
the Premises and (ii) any contamination of the Premises by Hazardous Materials
which constitutes a violation of any Hazardous Material Laws.
33.7 SURVIVAL: The obligations of Lessee under this Section 33 shall survive
the Lease Term or earlier termination of this Lease.
33.8 CERTIFICATION AND CLOSURE: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting from
Lessee's obligation in Paragraph 33. If pursuant to local ordinance, state or
federal law, Lessee is required, at the expiration of the Lease Term, to submit
a closure plan for the Premises to a local, state or federal agency, then
Lessee shall furnish to Lessor a copy of such plan.
33.9 PRIOR HAZARDOUS MATERIALS: Lessee shall have no obligation to clean up or
to hold Lessor harmless with respect to, any Hazardous Material or wastes
discovered on the Premises which were not introduced into, in, on, about, from
or under the Premises during the Lease Term or ground water contamination from
other parcels where the source is from off the Premises not arising from or
caused by Lessee or Lessee's Agents.
34. BROKERS: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease and Lessee
agrees to indemnify and hold Lessor harmless against any claim, cost, liability
or cause of action asserted by any broker or finder claiming through Lessee
Lessor represents and warrants that it has not utilized or contacted a real
estate broker or finder with respect to this Lease and Lessor agrees to
indemnify and hold Lessee harmless against any claim, cost, liability or cause
of action asserted by any broker or finder claiming through Lessor.
35. OPTION TO EXTEND
A. Option: Lessor hereby grants to Lessee two (2) options to extend the Lease
Term, with each extended term to be for a period of five (5) years, on the
following terms and conditions, which shall apply separately to each option to
extend:
(i) Lessee shall give Lessor written notice of its exercise of one of
its options to extend no earlier than twenty-four (24) calendar
months, nor later than six (6) calendar months before the Lease Term
would end but for said exercise. Time is of the essence.
(ii) Lessee may not extend the Lease Term pursuant to any option
granted by this section 35 if Lessee is in default as of the date of
the exercise of one of its options. If Lessee has committed a default
by Lessee as defined in Section 14 or 32 that has not been cured or
waived by Lessor in writing by the date that any extended term is to
commence, then Lessor may elect not to allow the Lease Term to be
extended, notwithstanding any notice given by Lessee of an exercise of
this option to extend.
(iii) Lessee must exercise each option consecutively, and if it fails
to exercise any one option, it waives the right to exercise the
subsequent option and the Lease Term shall not be extended further.
Page 17
<PAGE> 18
(iv) All terms and conditions of this Lease shall apply during each
extended term, except that the base rent and rental increases for each
extended term shall be determined as provided in Section 35 (B) below
(v) Once Lessee delivers a notice of exercise of one of its options to
extend the Lease Term, Lessee may not withdraw such exercise and
subject to the provisions of this Section 35, such notice shall
operate to extend the Lease Term. Upon any extension of the Lease
Term pursuant to this Section 35, the term "Lease Term" as used in
this Lease shall thereafter include the then extended term.
(vi) The option rights of On Command Video granted under this Section
35 are granted for On Command Video's personal benefit and may not be
assigned or transferred by On Command Video or exercised if On Command
Video is not occupying the Premises at the time of exercise.
B. Extended Term Rent - Option Period: The monthly Rent for the Premises during
the extended term shall equal ninety-five percent (95%) of the fair market
monthly Rent for the Premises as of the commencement date of the extended term,
but in no case, less than the Rent during the last month of the prior Lease
term. Promptly upon Lessee's exercise of the option to extend, Lessee and
Lessor shall meet and attempt to agree on the fair market monthly Rent for the
Premises as of the commencement date of the extended term. In the event the
parties fail to agree upon the amount of the monthly Rent for the extended term
prior to commencement thereof, the monthly Rent for the extended term shall be
determined by appraisal in the manner hereafter set forth; provided, however,
that in no event shall the monthly Rent for the extended term be less than in
the immediate preceding period. Annual base rent increases during the extended
term shall be three percent (3%) per year. In the event it becomes necessary
under this paragraph to determine the fair market monthly Rent of the Premises
by appraisal, Lessor and Lessee each shall appoint a real estate appraiser who
shall be a member of the American Institute of Real Estate Appraiser ("AIREA")
and such appraisers shall each determine the fair market monthly Rent for the
Premises taking into account the value of the Premises and the amenities
provided by the outside areas, the common areas, and the Building, and
prevailing comparable Rentals in the area. Such appraisers shall, within
twenty (20) business days after their appointment, complete their appraisals
and submit their appraisal reports to Lessor and Lessee. If the fair market
monthly Rent of the Premises established in the two (2) appraisals varies by
five percent (5%) or less of the higher Rent, the average of the two shall be
controlling. If said fair market monthly Rent varies by more than five percent
(5%) of the higher Rental, said appraisers, within ten (10) days after
submission of the last appraisal, shall appoint a third appraiser who shall be
a member of the AIREA and who shall also be experienced in the appraisal of
Rent values and adjustment practices for commercial properties in the vicinity
of the Premises. Such third appraiser shall, within twenty (20) business days
after his appointment, determine by appraisal the fair market monthly Rent of
the Premises taking into account the same factors referred to above, and submit
his appraisal report to Lessor and Lessee. The fair market monthly Rent
determined by the third appraiser for the Premises shall be controlling, unless
it is less than that set forth in the lower appraisal previously obtained, in
which case the value set forth in said lower appraisal shall be controlling, or
unless it is greater than that set forth in the higher appraisal previously
obtained in which case the Rent set for in said higher appraisal shall be
controlling. If either Lessor or Lessee fails to appoint an appraiser, or if
an appraiser appointed by either of them fails, after his appointment to submit
his appraisal within the required period in accordance with the foregoing, the
appraisal submitted by the appraiser properly appointed and timely submitting
his appraisal shall be controlling. If the two appraisers appointed by Lessor
and Lessee are unable to agree upon a third appraiser within the required
period in accordance with the foregoing, application shall be made within
twenty (20) days thereafter by either Lessor
Page 18
<PAGE> 19
or Lessee to AIREA, which shall appoint a member of said institute willing to
serve as appraiser. The cost of all appraisals under this subparagraph shall
be borne equally be Lessor and Lessee.
36. APPROVALS: Whenever in this Lease the Lessor's or Lessee's consent is
required, such consent shall not be unreasonably or arbitrarily withheld or
delayed. In the event that the Lessor or Lessee does not respond to a request
for any consents which may be required of it in this Lease within ten business
days of the request of such consent in writing by the Lessee or Lessor, such
consent shall be deemed to have been given by the Lessor or Lessee.
37. AUTHORITY: Each party executing this Lease represents and warrants that he
or she is duly authorized to execute and deliver the Lease. If executed on
behalf of a corporation, that the Lease is executed in accordance with the
by-laws of said corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and
that the Lease is binding upon said individual, corporation (or partnership) as
the case may be in accordance with its terms.
