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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, 1999
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. [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 14, 2000, was $76,684,826 based
upon a price of $16.84375 per share, which was the average of the bid and asked
prices of such stock on March 14, 2000, as reported on the NASDAQ National
Market Reporting System. As of March 14, 2000, there were 30,436,423 shares of
the Registrant's Common Stock issued and outstanding and 1,424,875 Series A
Warrants, 2,625,000 Series B Warrants, and 3,450,000 Series C Warrants
(non-registered) issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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Part I
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Item 1. Business
Introduction 1
General 2
Industry Overview 2
Operating and Growth Strategy 3
Platforms 3
Services 5
Sales and Marketing 6
Installation and Service Operations 7
Hotel Contracts 7
Technology -- Research and Development 7
Suppliers 7
Competition 8
Regulation 9
Patents, Trademarks, and Copyrights 9
International Markets 9
Licensees and Other System Sales 10
Markets and Customers 10
Employees 11
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
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Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
Part III
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Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management 52
Item 13. Certain Relationships and Related Transactions 54
Item 14. Exhibits, Financial Statements, Schedules and 56
Reports on Form 8-K
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PART I
This Form 10-K contains 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 factors, which could cause actual
results to differ materially, are described in the following paragraphs and are
particularly noted under Business Risks on pages 17 through 19. Although the
Company has attempted to list some of the important factors that may cause
actual results to differ materially from those anticipated, those factors should
not be viewed as the only factors that may affect future operating results.
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, 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"). At the time of the Merger and Acquisition, Ascent had been a
majority-owned subsidiary of COMSAT Corporation ("COMSAT"). On June 27, 1997,
COMSAT consummated the distribution of its 80.67% ownership interest in Ascent
to the COMSAT shareholders on a pro-rata basis in a transaction that was
tax-free for federal income tax purposes.
The Merger and Acquisition were effective on October 8, 1996. The
Merger was 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 other than On Command Development Corporation.
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.
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GENERAL
OCC 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. OCC is the leading provider
(by number of hotel rooms served) of in-room, on-demand video entertainment and
information services to the domestic lodging industry. OCC has experienced rapid
growth in the past seven years, increasing its base of installed rooms from
approximately 37,000 rooms at the end of 1992 to approximately 956,000 rooms at
December 31, 1999, of which approximately 884,000 rooms are served by on-demand
systems.
OCC provides in-room video entertainment and information services on
three technology platforms, the recently developed OCX video system, the On
Command Video (OCV) System and the SpectraVision Systems. The OCX video system
provides enhanced multimedia applications, including an improved graphical
interface for movies and games, TV-based Internet with a wireless keyboard, and
other guest services. At December 31, 1999, OCC had installed the OCX systems in
approximately 34,000 hotel rooms, 30,000 with Internet capability. The OCV video
system is a patented video selection and distribution technology platform that
allows hotel guests to select at any time movies and games through the
television sets in their hotel rooms. At December 31, 1999 OCC had approximately
749,000 rooms installed with the OCV platform. There are variations of the
SpectraVision video systems still installed in hotels including tape based
scheduled and on demand systems. The SpectraVision video system generally offers
fewer movie choices than the OCV or OCX systems. At December 31, 1999, OCC had
177,000 rooms installed with SpectraVision equipment.
In addition to movies, OCC's platforms provide for in-room viewing of
programming of select cable channels (such as HBO, Showtime, ESPN, CNN and
Disney Channel) and other interactive and information services, which includes
high speed Internet access through the OCX platform. OCC primarily provides its
services under long-term contracts to hotel chains, hotel management companies,
and individually owned and franchised hotel properties, predominantly in the
deluxe, luxury, and upscale hotel categories serving business travelers, such as
Marriott, Hilton, Hyatt, Wyndham, Starwood, Doubletree, Fairmont, Embassy
Suites, Four Seasons, and other select hotels.
At December 31, 1999, approximately 87% of OCC's 956,000 installed
rooms were located in the United States, with the balance located primarily in
Canada, the Caribbean, Australia, Europe, Latin America, and the Asia-Pacific
region. In addition to installing systems in hotels served by OCC, OCC sells its
systems to certain other providers of in-room entertainment, including
Hospitality Network, Inc., which is licensed to use OCC's systems to provide
on-demand, in-room entertainment and information services to certain
gaming-based, hotel properties and ALLIN Communications, Inc., which is licensed
to install OCC's systems in cruise ships.
INDUSTRY OVERVIEW
Providing in-room entertainment and information services to the lodging
industry includes offering pay-per-view motion pictures and Internet
connectivity, free-to-guest programming of select pay cable channels, and an
increasing array of interactive programs and information services. Pay-per-view
services were introduced in the early 1970s 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) 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, video games and Internet service. The market for
in-room entertainment and information is characterized as a highly competitive
environment among several industry-dedicated companies and a number of new
entrants including cable companies, telecommunications companies, laptop
connectivity companies and others. See "Competition."
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OPERATING AND GROWTH STRATEGY
On Command Corporation's operating and growth strategy is to: (i)
increase revenues and create new revenue sources through an expanding range of
interactive and information services offered to the lodging industry through the
OCX platform, including @Hotel TV-based Internet; (ii) 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; (iii) expand its room
base in underserved foreign markets; and (iv) increase revenues and decrease
costs in certain hotels acquired in the SpectraVision acquisition by installing
more current technology offering greater reliability, broader selection, and
more viewing flexibility.
OCC has been actively pursuing the renewal or extension of most of the
contracts with hotel customers with SpectraVision equipment by offering these
customers the opportunity to obtain OCV or OCX on-demand pay-per-view movies and
related services. As of December 31, 1999, OCC had converted approximately
181,000 rooms previously served by SpectraVision's systems to OCC's on-demand
system. Management expects to have a substantial majority of the remaining
SpectraVision rooms converted to OCC's on-demand system by the end of 2001.
PLATFORMS
OCX Platform
OCX is a multimedia platform that can be used to modify existing OCC
installations or can incorporate digital content storage in new installations.
At December 31, 1999, OCC had installed the OCX system in 34,000 hotel rooms,
and with Internet capability to approximately 30,000 rooms. The platform
currently provides interactive, multimedia menus, high-speed, TV-based Internet
service, e-mail access over the Internet, Sony PlayStation games, as well as
more choices and higher-quality video (with digital content storage) for OCC's
on-demand movie services. Potential offerings using the digital platform include
flexible pricing and packaging, non-theatrical short videos (such as business,
lifestyle, and sports videos) and special events, including out-of-market sports
events.
On July 1, 1999, OCC launched its OCX platform, which is now being
supported by OCC using standard procedures. Over the next several months, OCC
will be implementing new systems and procedures to better service and support
the existing OCX properties and improve the operational efficiencies of the OCX
platform. OCC has been actively marketing OCX and at December 31, 1999 had
signed contracts to install OCX in an additional 75,000 rooms. OCC is outfitting
all major metropolitan areas with sufficient technical staff to support the
increasing demand for OCX.
OCX provides enhanced multimedia applications and @Hotel Internet
access using a customized version of Microsoft's Internet Explorer, adapted for
use over the TV in conjunction with a wireless keyboard. @Hotel Internet service
is available to guests for a daily fee and includes complete web access and
e-mail capability. OCC has also partnered with several Internet content
providers to organize hotel-friendly Internet sites. OCX operates by means of
several client computers that serve multiple guestrooms and are located outside
of the actual rooms.