38. INDEMNIFICATION OF LESSOR: Except to the extent caused by the sole
negligence or willful misconduct of Lessor or Lessor's Agents, Lessee shall
defend, indemnify and hold Lessor harmless from and against any and all
obligations, losses, costs, expenses, claims, demands, attorney's fees,
investigation costs or liabilities on account of, or arising out of the use,
condition or occupancy of the Premises or any act or omission to act of Lessee
or Lessee's Agents or any occurrence in, upon, about or at the Premises,
including, without limitation, any of the foregoing provisions arising out of
the use, generation, manufacture, installation, release, discharge, storage, or
disposal of Hazardous Materials by Lessee or Lessee's Agents. It is understood
that Lessee is and shall be in control and possession of the Premises and that
Lessor shall in no event be responsible or liable for any injury or damage or
injury to any person whatsoever, happening on, in, about, or in connection with
the Premises, or for any injury or damage to the Premises or any part thereof.
This Lease is entered into on the express condition that Lessor shall not be
liable for, or suffer loss by reason of injury to person or property, from
whatever cause, which in any way may be connected with the use, condition or
occupancy of the Premises or personal property located herein. The provisions
of this Lease permitting Lessor to enter and inspect the Premises are for the
purpose of enabling Lessor to become informed as to whether Lessee is complying
with the terms of this Lease and Lessor shall be under no duty to enter,
inspect or to perform any of Lessee's covenants set forth in this Lease.
Lessee shall further indemnify, defend and hold harmless Lessor from and
against any and all claims arising from any breach or default in the
performance of any obligation to Lessee's part to be performed under the terms
of this Lease. The provisions of Section 38 shall survive the Lease Term or
earlier termination of this Lease with respect to any damage, injury or death
occurring during the Lease Term.
39. LESSOR'S LIABILITY: If Lessee should recover a money judgment against
Lessor arising in connection with this Lease, the judgment shall be satisfied
only out of the Lessor's interest in the Premises and neither Lessor or any of
its partners shall be liable personally for any deficiency.
40. CANCELLATION OF EXISTING LEASE: By lease dated September 15, 1993 (the
"Existing Lease"), Lessee leased from Lessor approximately 64,500 square feet
of space at 3301 Olcott, Santa Clara, CA. Effective on the Commencement Date
of this Lease, the Existing Lease term will be terminated early subject to all
the terms and conditions of the Existing Lease, except the obligation to pay
base rent. The cancellation of the Existing Lease shall not in any way release
Lessee from its obligations under the Existing Lease, including but not limited
to those covered under Sections 2 and 33.
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<PAGE> 20
41. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law and are in addition to all
other rights or remedies in law and in equity.
42. CHOICE OF LAW: This lease shall be construed and enforced in accordance
with the substantive laws of the State of California. The language of all
parts of this lease shall in all cases be construed as a whole according to its
fair meaning and not strictly for or against either Lessor or Lessee.
43. ENTIRE AGREEMENT: This Lease is the entire agreement between the parties,
and there are no agreements or representations between the parties except as
expressed herein. Except as otherwise provided for herein, no subsequent
change or addition to this Lease shall be binding unless in writing and signed
by the parties hereto.
IN WITNESS WHEREOF, Lessor and Lessee have executed these presents, the day and
year first above written.
LESSOR LESSEE
BERG & BERG DEVELOPERS ON COMMAND VIDEO
By: CARL E. BERG By: ROBERT SNYDER
---------------------------------- --------------------------------
signature of authorized signature of authorized
representative representative
Carl E. Berg Robert Snyder
- -------------------------------------- ------------------------------------
printed name printed name
G.P. President
- -------------------------------------- ------------------------------------
title title
24 June 1996 20 June 1996
- -------------------------------------- ------------------------------------
date date
Page 20
<PAGE> 21
DESCRIPTION TO COME
EXHIBIT A
<PAGE> 22
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR INTERNAL USE ONLY EXHIBIT B
- ----------------------------------------------------------------------------------------------------------------
Tenant: On Command Video
- ----------------------------------------------------------------------------------------------------------------
Tenant Improvement Budget Square Feet - 95,000
- ----------------------------------------------------------------------------------------------------------------
Unit Estimated
- ----------------------------------------------------------------------------------------------------------------
Item Description Units Type Cost Amount
- ----------------------------------------------------------------------------------------------------------------
AIA Berg staff 1 lump sum 5000.00 5,000
- ----------------------------------------------------------------------------------------------------------------
HVAC Engineering 1 lump sum 10000.00 10,000
- ----------------------------------------------------------------------------------------------------------------
Electrical Engineering 1 lump sum 15000.00 15,000
- ----------------------------------------------------------------------------------------------------------------
Structural Engineering 1 lump sum 5000.00 5,000
- ----------------------------------------------------------------------------------------------------------------
Sprinkler Engineering 1 lump sum 2000.00 2,000
- ----------------------------------------------------------------------------------------------------------------
Interior Design Berg staff 1 lump sum 3000.00 3,000
- ----------------------------------------------------------------------------------------------------------------
General Conditions 1 lump sum 10000.00 10,000
- ----------------------------------------------------------------------------------------------------------------
Construction Utilities 1 lump sum 8000.00 8,000
- ----------------------------------------------------------------------------------------------------------------
Clean Up 1 lump sum 15000.00 15,000
- ----------------------------------------------------------------------------------------------------------------
Supervision 1 lump sum 30000.00 30,000
- ----------------------------------------------------------------------------------------------------------------
Final Janitorial 0.00 By Tenant
- ----------------------------------------------------------------------------------------------------------------
Reproduction 1 lump sum 2000.00 2,000
- ----------------------------------------------------------------------------------------------------------------
Demolition 1 lump sum 65000.00 65,000
- ----------------------------------------------------------------------------------------------------------------
Construction Security 1 lump sum 5000.00 5,000
- ----------------------------------------------------------------------------------------------------------------
Plan Check & Permits 1 lump sum 10000.00 10,000
- ----------------------------------------------------------------------------------------------------------------
Interior Plan Check Fee 1 lump sum 5000.00 5,000
- ----------------------------------------------------------------------------------------------------------------
Interior Building Permit 1 lump sum 5000.00 5,000
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Plumbing 2 Ms and 2 Ws at lobby 1 lump sum 22500.00 22,500
- ----------------------------------------------------------------------------------------------------------------
Plumbing Remodel 1 lump sum 5000.00 5,000
- ----------------------------------------------------------------------------------------------------------------
Coffee Bars 2 each 5000.00 10,000
- ----------------------------------------------------------------------------------------------------------------
Toilet Parts/Access./Mirrors 3 each 4000.00 12,000
- ----------------------------------------------------------------------------------------------------------------
Showers 2 each 10000.00 20,000
- ----------------------------------------------------------------------------------------------------------------
Lockers 1 lump sum 3250.00 3,250
- ----------------------------------------------------------------------------------------------------------------