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The OCX platform supports a high degree of interactivity and
customization, including a powerful and compelling multimedia user interface.
The OCX platform is a standards-based, client-server architecture utilizing
Windows NT in the "back end" and a customized NTSC version of Internet Explorer
running on Windows 98 PC clients in the "front end." HTML-based menus allow
integration of content and navigational elements, and video content is provided
via a digital file server or an array of video cassette players.
A key component of OCX is the "Site Manager" software application that
controls the system, interfaces with the hotel Property Management System, and
acts as the system's overall resource manager (including user session management
and resource allocation). In its design and functionality, this application
reflects OCC's years of operational experience and provides a key strategic
advantage in serving the lodging industry.
The OCX platform provides a significant increase in the breadth of
possible services and in the efficiency of providing them. While the platform
itself may be extended to support extensive product offerings, early
implementations will include video-on-demand, TV-based Internet access, Sony's
PlayStation video games, and a rich multimedia user interface. With the OCX
technology, each component of the platform has multiple uses. For example, the
same PC client used for navigating graphics-intensive menus is used subsequently
for accessing the Internet, and sending e-mail, etc. With digital content
storage, a feature film could be replaced by four 30-minute short subject videos
(for example, instructional videos, self-help videos or comedy videos), unlike
one-for-one replacement with videocassettes. More importantly, the Company can
begin to transition to network delivery of content.
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, the quality of the cabling and antenna system at the hotel,
and the configuration of the system installed, the installation cost of a new,
OCV on-demand system with movies, guest services and video game capabilities,
including the head-end equipment averages from approximately $375 to $450 per
room. If the Company provides televisions, the cost can increase by $200 to $325
per room depending on the size of the TV. The installation cost of a full OCX
system, including digital content storage and Internet capability with a
wireless keyboard is approximately $75 per room higher than the OCV system in
the same size hotel. In addition, the OCV system can be modified to enable OCX
functionality for movies, games, Internet, and guest services. The cost of this
modification is between $175 - $300 per room depending on the required wiring in
the hotel. Most installations undertaken by OCC today use the OCX platform. Due
to constraints placed on OCC by most movie studios, OCX is only installed with
videocassette players in certain international markets.
OCV Platform
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 videocassettes once per month and are all handled by OCC's service
personnel who also update the system's movie titles screens. 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. The high-speed,
two-way digital communications capability of the OCV system enables OCC to
provide advanced interactive and information features, such as video games, in
addition to basic guest services such as video checkout, room service ordering
and guest satisfaction surveys. The OCV system also enables hotel owners to
broadcast informational and promotional messages and to monitor room
availability.
For example, in a typical hotel with 400 rooms, the central head-end
video rack would consist of approximately 120 videocassette 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 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
currently available to the guest, thus eliminating the possibility of a guest
being disappointed when the guest's selection is not available.
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SpectraVision Platform
In comparison with OCV systems, hotels still equipped with
SpectraVision technology generally offer fewer choices if served by
SpectraVision on-demand systems, or only offer hotel guests eight movies per day
at scheduled times, or some combination thereof. SpectraVision originated a
tape-based system which typically offered a hotel guest eight movies per day at
predetermined times. In 1991, SpectraVision introduced the Guest Choice system
to provide hotel guests with on-demand viewing of videotapes based upon
proprietary equipment and software. In 1994, SpectraVision introduced a digital
video on-demand service, called Digital Guest Choice. The Digital Guest Choice
system provides on-demand viewing of digitally stored movies that reside on high
capacity disk arrays. The Company has converted the Digital Guest Choice systems
in the United States to its OCV on-demand systems although some units of Digital
Guest Choice equipment continue to be used in Asia.
SERVICES
Pay-Per-View Movie Services
Through its OCV and SpectraVision subsidiaries, OCC provides on-demand
and, in some cases, scheduled in-room television viewing of major motion
pictures 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 up to 50 different movies
with an on-demand system, or from eight to twelve 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. 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
motion pictures 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 provide
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 its
own televisions, however, based on certain economic evaluations, OCC may provide
televisions to hotels in exchange for other contractual consideration. OCC's
contracts with hotels generally provide that OCC will be the exclusive provider
of in-room, pay-per-view video 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 systems 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 agreement on terms that are based upon the competitive situation in
the market.
The revenue generated from OCC's pay-per-view service is dependent on
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 based on the property's location, its
competitive position within the 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 and the business of OCC is
closely related to the performance of the business and luxury hotel segments of
the lodging industry. 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 range from $8.95 to $9.95 for a purchase
by the hotel guest. The current price for OCC's pay-per-day service is $15.99
per day.
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Free-To-Guest Services
OCC also markets free-to-guest services pursuant to which a hotel may
elect to receive one or more programming channels, such as HBO, Showtime, CNN,
ESPN, TBS, Disney Channel, Discovery Channel, 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.
Internet Services
Beginning in 1997, OCC developed and selectively deployed for market
testing several new services to complement its existing offerings and strengthen
its growth strategy by creating new potential revenue sources. In July 1999, OCC
commercially released its OCX platform which enables guest use of the @ Hotel
Internet services over the TV. At December 31, 1999, OCC had installed the
Internet service in approximately 30,000 rooms. As an adjunct to the OCX
multimedia platform, OCC has also installed high-speed laptop connectivity for
hotel rooms and high-bandwidth services for conference spaces. OCC's goal is to
provide a variety of services that leverage the connectivity infrastructure that
it has or will establish in its client hotels.
Game Services
At December 31, 1999, On Command offered games in approximately 186,000
rooms. Both the OCV and OCX platforms support Sony PlayStation games. Kids,
families, and business travelers can entertain themselves with the most popular
video game titles available on the market. There are between 8-16 titles
available in most game rooms at a guest price of $5.99/hour.
Other Hotel and Guest Services
In addition to entertainment services, OCC provides other guest
services to the lodging industry. These services use two-way interactive
communications capability of the Company's equipment and room availability
monitoring. Among the guest services provided are video check-out, room service
ordering and guest satisfaction survey. Guest services are also currently
available in Spanish, French, and certain other foreign languages. In most
cases, the guest services are made a part of the contract for pay-per-view
services which typically runs for a term of five to seven years. OCC is also
testing shorter and more targeted non-movie programming on a lower cost
pay-per-view basis. The initial categories of content include business,
lifestyle and kids-only. In addition, OCC is in the process of long-term testing
of a new sports category of programming that provides hotel guests with a
selection of out-of-market sports not televised nationally, or subject to local
blackout restrictions.
SALES AND MARKETING
Substantially all of OCV's growth to date has been derived from
obtaining contracts with hotels in the United States not under contract with
existing vendors or served by other vendors as the contracts covering such
hotels expired. OCC believes that, as a result of the Acquisition, opportunities
for additional growth in the United States are more limited than in the past.
Therefore, the Company has broadened its strategy for obtaining new hotel
customers to both smaller hotels and international markets. The Company believes
that both smaller hotels in the United States and hotels in many international
markets are underserved by the in-room entertainment industry.
OCC's marketing efforts have historically been primarily focused on
business and leisure hotels with approximately 150 rooms or more. Management
believes that such hotels consistently generate the highest revenues per room in
the lodging industry and have the highest potential for new service revenue
growth. The Company also targets smaller deluxe, luxury and upscale hotels and
select mid-priced hotels serving business travelers that meet its profitability
criteria. As mentioned above, the Company has recently begun to employ
additional engineering, development and marketing efforts to target hotels under
150 rooms. On Command intends to continue targeting established hotel chains,
certain business and leisure hotel management companies, and selected
independent hotels.
OCC markets its services to hotel guests by means of on-screen
advertising that highlights the services and motion picture selections of the
month as well as an in-room entertainment guide distributed to more than 817,000
hotel rooms each month.
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INSTALLATION AND SERVICE OPERATIONS
At December 31, 1999, OCC's installation and service organization
consisted of approximately 368 installation and service personnel in the United
States and Canada. OCC installation and service personnel are responsible for
all of the hotel rooms served by OCC in the United States and Canada, including
system maintenance and distribution of videocassettes. OCC's installation
personnel also 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. OCC also uses local installation
subcontractors supervised by full-time OCC 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 OCX, OCV and SpectraVision 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. Should a service visit be
required, the modular design of the OCX, OCV and SpectraVision systems generally
permits installation and service personnel to replace defective components at
the hotel site.
HOTEL CONTRACTS
The Company typically negotiates and enters into a separate contract
with each hotel for the services provided. However, for some of the Company's
large hotel management customers, the Company negotiates and enters into a
single master contract for the provision of services for all of the
corporate-managed hotels of such management company. 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 typically seeks
to extend the term of the contract on terms competitive in the market. At
December 31, 1999, approximately 10% of the pay-per-view hotels served by OCC
have contracts that have expired and are on a month-to-month basis.
Approximately 10% of the pay-per-view hotels served by OCC have contracts
expiring in 2000. However, some of the SpectraVision hotel contracts, which the
Company classified internally as expired, have two-year automatic renewal
provisions under certain conditions and may continue to be in effect. As a
result, the expiration rates set forth above may overstate the actual number of
hotel contracts that are expiring.
TECHNOLOGY - RESEARCH AND DEVELOPMENT
On Command Development Corporation, a wholly-owned subsidiary of OCC,
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.
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 OCX system enables the Company to provide advanced interactive features
such as video games and Internet in addition to basic guest 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, televisions, amplifiers, and computers. Because the Company's
systems generally use industry standard interfaces, OCC can integrate new
technologies as they become economically viable.
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 the SpectraVision systems currently
installed in hotels require a high level of service and repair. As these systems
become older, servicing replacement parts will become more difficult. If the
Company were to experience a shortage of any given electronic part, the
7
<PAGE> 10
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 OCC-employed and trained technicians install the system, typically
assisted by independent contractors.
For those hotels for which the Company supplies televisions, On Command
purchases such televisions from a small number of television vendors. In the
event of a significant price increase for televisions by such vendors, the
Company could face additional, unexpected capital expenditure costs.
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/or their domestic and
international distributors and programming networks. OCC believes its
relationships with all suppliers are good.
In addition, the Company receives satellite signal transport services
for much of its domestic cable television programming from DirecTV, Inc. The
Company believes that its relationship with DirecTV, Inc. is good. However, an
interruption in DirecTV's satellite service could interfere with the Company's
ability to serve many of its hotel customers' free-to-guest cable programming
requirements.
COMPETITION
In the U.S., taking into account the various providers of cable
television services, there are numerous providers of in-room video entertainment
to the lodging industry, at least three of which provide on-demand pay-per-view,
free-to-guest programming, and guest services by means of the in-room
television. Internationally, there are more companies competing in the
pay-per-view lodging industry than in the United States.
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 competitors that are developing ways to use
their existing infrastructure to provide in-room entertainment and/or
information services to the lodging industry, including cable companies
(including wireless cable), telecommunications companies, Internet and
high-speed connectivity companies, and direct-to-home and direct broadcast
satellite companies. Some of these competitors have been providing free-to-guest
services to hotels and are beginning to provide video-on-demand, Internet and
high speed connectivity to hotels.
OCC is the leading provider (by number of hotel rooms served) of
in-room video entertainment services to the United States lodging industry. OCC
is also the leading provider (by number of hotel rooms served) of in-room
on-demand video entertainment services to the lodging industry on a worldwide
basis. Domestically, OCC competes on a national scale primarily with LodgeNet
Entertainment Corporation ("LodgeNet") and on a domestic and international
regional basis with certain other smaller entities. Based on publicly available
information, OCC estimates that, at December 31, 1999, LodgeNet currently serves
approximately 4,900 lodging properties, of which 661,700 rooms are equipped with
on-demand service. At December 31, 1999, OCC served approximately 956,000 rooms,
of which approximately 884,000 are on-demand rooms.
Competition with respect to in-room video entertainment and information
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 and information 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.
Furthermore, while the Company is addressing the likelihood of
increased demand for Internet services in the hotel guestroom, OCC may face
additional competition in this area from traditional as well as new competitors.
8
<PAGE> 11
Some of these competitors may be better funded from both public capital and/or
private venture capital markets and have access to additional capital resources
which OCC does not have.
OCC believes its competitive advantages include (i) technological
leadership represented by its superior on-demand capability and range of
services offered, (ii) system reliability and high quality service, and (iii)
its presence and ability to offer its service in most markets around the world.
OCC believes that its growth (including OCV's growth prior to the Acquisition)
reflects the strong competitive position of its products and services.
OCC also competes with local cable television operators by customizing
packages of programming to provide only those channels desired by the hotel
subscriber, which typically reduces the overall cost of the service provided.
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 and information 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
information 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 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 OCC's operations unless
the Company 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
the Company's pay-per-view or free-to-guest services.
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
The Company owns a number of patents and patent licenses covering
various aspects of its pay-per-view and interactive systems. Although OCC
maintains these patents, On Command Corporation believes that the design,
innovation, and quality of its products and their relations with its customers
are at least as important, if not more so, to the maintenance and growth of the
Company. The Company also owns various trade names, trademarks, service marks,
and logos used in its businesses, which OCC intends to actively protect. In
connection with the LodgeNet litigation, in 1998 the Company and LodgeNet have
licensed each other's patented technology for five years.
INTERNATIONAL MARKETS
In addition to its operations in the fifty United States, OCC offers
its services in Canada, Latin America, Puerto Rico, the U.S. Virgin Islands,
Hong Kong, Singapore, Thailand, Australia, the Bahamas, Europe, and elsewhere in
the Asia-Pacific region.
The Company historically experienced higher international revenues and
operating cash flow per room than in the United States because of higher prices,
higher buy rates, and the general lack of programming alternatives. However, the
Company generally also incurs greater capital expenditure and operating costs
outside
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<PAGE> 12
the United States. Additionally, the effect of the Asian economic crisis
contributed to a decline in revenues from that region in 1998 and 1999. At
December 31, 1999, the Company serviced 423 hotels with a total of approximately
126,000 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
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.
LICENSEES AND OTHER SYSTEM SALES
OCC sells systems to certain other providers of in-room entertainment
including Hospitality Network, Inc., which is licensed to use OCV's system to
provide on-demand, in-room entertainment and information services to certain
gaming-based, hotel properties and Allin Interactive, who is licensed to install
OCX equipment on cruise ships. Through September 1998, MagiNet Corporation
(formerly Pacific Pay Video Limited) ("MagiNet"), was licensed to use OCV's
system to provide on-demand in-room entertainment in the Asia Pacific region. In
September 1998, OCV filed suit against MagiNet for violations of the license
agreement between MagiNet and OCV, and concurrently terminated MagiNet's license
to use the OCV system. MagiNet is contesting the termination and the lawsuit and
has asserted counterclaims against OCC and OCV.