Ceramic Tile (4' Wainscoat) Shower & new RR 1 lump sum 15000.00 15,000
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Electrical Redistribute existing 1 Allowance 145000.00 145,000
- ----------------------------------------------------------------------------------------------------------------
T-Bar Lighting T-8 lamps, elect. ballasts 1 lump sum 130000.00 130,000
- ----------------------------------------------------------------------------------------------------------------
Temporary Power, Cords & Boxes 1 lump sum 3000.00 3,000
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
HVAC Remodel existing 1 Allowance 45000.00 45,000
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Sound insulation 1 lump sum 3000.00 3,000
- ----------------------------------------------------------------------------------------------------------------
Millwork 1 lump sum 18000.00 18,000
- ----------------------------------------------------------------------------------------------------------------
Roof insulation 1 lump sum 5000.00 5,000
- ----------------------------------------------------------------------------------------------------------------
Doors, Frames & Hardware Use Existing 80 each 250.00 20,000
- ----------------------------------------------------------------------------------------------------------------
Drywall & Metal Framing 1200 ln.ft. 25.00 30,000
- ----------------------------------------------------------------------------------------------------------------
Dividing Wall 265 ln.ft. 32.00 8,480
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Lobby & Conference Upgrades Miscellaneous upgrades 1 lump sum 10000.00 10,000
- ----------------------------------------------------------------------------------------------------------------
Glass Walls in Sheetrock 3' x 8' steel frames and wire glass 10 each 850.00 8,500
- ----------------------------------------------------------------------------------------------------------------
Glass, Glazing & Mirrors Glass wall office 1 Allowance 18000.00 18,000
- ----------------------------------------------------------------------------------------------------------------
Acoustical Ceiling Remodel 95000 sq.ft. 0.70 66,500
- ----------------------------------------------------------------------------------------------------------------
Carpeting & Flooring 45000 sq.ft. 2.20 99,000
- ----------------------------------------------------------------------------------------------------------------
VCT 50000 lump sum 1.35 67,500
- ----------------------------------------------------------------------------------------------------------------
Painting/Wall Coverings 1 lump sum 26000.00 26,000
- ----------------------------------------------------------------------------------------------------------------
Patio & Fence 1 lump sum 24000.00 24,000
- ----------------------------------------------------------------------------------------------------------------
Parking Lot 1 lump sum 2000.00 2,000
- ----------------------------------------------------------------------------------------------------------------
Fire Protection Remodel 1 lump sum 20000.00 20,000
- ----------------------------------------------------------------------------------------------------------------
Central Fire Monitor 1 lump sum 2000.00 2,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 23
FOR INTERNAL USE ONLY EXHIBIT B
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Tenant: On Command Video
- ------------------------------------------------------------------------------
Tenant Improvement Budget Square Feet 95,000
- ------------------------------------------------------------------------------
Unit Estimated
Item Description Units Type Cost Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fire Extinguishers 1 lump sum 3,000.00 3,000
- ------------------------------------------------------------------------------
Smoke Detection--Lobby 1 lump sum 5,000.00 5,000
- ------------------------------------------------------------------------------
Dock Levelers 2 each 3,700.00 7,400
- ------------------------------------------------------------------------------
Projection Screens 2 each 500.00 1,000
- ------------------------------------------------------------------------------
Miscellaneous Other 1 lump sum 25,000.00 71,670
- ------------------------------------------------------------------------------
SUBTOTAL 1,121,800
- ------------------------------------------------------------------------------
Management Fee @ 6% 67,000
- ------------------------------------------------------------------------------
Construction Interest
& Points @ 1% 11,200
- ------------------------------------------------------------------------------
SUBTOTAL 78,200
- ------------------------------------------------------------------------------
TOTAL 1,200,000
- -------------------------------------------------------------------------------
</TABLE>
COSTS PER ITEM MAY VARY, BUT BASED ON OUR UNDERSTANDING OF YOUR REQUIREMENTS, WE
ESTIMATE THAT WE CAN ACCOMPLISH ALL ITEMS ON THIS SCHEDULE FOR THE QUOTED RENT.
- ------------------------------------------------------------------------------
THE FOLLOWING ARE NOT INCLUDED IN OUR COST ESTIMATE: TELEPHONE, DATA, SECURITY,
OPEN OFFICE MOVABLE PARTITIONS, AND SPECIAL ON COMMAND REQUIREMENTS.
- ------------------------------------------------------------------------------
PARKING FOR THE WAREHOUSE SHALL INCLUDE 45 UNRESERVED PARKING SPACES.
- ------------------------------------------------------------------------------
THE ABOVE COSTS ARE TO REMODEL THE 95,000 SQ. FT., THE COST OF THE WAREHOUSE IS
INCLUDED IN OUR TURNKEY PROPOSAL. OUR RENT INCLUDES THE 95,000 SQ. FT. REMODEL
AND THE WAREHOUSE COMPLETE.
- ------------------------------------------------------------------------------
Page 2
<PAGE> 24
Exhibit C
Lessor shall construct an approximate 36,000 sq.ft. warehouse between
6321 and 6331 San Ignacio as a turnkey project which shall conform in
general to the following:
24 feet clear height
3 docks
Distributed dump HVAC
Insulation to meet Title 24
Sealed concrete floor
Warehouse lighting
Overhead sprinklers (no rack sprinklers included)
3 Dock levelors
20 Convenience electrical outlets
2 Private offices
Restroom: 1 men's and 1 women's
Page 22
<PAGE> 25
Exhibit E
Lessee Approval Deadlines
Lease signed 06/21/96
Approval of preliminary floor plan, single line 06/21/96
Final selection of all material and interior finishes for
construction such as carpet, ceramic tile, paint and any
other lessee selected materials & finishes 07/21/96
The Commencement Date shall be extended one day for each day Lessee does not
meet each deadline set forth on this Exhibit E.
Page 23
<PAGE> 26
EXHIBIT A-3
DESCRIPTION TO COME
<PAGE> 1
EXHIBIT 10.11
GE-1 TRANSPONDER SUBLEASE AGREEMENT
BETWEEN
ON COMMAND CORPORATION
AND
HUGHES NETWORK SYSTEMS, INC.
JANUARY, 1997
<PAGE> 2
HUGHES NETWORK SYSTEMS, INC. (HNS)
GE-1 TRANSPONDER SUBLEASE AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of this
22nd day of January, 1997 (the "Execution Date") by and between the On Command
Corporation ("Customer"), whose principal place of business is located at 6331
San Ignacio, San Jose, California and HUGHES NETWORK SYSTEMS, Inc. ("HNS"), a
Delaware corporation, whose principal place of business is located at 11717
Exploration Lane, Germantown, Maryland 20876.
WHEREAS, HNS currently leases certain Ku-band transponder capacity
from GE American Communications, Inc. ("GEAC"); and
WHEREAS, HNS is willing to sublease certain of the Ku-band transponder
capacity that HNS has leased from GEAC to Customer and Customer desires to
sublease said transponder capacity.
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration received and acknowledged, and pursuant to the terms and
conditions set forth herein, including those defined terms in quotations and
the attached Terms and Conditions, by which Customer agrees to abide, HNS and
Customer hereby agree as follows:
1. HNS hereby agrees to sublease to Customer, and Customer hereby agrees
to accept such sublease of all of the transponder capacity currently
leased by HNS from GEAC described as "Transponder 15" on the satellite
commonly referred to as GE-1.
2. The term of such sublease shall extend from 4:00 p.m. (Eastern Time)
on January 24, 1997 (the "Commencement Date") through 3:59 p.m.
(Eastern Time) on July 23, 1997 (the "Termination Date"), unless
earlier terminated pursuant to the Agreement. HNS may in its sole
discretion extend this term by an additional term not to exceed two
(2) months.
3. In consideration of the provision of the transponder capacity
described herein, Customer shall pay to HNS a Monthly Lease Payment of
$ 210,000 from the Commencement Date through the Termination Date.
Other conditions relating to payments are set forth in Section VII of
the attached Terms and Conditions.
4. This Agreement and Customer's usage of the Transponder Capacity are
expressly conditioned upon Customer's compliance with the attached
Terms and Conditions, which are hereby incorporated by reference.
WITNESS the following signatures:
HUGHES NETWORK SYSTEMS, INC. ON COMMAND CORPORATION
By: [sig] By: [sig]
----------------------------------- ---------------------------------
Title: Senior Director, Contracts Title: President, CEO
--------------------------------- ------------------------------
Date: 2/17/97 2/3/97
--------------------------------- -------------------------------
1
<PAGE> 3
TERMS AND CONDITIONS
During the Lease Term, HNS shall provide Customer's Transponder
Capacity in accordance with, and Customer shall be bound by, the terms and
conditions set forth below:
GENERAL
I. CERTAIN DEFINITIONS
A. "Affiliates" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or
under common control (i.e., the power to direct affairs by
reason of ownership of voting stock, by contract or otherwise)
with such Person and any member, director, officer or employee
of such Person.
B. "FCC" shall mean the Federal Communications Commission or any
successor organization.
C. "Satellite" shall mean that satellite which is commonly
referred to as GE-1.
D. "GEAC" shall mean GE American Communications, Inc., or any of
its Affiliates.
E. "Laws" shall mean all international, federal, state, local and
other laws, rules and other regulations, including without
limitation, those issued by the FCC.
F. "Person" shall mean any person or entity, whether an
individual, trustee, corporation, general partnership, limited
partnership, trust, unincorporated organization, business
association, firm, joint venture, governmental agency or
authority, or otherwise.
G. "Transponder(s)" shall mean a specified component of the
Satellite which, for a particular frequency band, receives,
amplifies, translates frequency and retransmits radio signals.
Each Transponder contains one traveling wave tube amplifier (a
"TWTA"). Transponder shall also mean, for purposes of this
definition, any replacement of alternate components thereof.
H. "Transponder Capacity Failure" shall mean the failure of
Hughes to provide Customer's aggregate Transponder Capacity on
a Transponder which meets a saturated downlink EIRP level of
43 BW. Determination that a Transponder Capacity Failure has
occurred shall be made by Hughes in its sole discretion using
facilities located at GEAC's telemetry, tracking and control
earth station. The duration of a Transponder Capacity Failure
shall be measured as set forth in Section V.
I. "Usage" or "Use" shall refer to Customer's (or its uplinking
or other agents') radio transmission to, or utilization of,
the Satellite(s) or Customer's Transponder Capacity.
J. "User" shall mean the actual owner of a Transponder, including
HNS or GEAC, if there remain any unsold or unleased
Transponders, or any permitted lessee, licensee, or assignee
of such Transponder, or any entity to which GEAC provides
services on a Transponder.
1
<PAGE> 4
NOTICE OF PROPRIETARY INFORMATION
All information contained in or disclosed by this document is
confidential and proprietary to Hughes Network Systems, Inc.
By accepting this material the recipient agrees that this
material and the information contained therein will be held in
confidence and will not be reproduced, disclosed, or used in
whole or in part except for purposes of this agreement.
ii
<PAGE> 5
II. CERTAIN UNDERSTANDINGS
A. Ownership of Transponders. Customer understands and agrees
that GEAC is the FCC-authorized operator of the Satellite. Neither this
Agreement nor Customer's Use of Transponder Capacity shall, or shall be deemed
to, convey title or any other ownership interest to Customer in or to any
Transponder. Customer acknowledges and agrees (i) that nothing contained in
this Agreement shall prevent any sale, mortgage, or encumbrance of the
Satellite or any Transponder thereof by GEAC, (ii) that Customer's Transponder
Capacity is provided on a leased basis and is not being sold to Customer, (iii)
that neither any Transponder nor any Satellite, nor any lease thereof nor any
interest of any type therein, shall be subject to any claim, prior, subsequent
or otherwise, of Customer or its creditors as a result of this Agreement, and
(iv) that, as to any Transponder, the rights of Customer under this Agreement
will be subject and subordinate to the rights of any purchaser purchasing such
Transponder and leasing it back to GEAC pursuant to a sale and leaseback
transaction. Notwithstanding the foregoing, Customer acknowledges that GEAC
has agreed that it shall use reasonable efforts to provide that any sale,
mortgage, or encumbrance shall not impact or interfere with Customer's Use of
Customer's Transponder Capacity as provided for herein. HNS may assign its
rights or obligations to GEAC, or other financial entities pursuant to this
Section II.A, or their respective Affiliates.
B. Control of Satellite. Customer understands and agrees that
GEAC shall control and provide for the operation of the Satellite. Customer
acknowledges that GEAC has agreed with HNS that GEAC is be responsible for:
(i) securing, providing and maintaining the FCC license(s) for the Satellite;
(ii) maintaining the Satellite; (iii) complying at all times during the term of
this Agreement with all applicable FCC regulations relating to the Satellite.
III. CONTINUITY OF SERVICE
A. Preemption/Interruption of Service. Customer recognizes and
agrees that for "Technical or Safety Reason(s)", which shall include, but shall
not be limited to, (1) the protection of the overall health or performance of
the Satellite or its Transponders; (2) the prevention of interference or
cross-talk; (3) the protection of public safety; or (4) compliance with an
order from the FCC or other governmental authorities - and the existence of
which HNS shall determine in its sole discretion - GEAC may take the following
"Action(s)": (i) preempt or interfere with Customer's Use of any Transponder or
other component of the Satellite, (ii) reassign TWTAs to different Transponders
on the Satellite, or (iii) reassign the frequency assignment of Customer's
Transponder Capacity. Customer acknowledges and agrees that an Action may
result in the preemption or interruption of the Use of Customer's Transponder
Capacity. HNS or GEAC shall use reasonable efforts give Customer oral or
written notice within 24 hours prior to taking an Action and shall use
reasonable efforts to schedule and conduct such Action so as to minimize the
disruption of Customer's Use of Customer's Transponder Capacity. Customer
acknowledges and agrees that if such preemption or interruption occurs, then
Customer shall cooperate with and assist GEAC and HNS during such periods and
Customer's sole remedies shall be the recovery of an Outage Allowance pursuant
to Article V or the termination of this Agreement pursuant to Article VIII.
B. Provision of Continuing Service. In the event of a
Transponder Capacity Failure, HNS has contracted with GEAC that GEAC shall
provide Customer's Transponder Capacity using a spare component of a
Transponder on the Satellite (including a spare traveling wave tube), if
available, or if such spare component is unavailable, then by using an
alternate Transponder on the Satellite, if available. The availability of such
spare component or alternate Transponder on the Satellite, on a permanent or
temporary basis, shall be determined by GEAC in its sole discretion. In the
event that (i) Customer's Transponder Capacity suffers interference, (ii) GEAC
determines that such interference is caused by GEAC's customers other than
Customer or an entity using Customer's Transponder Capacity on behalf of
Customer, and (iii) the interference to Customer's Transponder Capacity
continues, then GEAC will
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(but will not be obligated to) provide the affected Customer's Transponder
Capacity by using another Transponder Capacity on the Satellite on which the
affected Customer's Transponder Capacity is located, if available, to be
determined by GEAC in its sole discretion. The foregoing notwithstanding,
Customer's sole remedies for any preemption or interruption of Use under this
Article III, shall be recovery of an Outage Allowance pursuant to Article V or
the termination of this Agreement pursuant to Article VIII.