MARKETS AND CUSTOMERS
On Command currently provides entertainment and information services to
hotels which are associated with major hotels chains, management companies and
independent hotels including Adam's Mark, Fairmont, Four Seasons, Hilton
(including Hilton Garden Inn), Doubletree, Embassy Suites, Hampton Inn, Holiday
Inn, Hyatt, Loews, Marriott (including Courtyard By Marriott, Fairfield Inn,
Renaissance, Residence Inn, & Ritz-Carlton), Wyndham International, Inc.,
Radisson, Sheraton and Starwood Hotels & Resorts (W & Westin). OCC serves major
chains and selected other hotels throughout the United States, Canada, Latin
America, the United Kingdom, Spain, France, 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, 1999 and 1998,
respectively:
<TABLE>
<CAPTION>
As of December 31
1999 1998
---- ----
<S> <C> <C>
Hotels Served:
U.S. 2,871 2,799
Non-U.S. 423 421
Rooms Served:
U.S. 830,000 805,000
Non-U.S. 126,000 124,000
Total Net Room Revenue per Equipped
Room (NRER)
$21.19/month $20.76/month
</TABLE>
10
<PAGE> 13
EMPLOYEES
As of December 31, 1999, OCC employed a total of 914 persons, including
76 in engineering, 368 in domestic installation and service, 152 in domestic
manufacturing and operations, 29 in sales, 164 in management, administration and
finance, and 125 in international service and operations. During fiscal year
1999 and 1998, the 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.
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 contained approximately 84,000
square feet of office, light manufacturing, and storage space. OCC sold the
Richardson facility in the fourth quarter of 1997 and leased back the facility
through March 31, 1998. The Company has transferred all necessary operations to
the San Jose headquarters. In connection with the Acquisition, OCC also acquired
other leased space that housed SpectraVision's customer support operations
throughout the United States, Canada, Latin America, Puerto Rico, Hong Kong, and
Australia. The Company's properties are suitable and adequate for the Company's
business operations.
ITEM 3. LEGAL PROCEEDINGS
On September 11, 1998, OCC reached an agreement with LodgeNet
Entertainment Corporation ("LodgeNet") to settle all pending litigation between
the companies. As a result, the companies have dismissed all pending litigation
between the parties in United States Federal District Courts in California and
South Dakota, with no admission of liability by either party. The terms of the
confidential settlement include a cross-license of each company's patented
technologies at issue to the other party and a covenant not to engage in patent
litigation against the other party for a period of five years. Each company is
responsible for its own legal costs and expenses, and in connection with the
multiple cross-licenses, OCC expects to receive royalty payments, net of legal
fees and expenses, in an aggregate amount of approximately $10.8 million. OCC
received the first payment of approximately $2.9 million (net of expenses) in
September 1998, the second payment of approximately $3.9 million (net of
expenses) in July 1999 and expects to receive a payment of approximately
$3.9 million (net of expenses) in July 2000. OCC will recognize the additional
royalty revenue as the cash payments are received.
In September 1998, OCV filed suit against MagiNet, alleging a breach by
MagiNet of a license agreement between OCV and MagiNet, and terminating the
license agreement. OCV has also demanded the payment of license fees from
MagiNet which OCC believes were due and payable under the License Agreement and
have not been paid by MagiNet. MagiNet has counter-claimed against OCV, alleging
that OCV breached the license agreement, and alleging various torts by OCV in
its relationship with MagiNet. While the outcome of MagiNet's counterclaim
cannot be predicted with certainty, management of the Company intends to defend
itself vigorously and expects that any 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.
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.
11
<PAGE> 14
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 1999.
12
<PAGE> 15
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE 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 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 periods January 1,
1999 through December 31, 1999 and January 1, 1998 through December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Price Range
-----------
Common Stock High Low
------------ ---- ---
<S> <C> <C>
1999:
First Quarter $ 10.3750 $ 8.7500
Second Quarter $ 17.7500 $ 13.1250
Third Quarter $ 19.1900 $ 17.2800
Fourth Quarter $ 19.0000 $ 14.9400
1998:
First Quarter $ 10.3750 $ 8.8750
Second Quarter $ 17.7500 $ 9.0625
Third Quarter $ 19.1875 $ 18.0000
Fourth Quarter $ 19.0000 $ 14.9375
</TABLE>
<TABLE>
<CAPTION>
Price Range
-----------
Series A Warrants High Low
----------------- ---- ---
<S> <C> <C>
1999:
First Quarter $ 4.2500 $ 3.7500
Second Quarter $ 6.0000 $ 3.7500
Third Quarter $ 9.3750 $ 5.7500
Fourth Quarter $ 7.8750 $ 5.2500
1998:
First Quarter $ 7.1250 $ 6.7500
Second Quarter $ 6.0000 $ 5.5000
Third Quarter $ 5.8750 $ 5.2500
Fourth Quarter $ 5.7500 $ 3.5000
</TABLE>
<TABLE>
<CAPTION>
Price Range
-----------
Series B Warrants High Low
----------------- ---- ---
<S> <C> <C>
1999:
First Quarter $ 2.7500 $ 2.7500
Second Quarter $ 5.3750 $ 2.5000
Third Quarter $ 6.5000 $ 5.0000
Fourth Quarter $ 7.7500 $ 3.8750
1998:
First Quarter $ 5.4375 $ 5.1250
Second Quarter $ 5.1875 $ 5.0000
Third Quarter $ 4.1250 $ 2.9375
Fourth Quarter $ 3.0000 $ 2.0000
</TABLE>
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<PAGE> 16
As of March 27, 2000 there were 30,436,423 shares of Common Stock,
1,424,875 Series A Warrants, 2,625,000 Series B Warrants, and 3,450,000 Series C
Warrants issued and outstanding. As of March 27, 2000 there were 340 Common
Stockholders, 18 Series A Warrant holders, 270 Series B Warrant holders, and 8
Series C Warrant holders of record. The Company's Transfer Agent and Registrar
is the Bank of New York located at 101 Barclay Street, New York, New York.
The Company currently has a $200 million credit facility. This facility
has certain restrictive covenants including a restriction on the Company's
ability to pay dividends or make other distributions.