IV. CUSTOMER'S OBLIGATIONS
A. Compliance With Laws. From the effective date of this
Agreement and through and during the term hereof, Customer (which includes for
purposes of this Section IV, any and all uplinking or other agents of Customer)
shall comply with the terms of this Agreement and shall be responsible for
complying with, and shall comply with all Laws (including the Obscenity Laws
defined below) applicable to it regarding the operation and Use of the
Satellite and the Transponders, or Customer's lease or Use of Customer's
Transponder Capacity (including, but not limited to, the transmission of any
programming or material). Further, and without limiting the foregoing, if
Customer's Use involves video broadcasting, then Customer hereby agrees to
comply in all respects with Section 25.308 of the FCC rule regarding Automatic
Transmitter Identification Systems or ATIS.
B. Transmission Parameters. Customer transmissions to the
Satellite must be within the technical parameters specified by HNS or GEAC for
the transmission type Used and the Transponder Used. Customer's Use of
Customer's Transponder Capacity shall not interfere with the Use of that or any
other Transponder by others and shall not cause physical harm to that or any
other Transponder or to the Satellite. Whether Customer's Use of Customer's
Transponder Capacity interferes with another use or causes physical harm shall
be determined by GEAC in its sole discretion. In order to minimize
interference among various users of the Transponder Capacity, Customer shall
notify HNS and GEAC in a timely manner of Customer's proposed transmission
parameters, including power, frequency, modulation, and such other information
as such party may reasonably request. Customer shall not initiate transmission
or change its transmission parameters until written approval of such initiation
or change is received from GEAC.
C. Customer's Earth Terminals. Customer shall configure, equip,
and operate earth terminal facilities and all other equipment used in
connection with Customer's Use of Transponder Capacity to conform to the
characteristics and technical parameters of the Satellite. Customer shall
obtain all permits, licenses, variances, and other authorizations required by
Laws for the installation and operation of Customer's earth terminal equipment
used in connection with Customer's Transponder Capacity, copies of which shall
be delivered promptly to HNS and GEAC. Customer shall operate all transmitting
earth terminals with qualified and authorized personnel and in a manner that
allows for the immediate cessation of transmission. Upon written or oral
notice from HNS or GEAC that operational or technical reasons necessitate a
cessation (as determined by GEAC in its sole discretion), or that Customer's
Use is in violation of any law, Customer shall immediately cease transmission.
D. Central Authority. Customer shall furnish prior written
notification to HNS and GEAC of a central authority (and of any change in such
authority), which shall have at all times the ability promptly to control
Customer's transmitting earth terminals Used in connection with Customer's
Transponder Capacity. Customer shall coordinate with GEAC and GEAC designated
entity performing telemetry, tracking and control on the Satellite and shall
follow prescribed procedures for the start or end of any transmission.
E. Cooperation. Customer shall cooperate with HNS and GEAC in
order to facilitate HNS' and GEAC's provision of Customer's Transponder
Capacity on a continuous basis. For example (and by way of illustration and
not limitation), Customer shall cooperate with HNS and GEAC in trouble
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determination and fault isolation activities. Customer shall furnish HNS and
GEAC with such relevant information as such party may reasonably require in
order to provide and protect the Transponder(s) used in providing Customer's
Transponder Capacity. Customer shall promptly notify HNS and GEAC when it
believes that a Transponder Capacity Failure has occurred.
F. Additional Usage Representations and Obligations. Customer
has not been convicted for the criminal violation of, and has not been found by
the FCC or other federal, state or local governmental authority with
appropriate jurisdiction (collectively, the "Governmental Authority") to have
violated any Laws concerning illegal or obscene program material or the
transmission thereof (the "Obscenity Laws"), and Customer is not aware of any
pending investigation (including, without limitation, a grand jury
investigation) involving Customer's programming or any pending proceeding
against Customer for the violation of any Obscenity Laws. Customer will notify
HNS and GEAC as soon as it receives notification of, or becomes aware of, any
pending investigation by any Governmental Authority, or any pending criminal
proceeding against Customer, which investigation or proceeding concerns
transmissions by Customer potentially in violation of any Law relating to the
Use of Customer's Transponder Capacity, including without limitation, Obscenity
Laws. Customer will not Use, or allow the Use of, Customer's Transponder
Capacity for direct distribution of programming to television viewers unless
the programming is scrambled such that television viewers can receive the
programming only through the use of a decoder authorized by Customer or
Customer's authorized agent.
V. OUTAGE ALLOWANCE
If applicable, HNS shall grant Customer an Outage Allowance as
follows:
If an "Outage Allowance Failure Period" (as defined below) occurs,
then for each hour of such Outage Allowance Failure Period HNS shall grant
Customer a pro rata Outage Allowance based upon the monthly charge for
Customer's Transponder Capacity and the length of the Outage Allowance Failure
Period, calculated pursuant to the equation below. Any such Outage Allowance
shall be applied to the next succeeding monthly billing to Customer and shall
not in any case exceed one month's standard billing. As used herein, "Outage
Allowance Failure Period" shall mean the aggregate period (in hours) -- only
where such aggregation exceeds twelve (12) hours during any consecutive thirty
(30) day period -- during which a Transponder Capacity Failure(s) occurs. For
purposes of this Agreement, a Transponder Capacity Failure shall be measured
from the time HNS receives notice from Customer of the Transponder Capacity
Failure until the time the Transponder has been restored to operation, but
shall not begin in any event until Customer ceases to Use Customer's
Transponder Capacity.
Outage Allowance = Outage Allowance Failure Period (in Hours) x Monthly Lease
Payment
----------------------------------------------------------
720 hours/month
In no case shall an Outage Allowance be made for any Transponder Capacity
Failure related: (i) any failure on the part of Customer to perform its
transmission or other material or operational obligations pursuant to this
Agreement, (ii) failure of facilities provided by Customer, (iii) reasonable
periodic maintenance, (iv) interference from third party transmissions or
usage, (v) cooperative testing, except where trouble or fault is found in the
Transponder or (vi) any other act or failure to act by Customer.
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VI. REMEDIES
A. Limitation of Liability.
1. ANY AND ALL EXPRESS AND IMPLIED WARRANTIES INCLUDING,
BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY
PURPOSE OR USE, ARE EXPRESSLY EXCLUDED AND DISCLAIMED. IT IS
EXPRESSLY AGREED THAT HNS' SOLE OBLIGATIONS AND CUSTOMER'S EXCLUSIVE
REMEDIES FOR ANY CAUSE WHATSOEVER (INCLUDING, WITHOUT LIMITATION,
LIABILITY ARISING FROM NEGLIGENCE) ARISING OUT OF OR RELATING TO THIS
AGREEMENT AND/OR THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY ARE
LIMITED TO THOSE SET FORTH IN ARTICLES V AND VIII, HEREOF, AND ALL
OTHER REMEDIES OF ANY KIND ARE EXPRESSLY EXCLUDED.
2. IN NO EVENT SHALL HNS BE LIABLE FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE OR NOT, OCCASIONED BY ANY
DEFECT IN CUSTOMER'S TRANSPONDER CAPACITY, FAILURE OF THE CUSTOMER'S
TRANSPONDER CAPACITY TO PERFORM OR ANY OTHER CAUSE WHATSOEVER. HNS
MAKES NO WARRANTY, EXPRESS OR IMPLIED, TO ANY OTHER PERSON CONCERNING
CUSTOMER'S TRANSPONDER CAPACITY AND CUSTOMER SHALL INDEMNIFY HNS FROM
ANY CLAIMS MADE UNDER ANY WARRANTY OR REPRESENTATION BY CUSTOMER TO
ANY THIRD PARTY.
B. Indemnification.
1. Customer shall indemnify and save HNS harmless from
all liability disclaimed by HNS, as specified in Section VI.A. above,
to the extent such liability arises in connection with (i) Customer's
Use of Customer's Transponder Capacity pursuant to this Agreement,
including, without limitation, Customer's violation or alleged
violation of any of the Laws, including without limitation, the
Obscenity Laws described in Section VI.D or (ii) any claims made under
any warranty or representation by Customer to any third party
concerning Customer's Transponder Capacity.
2. Customer shall pay all expenses (including attorneys'
fees) incurred by HNS in connection with all legal or other formal or
informal proceedings concerning claims of third parties arising out of
or related to the items specified in Section B.1. above, and Customer
shall satisfy all judgments, costs, or other awards which may be
incurred by or rendered against HNS with respect to the claims
referred to in Section VI.B.1, above.
3. HNS shall have the sole right of defense in any legal
or other formal or informal proceedings concerning claims of third
parties, provided, however, that HNS shall conduct such defense with
legal counsel reasonably satisfactory to Customer. Customer shall pay
any settlement of any such claim or legal or other formal or informal
proceeding, but Customer shall not agree to any settlement of any
third party claim without first giving thirty (30) days prior written
notice of the terms and conditions of such settlement to HNS and
obtaining HNS' written consent to such settlement.
C. Injunctive Relief.
1. HNS' Right to Injunctive Relief. In order to protect
against or prevent violations of Laws or to protect the Satellite,
other satellites and/or the transponder capacity or other Users
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(including HNS) from interference or other similar breaches of this
Agreement, Customer acknowledges that GEAC and HNS shall have the
right immediately to obtain injunctive relief, including a temporary
restraining order on notice of four (4) hours or more to Customer, to
prevent Customer from breaching, or to compel Customer to perform, its
obligations under this Agreement.
2. Customer's Right to Injunctive Relief. In order to
protect Customer's right to Use Customer's Transponder Capacity from a
wrongful termination pursuant to Section VIII.C, below, or a wrongful
denial of Customer's access pursuant to Section VI.D, Customer shall
have the right immediately to seek injunctive relief, including a
temporary restraining order on notice of four (4) hours or more, if
any such wrongful termination or denial of access occurs.
D. Right to Deny Access.
1. If Customer violates any provision of Article IV and,
following notice from GEAC or HNS, continues to violate any such
provision, then in addition to its other rights hereunder, GEAC and/or
HNS shall have the immediate right to prevent Customer from accessing
Customer's Transponder Capacity to the extent, but only to the extent
necessary and for the time necessary (as reasonably determined by
GEAC) to prevent such breach from continuing.
2. If, in connection with Using Customer's Transponder
Capacity,
(i) user is indicted or is otherwise charged as a
defendant in a criminal proceeding, or is convicted under any
Obscenity Law or has been found by any Governmental Authority
to have violated any such law;
(ii) based on any user's Use of Customer's
Transponder Capacity, HNS and/or GEAC is indicted or otherwise
charged as a criminal defendant, becomes the subject of a
criminal proceeding or a governmental action seeking a fine,
license revocation or other sanctions, or any Governmental
Authority seeks a cease and desist or other similar order or
filing;
(iii) the FCC has issued an order initiating a
proceeding to revoke GEAC's authorization to operate the
Satellite;
(iv) GEAC obtains a court order pursuant to this
Section, or a court or Governmental Authority of competent
jurisdiction orders GEAC to deny access to user or orders user
to cease transmission; or
(v) HNS and or GEAC receives notice (the "Illegal
Programming Notice"), written or oral, from a Governmental
Authority that such authority considers Customer and/or any
other user's programming to be in violation of Obscenity Laws
(the "Illegal Programming"), and that if HNS and/or HNS does
not cease transmitting such Illegal Programming, then HNS and
or GEAC and/or any of their executives will be indicted or
otherwise charged as a criminal defendant, will become the
subject of a criminal proceeding or a governmental action
seeking a fine, license revocation or other sanctions, or that
such Governmental Authority will seek a cease and desist or
other similar order or filing (with HNS being obligated, to
the extent permitted by law, to provide Customer with a copy
of such Illegal Programming Notice, if written, or with other
verification, including the details thereof, if oral);
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then, upon notice from HNS or GEAC to Customer (the "Denial of Access
Notice"), which may be oral directed to any officer of Customer, user
shall cease using Customer's Transponder Capacity, immediately, in the
case of a denial of access pursuant to subparagraphs (i), (ii), (iii)
or (IV) above, or within 24 hours following receipt of such notice, in
the case of a denial of access pursuant to subparagraph (v), above;
and if user does not voluntarily cease using such capacity at the
appropriate time, then HNS or GEAC shall have the right to take such
steps as they may deem necessary to prevent user from accessing
Customer's Transponder Capacity. Provided, however, that if user has
more than one programming service, then the denial of access by HNS or
GEAC shall apply only to the Transponder used to provide the illegal
Programming Service; and provided further, however, that if, upon
receipt of the Denial of access Notice, user does not immediately
cease transmission of such Illegal Programming Service, then HNS or
GEAC shall have the right to take such steps as they deem necessary to
prevent user from accessing the Transponder used to transmit such
Illegal Programming Service (and if, thereafter, Customer transmits
such Illegal Programming Service using any of Customer's Transponder
Capacity, then GEAC and HNS shall have the immediate right, without
further notification, to take such steps as they deem necessary to
prevent Customer from accessing any of Customer's Transponder
Capacity). As used herein, "user" shall mean Customer and any person
to whom Customer transfers all or part of its right to Use Customer's
Transponder Capacity, including without limitation, a sublessee,
licensee or assignee.
E. Cumulative Nature of Remedies. All remedies set forth in this
Agreement shall be cumulative and in addition to, and not in lieu of, any other
remedies available at law, in equity or otherwise, and may be enforced
concurrently or from time to time.
VII. PAYMENTS TO HNS
A. Payment.
1. Unless otherwise specifically provided in the
Agreement between HNS and Customer, any sum due under the terms of any
Sublease between HNS and its Customer shall be due and payable in
advance on the first day of each month for the provision of Customer's
Transponder Capacity.
2. If any payment of any sum due from Customer is not
received by HNS within thirty (30) days after such payment is due,
then such overdue amount shall be subject to a late charge at the rate
of interest equal to one and one-half percent (1 1/2%) per month, or
the highest legally permissible rate of interest, whichever is lower,
from the date such overdue amount was actually due until the date it
is actually received by HNS. Customer acknowledges that such late
charge is reasonable under all the circumstances existing at the time
this Agreement is entered into. Customer agrees that acceptance of
all or any portion of such late charge by HNS shall in no event
constitute a waiver by HNS of Customer's default with respect to such
overdue amount, nor shall it prevent HNS from exercising any or all
other rights or remedies which HNS may have.