ITEM 6. SELECTED FINANCIAL DATA
The financial data set forth below, except hotel and room 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,
------------------------------------------------------------------
1999 1998 1997 1996(1) 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues ................................. $ 252,948 $ 238,820 $ 222,103 $ 147,469 $ 102,059
Total direct costs of revenues ................. 113,218 103,902 103,343 71,019 48,417
Total operating expenses ....................... 158,636 151,068 142,166 87,770 45,091
Income (loss) from operations .................. (18,906) (16,150) (23,406) (11,320) 8,551
Net income (loss) (2) .......................... (29,394) (25,966) (33,314) (14,739) 4,902
Net income (loss) applicable to
nonredeemable common stock ................ (29,394) (25,966) (33,314) (15,222) 4,261
Basic net income (loss) per share .............. (0.97) (0.86) (1.11) (0.67) 0.24
Diluted net income (loss) per share ............ (0.97) (0.86) (1.11) (0.67) 0.22
Shares used in basic per share
calculations (in thousands) ................ 30,222 30,150 30,081 22,625 17,554
Shares used in diluted per share
calculations (in thousands) ................ 30,222 30,150 30,081 22,625 19,406
CASH FLOW DATA:
Net cash provided by operating activities .... $ 70,893 $ 53,913 $ 53,481 $ 42,784 $ 41,374
Net cash used in investing activities ......... (85,478) (83,208) (88,044) (80,505) (63,693)
Net cash provided by financing activities ..... 16,337 30,379 35,268 42,521 14,952
OTHER DATA:
EBITDA (3) ..................................... $ 75,912 $ 72,049 $ 55,578 $ 41,960 $ 37,288
Cash dividends per share ....................... -- -- -- $ 0.49 --
Rooms served at end of period (4) .............. 956,000 929,000 893,000 917,000 361,000
On Demand rooms ............................ 884,000 829,000 765,000 709,000 361,000
Scheduled rooms ............................ 72,000 100,000 128,000 208,000 --
Hotels served at end of period ................. 3,366 3,220 3,060 3,144 1,221
Capital expenditures (5) ....................... $ 85,478 $ 83,208 $ 92,307 $ 70,545 $ 63,693
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets ................................... $ 402,917 $ 402,968 $ 401,388 $ 396,538 $ 211,005
Total debt ..................................... 180,000 163,000 133,000 98,000 15,942
Redeemable common stock ........................ -- -- -- -- 11,684
Total stockholders' equity ..................... 164,095 190,005 217,167 250,917 169,804
</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 and the assets and liabilities of SpectraVision at
December 31, 1996.
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<PAGE> 17
(2) 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 affected
EBITDA (see note 3). Excluding non-recurring charges, the net loss
applicable to non-redeemable 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.
(3) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, stock based compensation and other non-operating items
such as gain/loss on disposal of assets and exchange rate gain/loss.
The most significant difference between EBITDA and cash provided from
operations is changes in working capital. EBITDA is presented because
it is a widely accepted financial indicator used by certain investors
and analysts to analyze and compare companies on the basis of operating
performance. 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. The Company's
method for calculating EBITDA may be different than other companies.
(4) The decrease in rooms in 1997 is primarily due to the sale and
termination of certain U.S. hotel contracts, which hotels received
satellite only broadcasts of pay-per-view movies.
(5) Capital expenditures primarily include the installation of systems in
new hotels, the conversion of SpectraVision systems and upgrades made
to existing equipment in hotels, and internal fixed asset purchases.
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, 1999, 1998 and 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenues for the year ended December 31, 1999 increased $14.2
million, or 5.9%, to $253.0 million, as compared to $238.8 million in 1998. Room
revenues increased $12.3 million, or 5.4%, in 1999 to $239.5 million, as
compared to $227.2 million in 1998. The increase was primarily attributable to
new hotel installations, continued conversions of SpectraVision equipped
properties, lower movie denial rates, higher average movie price, higher game
and internet revenue, and, on average, more cable programming channels in each
room during 1999 than in 1998. Video system sales and other revenues increased
$1.9 million, or 16.4%, to $13.5 million in 1999, as compared to $11.6 million
in 1998. The increase was primarily due to increased ordering of video systems
by a major licensee, sales of OCX systems to a provider of entertainment systems
to the cruise ship industry, and an increase in the net royalty payment received
from LodgeNet. (See Note 13 to Notes to Consolidated Financial Statements).
Total direct costs of revenues for the year ended December 31, 1999
increased $9.3 million, or 9.0%, to $113.2 million, as compared to $103.9
million in 1998. Direct costs associated with room revenue in 1999 increased
$7.8 million, or 7.9%, to $106.8 million, as compared to $99.0 million in 1998,
and as a percentage of room revenue increased to 44.6% for the year ended
December 31, 1999 from 43.6% for the year ended December 31, 1998. The increase
in the direct cost as a percentage of revenue is primarily due to an increase in
movie royalties and hotel commissions. Direct costs from video system sales and
other revenues increased $1.5 million,
15
<PAGE> 18
or 30.6%, to $6.4 million in 1999, as compared to $4.9 million in 1998,
primarily due to the increase in video system sales. Direct costs associated
with video systems sales and other revenue as a percentage of video system sales
and other revenues increased to 47.7% for the year ended December 31, 1999 from
42.1% for the year ended December 31, 1998. The increase is primarily due to
lower margins on projects where the Company will contract with the hotel to
provide wiring services prior to the movie system installation and lower margins
on system sales.
Operations expenses, which consist primarily of labor and material
expense required to maintain the existing equipment in hotels, for the year
ended December 31, 1999 decreased $1.4 million, or 4.5%, to $29.9 million, as
compared to $31.3 million for the year ended December 31, 1998, and as a
percentage of room revenue decreased to 12.5% from 13.8% for the same period of
1998. The decrease is primarily due to the shut-down of the Company's Richardson
facility in the first quarter of 1998 and lower costs for repair material,
freight, and TV repair during 1999.
Research and development expenses for the year ended December 31, 1999
increased $1.0 million, or 13.3%, to $8.5 million, as compared to $7.5 million
for the year ended December 31, 1998. The increase is primarily due to the
continued development of the OCX system, the Company's interactive multimedia
technology and other new product offerings such as high-speed laptop
connectivity.
Selling, general and administrative expenses for the year ended
December 31, 1999 increased $1.4 million, or 5.8%, to $25.4 million, as compared
to $24.0 million for the year ended December 31, 1998. The increase is
principally due to increased expenses in the areas of Account Management and
Product Management as the Company continues to build its infrastructure in
support of new interactive services (e.g. @Hotel Internet service) offered with
OCX, the Company's new interactive platform.
Depreciation, amortization, and stock based compensation expenses for
the year ended December 31, 1999 increased $6.6 million, or 7.5%, to $94.8
million, as compared to $88.2 million for year ended December 31, 1998, and as a
percentage of total revenue increased to 37.5% for 1999 from 36.9% during 1998.
The increase is mainly due to depreciation on capital investments associated
with the growing room base and converting hotels served by SpectraVision
equipment, accelerated depreciation on certain end-of-life assets and a $1.1
million non-cash expense associated with accounting for cashless stock options
in an executive compensation agreement, reflecting the increased share price,
partially offset by the termination of amortization on SpectraVision equipment
in October 1999.
Interest Income for the year ended December 31, 1999 remained
relatively flat as compared to 1998.
Interest Expense/other expense for the year ended December 31, 1999
increased $0.4 million to $10.8 million, as compared to $10.4 million for the
year ended December 31, 1998. This increase is attributable to additional
borrowings incurred by On Command during 1999.
Provision for income taxes for the year ended December 31, 1999
represents tax on income in certain international and domestic jurisdictions.
Net loss increased to $29.4 million for the year ended December 31,
1999 from $26.0 million for year ended December 31, 1998 due to the factors
described above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues increased $16.7 million, or 7.5%, to $238.8 million in
1998, as compared to total net revenues of $222.1 million in 1997. Room revenues
increased $16.7 million, or 7.9%, to $227.2 million in 1998 from $210.5 million
in 1997. The increase was primarily due to stronger buy rates for movies during
1998, higher total rooms during the year, and a higher percentage of total rooms
being served by higher revenue producing on-
16
<PAGE> 19
demand equipment in 1998 as compared to 1997. Revenues during 1997 were also
affected by a satellite outage in January affecting certain SpectraVision
properties and the termination and sale of approximately 40,000 rooms during the
second half of the year that were receiving satellite only pay-per-view movies.
Video system sales and other revenues remained relatively flat during 1998 as
compared to 1997. This was due to a lower number of video system sales to the
Company's primary licensees offset by the receipt of a $2.9 million royalty
payment (net of legal fees) from LodgeNet made during the third quarter of 1998
(see Note 14 of Notes to Consolidated Financial Statements).
Total direct cost of revenues increased by $0.6 million, or 0.5%, to
$103.9 million in 1998 as compared to $103.3 million in 1997. Direct costs
associated with room revenue increased $2.4 million, or 2.5%, to $99.0 million
in 1998 from $96.6 million in 1997, however, as a percentage of room revenue
decreased to 43.6% in 1998 as compared to 45.9% in 1997. The dollar amount
increase was due to higher room revenues in 1998 as compared to 1997, while the
decrease in the percentage was due to lower feature movies royalties as a
percentage of total room revenues, and lower satellite/lease cost during 1998.
Direct costs from video system sales and other revenues decreased $1.8 million,
or 27.1%, to $4.9 million, as compared to $6.7 million in 1997, as a result of a
decline in sales of video systems. Direct costs as a percentage of video system
sales and other revenues decreased to 42.1% in 1998 from 57.9% in 1997. The
improved gross margin was largely due to the receipt of the LodgeNet royalty
payment during 1998.
Operations expenses, which consist primarily of labor and material
expense required to maintain the existing equipment in hotels, decreased $2.7
million, or 7.9%, to $31.3 million in 1998, as compared to $34.0 million in
1997, and as a percentage of total revenue decreased to 13.1% in 1998 from 15.3%
in 1997. The decrease was primarily due to non-recurring satellite re-deployment
expenses incurred in the first quarter of 1997 and a higher percentage of rooms
using OCV technology which is less expensive to support than SpectraVision
technology.
Research and development expenses in 1998 increased $0.6 million, or
9.0%, to $7.5 million as compared to $6.9 million in 1997. The higher expenses
are due to increasing efforts in the development of the Company's new products,
services and programming support.
Selling, general, and administrative expenses increased $1.8 million,
or 7.9%, to $24.0 million in 1998, as compared to $22.3 million in 1997. The
increase is principally due to higher expenses in product management and
marketing in order to support new products and initiatives.
Depreciation and amortization expense increased $9.2 million, or 11.7%,
to $88.2 million in 1998 from $79.0 million in 1997, and as a percentage of
total revenue increased to 36.9% in 1998 from 35.6% in 1997. These expenses are
primarily attributable to depreciable assets associated with video systems that
generate movie revenue. The dollar increase reflects capital investments
associated with growing the Company's room base and converting SpectraVision
rooms to OCC equipment.
Interest/Other expense net increased to $10.4 million in 1998, as
compared to $9.3 million in 1997. This increase was due to the Company's greater
reliance on debt financing to continue its expansion of its installed customer
base, somewhat offset by a lower effective interest rate in 1998.
Provision for income taxes for 1998 represents tax benefits on losses
in certain foreign jurisdictions.
Net loss decreased to $26.0 million in 1998 from $33.3 million in 1997
due to the factors described above.
17
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during 1999 were net cash from operations
of $70.9 million and net borrowings of $17.0 million from the Company's
revolving credit facility. Cash was expended primarily for capital expenditures
which totaled $85.5 million during 1999, primarily for the conversion of
SpectraVision systems, the installation of new hotels with the OCX and OCV
systems, the conversion of OCV systems to OCX, increased inventory, and internal
fixed asset purchases. At December 31, 1999, the Company's installed room base
was approximately 956,000, as compared to approximately 929,000 at the end of
1998. During 1999, the Company installed its OCX and OCV systems in
approximately 96,900 rooms, of which approximately 56,900 were new hotel
installations, approximately 29,500 were conversions of SpectraVision
properties, and 10,500 were conversions of OCV systems to OCX.
The Company's principal cash requirements in 2000 are expected to
include the installation of the Company's OCX system in new hotels, the
continued conversion of SpectraVision properties to the more dependable OCX
system, and conversions of OCV rooms to OCX, and internal fixed asset purchases.
The Company anticipates these activities will require capital expenditures of
approximately $90.0 to $110.0 million in 2000.
At December 31, 1999, the Company had $180.0 million outstanding under
its Credit Facility and had access to an additional $20.0 million of long-term
financing. The Company expects that the available cash, cash flows from
operations and funds available under the Credit Facility will be sufficient to
finance its expected investment in in-room video systems through the first
quarter and into the second quarter of 2000. The Company anticipates capital
expenditures in connection with the continued installation and conversion of
hotel rooms will be approximately $6 to $8 million per month through June 30,
2000. In order to meet its business plan beyond the second quarter of 2000, the
Company will need to raise additional financing and re-negotiate the financial
covenants in its current Credit Facility. The Company is currently pursuing its
alternatives in this area. If the Company is unable to raise additional
financing, the Company would need to reduce its capital spending well below the
levels stated above for the year 2000 which would inhibit its ability to grow -
see Business Risks - "DEPENDENCE ON ADDITIONAL CAPITAL FOR GROWTH."
LIMITATIONS ON ADDITIONAL DEBT FINANCING
On Command Corporation and Ascent entered into a Corporate Agreement,
as amended (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 Credit Facility, and indebtedness incurred in the
ordinary course of operations which together shall not exceed $200 million in
the aggregate through June 30, 2000.
FOREIGN EXCHANGE
The Company 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.
BUSINESS RISKS
CONTROL BY ASCENT
Ascent owned approximately 56.6% of the outstanding OCC Common Stock at
December 31, 1999. Accordingly, Ascent has 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 addition,
the Company and Ascent have entered into a Corporate Agreement which requires
the Company to get Ascent's approval with respect to incurring indebtedness and
issuing equity.
On February 22, 2000, Ascent entered into an Agreement and Plan of
Merger with Liberty Media Corporation ("Liberty") and Liberty AEG Acquisition,
Inc. ("Merger Sub"), an indirect wholly-owned subsidiary of Liberty. Pursuant to
the Merger Agreement, Merger Sub commenced a Tender Offer (the "Offer") offering
18
<PAGE> 21
Ascent stockholders $15.25 in cash for each share of Ascent common stock.
Liberty commenced the Offer on February 29, 2000 and under its terms and subject
to its conditions, the Offer will expire on March 27, 2000, unless extended
pursuant to the Merger Agreement. The Offer is conditioned on the tender of at
least a majority of the Ascent shares as well as other customary conditions.
Under the Merger Agreement and subject to the terms thereof, if Merger Sub
purchases a majority of the outstanding Ascent common stock in the Offer, Merger
Sub will be merged with and into Ascent (the "Merger") and all shares not
purchased in the Offer (other than Shares held by Liberty, Merger Sub or Ascent,
or shares held by dissenting stockholders) will be converted into the right to
receive $15.25 per Share in cash. Liberty has indicated its intention to sell
Ascent's Sports related businesses.
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. Prior to the acquisition of SpectraVision, OCC had 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
On Command Corporation. On Command Corporation intends to use cash flow from
operations and additional borrowings (subject to the limitations discussed under
"Limitations on Additional 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 "Limitations on Additional 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.