B. Taxes. If any property or sales taxes are asserted against
HNS by any governmental entity, with respect to Customer's Use of Customer's
Transponder Capacity or the lease thereof to Customer, Customer shall be solely
responsible for such taxes. If any taxes, charges or other levies are asserted
by reason of the use of the point in space or the frequency spectrum at that
point in space in which the Satellite is located, or the use or ownership of
such Satellite (excluding any FCC license fee imposed on the Satellite itself,
as compared to the Transponders, which license fee shall be paid by HNS), and
such taxes are not specifically allocated among the various components of such
Satellite, then HNS, Customer and the other Users or Customers of such
Transponders (or portions thereof) shall each
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pay a proportionate amount of such taxes based on the Transponders (or portions
thereof) each of them owns or leases (with credit to any User, if applicable,
for reductions or refunds of such taxes directly attributable to such User's
nonprofit status).
VIII. TERMINATION
This Agreement shall terminate automatically upon the Termination
Date, unless terminated earlier pursuant to one of the following paragraphs:
A. Termination for Cause. In the event that either party
materially defaults in the performance of any of its duties or obligations set
forth in this Agreement and such default is not substantially cured within
thirty (30) days after written notice is given to the defaulting party
specifying the default, then the party not in default may, by giving written
notice thereof to the defaulting party, terminate this Agreement as of a date
specified in such notice of termination.
B. Termination for Transponder Capacity Failure. If a
Transponder Capacity Failure continues uninterrupted for more than ten (10)
consecutive days (measured in accordance with Section V ("Outage Allowance")),
or such other period as is mutually agreed upon in writing by HNS and Customer,
then this Agreement may be immediately terminated by either party by written
notice to the other delivered on or before the thirtieth day after the calendar
day on which the Transponder Capacity Failure began. If so terminated, HNS
shall refund to Customer a prorated amount of any prepaid charges for the
terminated transponder capacity and HNS shall have no other or further
liability to Customer.
C. Cancellation for Non-Payment and Violations of Law.
Notwithstanding anything to the contrary and in addition to all other remedies
HNS may have, HNS may immediately cancel this Agreement and accelerate all
remaining payments due through the Lease Term (1) if Customer fails to pay when
due any amounts due pursuant to this Agreement within (10) days after HNS has
delivered notice to Customer of such non-payment, or (2) if Customer violates
the provisions of Sections IV.A ("Compliance with Laws"). Upon any termination
pursuant to this Subsection VIII.C.1, HNS shall be entitled to transfer
Customer's Transponder Capacity immediately to whomever HNS sees fit, Customer
shall not be entitled to any equitable relief as a result thereof, and
Customer's exclusive remedy shall be limited to recovery of any payments made
by it to HNS for the period of time as to which it has been canceled, without
interest, less any claim HNS has against Customer by reason of such Customer's
default. Upon any cancellation pursuant to Subsection VIII.C.2, Customer's
exclusive remedy for any wrongful cancellation shall be limited to recovery of
any payments made by it to HNS for the period as to which it was canceled and
to seek injunctive relief to compel HNS to perform its obligations as provided
for in Section VI.C.2 ("Customer's Right to Injunctive Relief").
D. Termination for Removal of Satellite. If, during the Lease
Term, GEAC, in its sole discretion, (a) determines that it is necessary to
remove the Satellite from operation and (ii) does not elect to provide
equivalent replacement capacity to Customer at the same orbital slot as was
previously occupied by the Satellite, then it is understood and agreed that
upon removing the Satellite from its assigned orbital location, HNS shall have
no further obligations to Customer under the Agreement; provided, however, that
until GEAC so removes the Satellite, HNS shall continue to make available
Customer's Transponder Capacity as provided for in this Agreement. HNS will, to
the extent possible, provide Customer with ninety (90) days notice prior to the
disposition of the Satellite. Upon any termination of this Agreement pursuant
to this Section, HNS shall refund to Customer a prorated amount of any prepaid
charges for the terminated Transponder Capacity. Except as set forth in the
preceding sentence, HNS shall have no liability to Customer upon such
termination.
E. Termination for Events of Default. Notwithstanding any
provision to the contrary contained in this Agreement, HNS may terminate this
Agreement immediately and have no further
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obligation to Customer upon dissolution, termination of existence, insolvency,
or business failure of Customer, or appointment of a receiver, trustee, or
custodian, for all or any part of the property of, assignment for the benefit
of creditors by, or the commencement of any proceeding by or against, Customer
under any reorganization, bankruptcy, insolvency, arrangement, dissolution or
liquidation law or statute of any jurisdiction, now or hereafter in effect; or
entry of a court order which enjoins, restrains, or in any way prevents
Customer from conducting all or any part of its business ("Events of Default").
If any of the Events of Default shall occur, Customer shall provide HNS with
immediate written notice thereof.
IX. MISCELLANEOUS
A. Headings. The Article and Section headings used in this
Agreement, except where terms are specifically defined, are for reference and
convenience only and shall not enter into the interpretation hereof.
B. Waiver. No delay or omission by either party to exercise any
right or power shall impair any such right or power or be construed to be a
waiver thereof. A waiver by either of the parties of any of the covenants,
conditions or agreements to be performed by the other or any breach thereof
shall not be construed to be a waiver of any succeeding breach thereof or of
any other covenant, condition or agreement herein contained.
C. Severability. If, but only to the extent that, any provision
of this Agreement is declared or found to be illegal, unenforceable or void,
then both parties shall be relieved of all obligations arising under such
provision, it being the intent and agreement of the parties that this Agreement
shall be deemed amended by modifying such provision to the extent necessary to
make it legal and enforceable while preserving its intent. If that is not
possible, another provision that is legal and enforceable and achieves
substantially the same objective shall be substituted. If the remainder of
this Agreement is not affected by such declaration or finding and is capable of
substantial performance, then the remainder shall be enforced to the extent
permitted by law.
D. Relationship of Parties. HNS is performing pursuant to this
Agreement only as an independent contractor and nothing set forth in this
Agreement shall be construed to create the relationship of principal and agent
between HNS and Customer. Neither HNS nor Customer shall act or attempt to act
or represent itself, directly or by implication, as an agent of the other party
or its Affiliates or in any manner assume or create, or attempt to assume or
create, any obligation on behalf of, or in the name of, the other party of its
Affiliates.
E. Approvals and Authorizations. The obligations of the parties
hereto shall be subject to obtaining and maintaining all necessary regulatory
and other governmental approvals and authorizations. The parties agree to use
their respective and, where applicable, collective best reasonable efforts to
obtain promptly and maintain any such approvals.
F. Notices. Wherever one party is required or permitted to give
notice to the other pursuant to this Agreement, such notice shall be deemed
given when delivered in hand, upon the expiration of the first business day
after being dispatched by Federal Express, Express Mail, or other means of
overnight courier services, or upon the expiration of the fifth business day if
sent by first class United States mail, postage prepaid, or by registered or
certified United States mail, return receipt requested, postage prepaid to the
other party at its principal place of business, as identified above in the
introductory paragraph.