THINLY TRADED STOCK IN THE PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
At December 31, 1999, approximately 43.4% of the outstanding On Command
Common Stock is traded on the Nasdaq National Market, the public market for the
OCC Common Stock and the On Command Corporation Warrants, and accordingly, the
Stock and 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 current
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 those
contracts expire. The loss by On Command Corporation of one or more of the major
hotel chain customers, such as Marriott, Starwood, Hyatt or Hilton, could have a
material adverse impact on On Command Corporation's results of operations. On
Command Corporation is currently engaged in negotiations with Marriott, Hilton,
and Starwood, as well as other key customers, regarding the renewal, extension
or amendment of their existing contracts, and On Command Corporation believes
that each of these negotiations is affected by the competitive environment. 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.
19
<PAGE> 22
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Marriott, Hilton, Holiday Inn, Hyatt and Starwood accounted for
approximately 25%, 20%, 10%, 8%, and 7%, respectively, of On Command
Corporation's room revenues for the year ended December 31, 1999. These revenue
percentages represent all chain affiliations including owned, managed, and
franchised hotels. Contracts are written at the hotel level and therefore
expirations occur over extended periods of time depending on the installation
date of the particular hotel. 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
On Command's business is closely linked to the performance of the hotel
industry in which overall occupancy has been declining recently, though not as
significantly as in many of the luxury and business hotels served by OCC.
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.
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
Ascent owns approximately 56.6% of the OCC Common Stock at December 31,
1999, before giving effect to the exercise of any Warrants. Accordingly, On
Command Corporation will not be able to engage in any strategic transactions
without the approval of Ascent - see "CONTROL BY ASCENT." Even if Ascent's
interest in On Command Corporation were reduced below such level, On Command
Corporation's Certificate of Incorporation contains certain provisions that
could make it more difficult for a third party to acquire, or discourage a third
party from attempting to acquire, control of On Command Corporation. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of OCC Common Stock. Certain of such provisions allow
On Command Corporation to issue preferred stock with rights senior to those of
the OCC Common Stock and impose various procedural and other requirements which
could make it more difficult for stockholders to effect certain corporate
actions.
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. While the Company
intends to address such trends, there can be no assurance that the Company's
efforts will prove effective.
20
<PAGE> 23
YEAR 2000
The Company had developed a formal plan to identify, evaluate and
implement changes to its computer systems as necessary to address the Year 2000
issue. Through the date of this report, there have been no adverse effects on
the Company's business, results of operations or financial condition as a result
of Year 2000 problems with its computer systems and operations. In addition, the
Company has not encountered any Year 2000 problems with any of its vendors or
customers. Although the Company has made reasonable efforts to identify and
protect itself with respect to external Year 2000 problems, there can be no
assurance that the Company will not be affected by such problems.
21
<PAGE> 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates,
which could impact its results of operations and financial condition,
particularly, the Company's interest expense and cash flow. The Company does not
hedge this exposure. Revolving loans extended under the Credit Facility
generally bear an interest rate that is variable and based on the London
Interbank Offering Rate ("LIBOR") and on certain operating ratios of the
Company. At December 31, 1999, the Company had $180.0 million outstanding on the
Credit Facility and the weighted average interest rate on the Credit Facility
was 6.736%. Assuming no increase or decrease in the amount outstanding, a
hypothetical immediate 100 basis point increase (or decrease) in interest rates
at December 31, 1999 would increase (or decrease), the Company's annual interest
expense and cash outflow by approximately $1.8 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Comprehensive Loss for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to the Consolidated Financial Statements
22
<PAGE> 25
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, comprehensive loss and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States of America. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. 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 LLP
San Jose, California
March 3, 2000
23
<PAGE> 26
ON COMMAND CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,972 $ 7,235
Accounts receivable (less allowance for doubtful accounts of $2,287 in 1999
and $1,484 in 1998) 32,037 32,167
Other current assets 1,211 2,633
---------- ----------
Total current assets 42,220 42,035
VIDEO SYSTEMS, Net 266,947 267,880
PROPERTY AND EQUIPMENT, Net 17,644 11,829
GOODWILL, Net 73,297 77,674
OTHER ASSETS, Net 2,809 3,550
---------- ----------
$ 402,917 $ 402,968
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 31,435 $ 23,305
Accounts payable to stockholder (Note 9) 1,054 138
Accrued compensation 6,431 5,916
Other accrued liabilities 8,750 11,977
Current portion of capital lease obligations 2,533 --
Taxes payable 6,809 7,632
---------- ----------
Total current liabilities 57,012 48,968
CAPITAL LEASES OBLIGATIONS AND OTHER LONG TERM LIABILITIES (Note 6) 1,758 995
REVOLVING CREDIT FACILITY (Note 5) 180,000 163,000
---------- ----------
Total liabilities 238,770 212,963
COMMITMENTS AND CONTINGENCIES (Notes 6 and 13)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; shares authorized - 10,000; none outstanding -- --
Common stock, $.01 par value; shares authorized - 50,000 in 1999 and 1998; 303 302
shares issued and outstanding 30,313 in 1999 and 30,173 in 1998
Additional paid-in capital 251,677 249,809
Common stock warrants 31,450 31,450
Accumulated other comprehensive loss (872) (2,539)
Accumulated deficit (118,411) (89,017)
---------- ----------
Total stockholders' equity 164,147 190,005
---------- ----------
$ 402,917 $ 402,968
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Room revenues $ 239,473 $ 227,177 $ 210,493
Video systems sales/other
13,475 11,643 11,610
---------- ---------- ----------
Total revenues (see Note 10 for related party revenues) 252,948 238,820 222,103
---------- ---------- ----------
DIRECT COSTS OF REVENUES:
Room revenues 106,791 98,999 96,617
Video systems sales /other 6,427 4,903 6,726
---------- ---------- ----------
Total direct costs of revenues 113,218 103,902 103,343
---------- ---------- ----------
OPERATING EXPENSES:
Operations 29,958 31,301 33,993
Research and development 8,479 7,537 6,912
Selling, general and administrative (excludes $1,064
of stock based compensation in 1999 included below) 25,381 24,031 22,277
Depreciation, amortization and stock-based compensation (Note 7) 94,818 88,199 78,984
---------- ---------- ----------
Total operating expenses 158,636 151,068 142,166
---------- ---------- ----------
LOSS FROM OPERATIONS (18,906) (16,150) (23,406)
INTEREST INCOME 520 503 155
INTEREST/OTHER EXPENSE (10,808) (10,428) (9,277)
---------- ---------- ----------
LOSS BEFORE INCOME TAXES (29,194) (26,075) (32,528)
PROVISION (BENEFIT) FOR INCOME TAXES
200 (109) 786
---------- ---------- ----------
NET LOSS $ (29,394) $ (25,966) $ (33,314)
========== ========== ==========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.97) $ (0.86) $ (1.11)
========== ========== ==========
SHARES USED IN BASIC AND DILUTED
PER SHARE COMPUTATIONS 30,222 30,150 30,081
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUM.
COMMON STOCK ADDITIONAL COMMON OTHER
------------------------ PAID-IN STOCK COMP.