G. Confidentiality. Each party hereby agrees that all
non-public, written confidential or proprietary information marked as
confidential communicated to it by the other party or its customers, whether
before or after the Execution Date, shall be and was received in strict
confidence, shall be used
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only for purposes of this Agreement, and, for a period of five (5) years
following the termination of this Agreement, shall not be disclosed by such
party, its agents or employees without the prior written consent of the other
party, except as may be necessary by reason of legal, accounting or regulatory
requirements beyond the reasonable control of the disclosing party. This
Agreement imposes no obligation upon a recipient with respect to any
confidential information disclosed under this Agreement which: (a) was in the
recipient's possession before receipt from the disclosure; or (b) is or becomes
a matter of public knowledge through no fault of the recipient; or (c) is
rightfully received by the recipient from a third party without a duty of
confidentiality; or (d) is disclosed by the discloser to a third party without
a duty of confidentiality on the third party; or (e) is independently developed
by the recipient; or (f) is disclosed under operation of law; or (g) is
disclosed by recipient with the discloser's prior written approval. The
obligations set forth in this Section shall survive termination of this
Agreement.
H. Media Releases. Except for any announcement intended solely
for internal distribution by a party or any disclosure required by legal,
accounting or regulatory requirements beyond the reasonable control of a party,
all media releases, public announcements or public disclosures (including, but
not limited to, promotional or marketing material) by a party or its employees
or agents relating to this Agreement or its subject matter, or including the
name of the other party, shall be coordinated with and approved in writing by
the other party prior to the release thereof, such approval to not be
unreasonably withheld.
I. Force Majeure. The term "Force Majeure" shall include, but
not be limited to, fires or other casualties or accidents, acts of God, severe
weather conditions, sun outages, strikes or labor disputes, war or other
violence, any law, order, proclamation, regulation, ordinance, demand or
requirement of any governmental agency or any other act or condition whatsoever
beyond the reasonable control of the affected party. A party whose performance
of its obligations hereunder is prevented, restricted or interfered with by
reason of a Force Majeure condition shall be excused from such performance to
the extent of such Force Majeure condition so long as such party immediately
continues performance whenever and to the extent such causes are removed.
Nothing in this Section shall relieve Customer of its obligations to make
payments to HNS in accordance with Article VII of this Agreement.
J. Applicable Law and Entire Agreement. This Agreement shall be
interpreted, construed and governed in accordance with the laws of the State of
Maryland. This Agreement and Exhibits hereto dated as of even date herewith,
constitutes the entire agreement between the parties, supersedes all previous
understandings, commitments or representations and is intended as the complete
and exclusive statement of the terms of the agreement between the parties
concerning the subject matter. This Agreement may not be amended or modified
in any way, and none of its provisions may be waived, except by a writing
signed by each party hereto.
K. Attorney's Fees. In the event of any dispute or controversy
arising hereunder, any court having jurisdiction in any such dispute or
controversy shall determine which of the parties is the prevailing party and
shall award to the prevailing party the reasonable fees and expenses of
counsel, experts and other court costs incurred in connection with such dispute
or controversy.
L. Third-Party Beneficiaries. The provisions of this Agreement
are for the benefit of the parties hereto, and for the benefit of GEAC, which
as the Master Lessor, shall be deemed a third party beneficiary to this
Agreement, with all rights, benefits and remedies provided for under this
Agreement. No other third party may seek to enforce, or benefit from, these
provisions, except that both parties acknowledge and agree that the provisions
of Section IV.A are intended for the benefit of HNS and all other Users. Both
parties agree that any other such User shall have the right to enforce, as a
third-party beneficiary, the provisions of Section IV.A against Customer
directly, in an action brought solely by such other User, or may join with HNS
or any other User, in bringing an action against Customer for violation of such
Sections.
10
<PAGE> 14
M. No Right of Transfer. Customer shall not, and shall not have
the right to, grant, sell, assign, encumber, permit the utilization of,
license, lease, or otherwise convey, directly or indirectly, in whole or in
part (individually, a "Transfer"), Customer's Transponder Capacity, or any of
its rights under this Agreement, to any other entity or person, unless Customer
obtains HNS' prior written consent, which may be granted or withheld by HNS in
HNS' sole discretion. HNS may assign its rights or obligations to its
Affiliates or financing entities pursuant to Section II.A.
N. Successors and Assigns. Subject to Section IX.M, this
Agreement shall be binding on and shall inure to the benefit of any successors
and assigns of the parties, provided that no assignment of this Agreement shall
relieve either party hereto of its obligations to the other party. Any
purported assignment by either party not in compliance with the provisions of
this Agreement shall be null and void and of no force and effect.
O. No Brokers. Customer has not entered into any agreement or
incurred any obligation, directly or indirectly, for the payment of any
broker's or finder's fee or commission or any other payment to any person or
entity in connection with this Agreement or the transactions contemplated
hereby, and Customer is not otherwise obligated to pay such a fee or commission
or to make such a payment.
P. Counterparts. This Agreement may be executed in counterparts.
11
<PAGE> 1
EXHIBIT 11.1
ON COMMAND CORPORATION
STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Net income loss.............................................. $(14,739) $ 4,902 $ 3,456
Redeemable common stock accretion............................ (483) (641) (600)
------ ------ ------
Net income loss applicable to nonredeemable common stock..... $(15,222) $ 4,261 $ 2,856
====== ====== ======
Weighted average common shares outstanding................... 22,625 17,554 14,024
Weighted average common equivalent shares:
Redeemable common stock.................................... -- 1,167 1,167
Warrants and options....................................... 685 631
------ ------ ------
Total shares used in per share computations.................. 22,125 19,406 15,822
====== ====== ======
Net income loss per common and equivalent share.............. $ (0.67) $ 0.22 $ 0.18
====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
ON COMMAND CORPORATION'S SUBSIDIARIES
On Command Video Corporation
Spectravision of Canada
Kalevision Systems, Inc.
Kalevision USA
Spectradyne, Inc.
Spectradyne International, Inc.
Spectradyne Asia-Pacific
Spectradyne Australia, Pty, LTD
Spectradyne Singapore, Pte, LTD
Spectradyne Thailand, LTD
Spectradyne of Bahamas
Spectradyne of Bermuda
Spectradyne of Texas
Spectradyne GMBH
On Command Development Corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement (No.
333-16957) of On Command Corporation on Form S-8 of our report dated
January 27, 1997 (March 27, 1997 as to Note 14), appearing in this Annual Report
on Form 10-K of On Command Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
March 27, 1997
San Jose, California
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,733
<SECURITIES> 0
<RECEIVABLES> 25,957
<ALLOWANCES> 629
<INVENTORY> 0
<CURRENT-ASSETS> 36,937
<PP&E> 364,495
<DEPRECIATION> 102,858
<TOTAL-ASSETS> 396,538
<CURRENT-LIABILITIES> 92,063
<BONDS> 0
0
0
<COMMON> 300
<OTHER-SE> 250,617
<TOTAL-LIABILITY-AND-EQUITY> 396,538
<SALES> 147,469
<TOTAL-REVENUES> 147,469
<CGS> 71,019
<TOTAL-COSTS> 71,019
<OTHER-EXPENSES> 87,770
<LOSS-PROVISION> 450
<INTEREST-EXPENSE> 3,349
<INCOME-PRETAX> (14,565)
<INCOME-TAX> 174
<INCOME-CONTINUING> (14,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,739)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