SHARES AMOUNT CAPITAL WARRANTS LOSS
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996 30,047 $ 300 $ 249,164 $ 31,450 $ (260)
Exercise of stock options 67 1 238
Issuance of common stock under ESP plan (see Note 7) 2 29
Translation adjustment (704)
Net loss
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1997 30,116 301 249,431 31,450 (964)
Exercise of stock options 42 1 236
Issuance of common stock under ESP plan (see Note 7) 15 142
Translation adjustment (1,575)
Net loss
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1998 30,173 $ 302 $ 249,809 $ 31,450 $ (2,539)
Exercise of stock options 123 1 588
Stock based compensation 1,064
Issuance of common stock to directors 2 29
Issuance of common stock under ESP plan (see Note 7) 15 187
Translation adjustment 1,667
Net loss
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1999 30,313 $ 303 $ 251,677 $ 31,450 $ (872)
========== ========== ========== ========== ==========
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(DEFICIT) EQUITY
<S> <C> <C>
BALANCES, January 1, 1996 $ (29,737) $ 250,917
Exercise of stock options 239
Issuance of common stock under ESP plan (see Note 7) 29
Translation adjustment (704)
Net loss (33,314) (33,314)
---------- ----------
BALANCES, December 31, 1997 (63,051) 217,167
Exercise of stock options 237
Issuance of common stock under ESP plan (see Note 7) 142
Translation adjustment (1,575)
Net loss (25,966) (25,966)
---------- ----------
BALANCES, December 31, 1998 $ (89,017) $ 190,005
Exercise of stock options 589
Stock based compensation 1,064
Issuance of common stock to directors 29
Issuance of common stock under ESP plan (see Note 7) 187
Translation adjustment 1,667
Net loss (29,394) (29,394)
---------- ----------
BALANCES, December 31, 1999 $ (118,411) $ 164,147
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net loss $(29,394) $(25,966) $(33,314)
Translation adjustments 1,667 (1,575) (704)
-------- -------- --------
Comprehensive loss $(27,727) $(27,541) $(34,018)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (29,394) (25,966) (33,314)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation, amortization and stock based compensation 94,818 88,278 78,984
Deferred income taxes, net -- -- (47)
Provision for loss on long term investment -- -- 917
(Gain)/Loss on disposal of fixed assets (46) 72 (844)
Changes in assets and liabilities net of effects from acquired
operations:
Accounts receivable 412 (5,439) (1,584)
Other assets 1,056 7 1,420
Accounts payable 8,062 3,269 3,246
Accounts payable to stockholder 917 34 83
Accrued compensation 484 (121) 880
Other accrued liabilities (3,635) (2,735) 5,395
Taxes payable (1,781) (3,486) (1,655)
---------- ---------- ----------
Net cash provided by operating activities 70,893 53,913 53,481
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (85,478) (83,208) (92,307)
Proceeds from sale of property and equipment -- -- 4,263
---------- ---------- ----------
Net cash used in investing activities (85,478) (83,208) (88,044)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under credit facility 17,000 30,000 165,000
Payment of former credit facility -- -- (130,000)
Payments on capital lease obligations (1,468) -- --
Proceeds from issuance of common stock 805 379 268
---------- ---------- ----------
Net cash provided by financing activities 16,337 30,379 35,268
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (15) (136) (151)
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,737 948 554
CASH AND CASH EQUIVALENTS, Beginning of year 7,235 6,287 5,733
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, End of year $ 8,972 $ 7,235 $ 6,287
========== ========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ 193 $ -- $ 1,012
========== ========== ==========
Cash paid for interest $ 9,549 9,597 6,832
========== ========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Reversal of accrued mode in purchase price allocation $ -- $ -- $ 3,000
========== ========== ==========
Capital lease obligations $ 5,760 $ -- $ --
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
ON COMMAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION
On Command Corporation (the "Company" or "OCC") is a Delaware corporation
formed in July 1996 by Ascent Entertainment Group, Inc. ("Ascent") for the
purpose of effecting (i) 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. Following the Acquisition,
Spectradyne, Inc. changed its name to SpectraVision, Inc.
("SpectraVision"). Ascent had been a majority-owned subsidiary of COMSAT
Corporation ("COMSAT") and on June 27, 1997, COMSAT consummated the
distribution of its 80.67% ownership interest in Ascent to the COMSAT
shareholders on a pro-rata basis in a transaction that was tax-free for
federal income tax purposes (the "Distribution").
On February 22, 2000, Ascent entered into an Agreement and Plan of Merger
with Liberty Media Corporation ("Liberty") and Liberty AEG Acquisition,
Inc. ("Merger Sub"), an indirect wholly-owned subsidiary of Liberty. Prior
to Ascent entering into the Merger Agreement, the OCC Board of Directors
approved the Merger Agreement. Pursuant to the Merger Agreement, Merger
Sub commenced a Tender Offer (the "Offer") offering to Ascent stockholders
$15.25 in cash for each share of Ascent common stock. Liberty commenced
the Offer on February 29, 2000 and under its terms and subject to its
conditions, the Offer will expire on March 27, 2000, unless extended
pursuant to the Merger Agreement. The Offer is conditioned on the tender
of at least a majority of the Ascent shares as well as other customary
conditions. Under the Merger Agreement and subject to the terms thereof,
if Merger Sub purchases a majority of the outstanding Ascent common stock
in the Offer, Merger Sub will be merged with and into Ascent (the
"Merger") and all shares not purchased in the Offer (other than Shares
held by Liberty, Merger Sub or Ascent, or shares held by dissenting
stockholders) will be converted into the right to receive $15.25 per share
in cash.
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS - The Company designs, develops,
manufactures and installs proprietary video systems. The Company's primary
installed video system is OCV's 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. These interactive services
include games, Internet offerings and various hotel and guest services.
The Company has operating subsidiaries or branches in the United States,
Canada, Mexico, Hong Kong, Singapore, Thailand, Australia, Spain and the
United Kingdom. All significant intercompany accounts and transactions
have been eliminated.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of OnCommand Corporation and its wholly
owned subsidiaries. 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 consist primarily of certificates of deposit and bank savings
accounts.
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. Video systems and
equipment acquired from the SpectraVision Acquisition were depreciated
over 36 months, which term was completed in October 1999.
OTHER ASSETS - Other assets at December 31, 1999 and 1998 include an
investment of $348,000 in MagiNet Corporation (See Note 9 for additional
discussion on MagiNet) and approximately $0 and $610,000 at December 31,
1999 and 1998, respectively, for technology acquired in the SpectraVision
Acquisition (net of
29
<PAGE> 32
amortization recorded on a straight-line basis over three years). The
investment in MagiNet was reduced by $917,000 in 1997 from an original
cost of $1,265,000 due to a dilution of the Company's ownership in
MagiNet.
GOODWILL - Goodwill resulted from the SpectraVision Acquisition 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 was $4,376,000,
$4,376,000, and $4,454,000, in 1999, 1998, and 1997, respectively.
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". As of December 31, 1999 and 1998, 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 and payment is considered probable.
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 LOSS PER SHARE - Basic loss per share excludes dilution and is
computed by dividing net loss applicable to nonredeemable common stock by
the weighted-average number of common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Common share equivalents are excluded from
the computations in loss periods as their effect would be antidilutive.
For the years ended December 31, 1999, 1998 and 1997 approximately 10.0
million, 10.1 million, and 9.9 million equivalent dilutive securities
(primarily common stock options and warrants), respectively, have been
excluded from the weighted-average number of common shares outstanding for
the diluted net loss per share computation as they are antidilutive.
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 at December 31, 1999 was
approximately $187,000,000 based on the current rate offered to the
Company for debt of the same remaining maturities.
FOREIGN CURRENCY TRANSLATION - For translation of its foreign 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 average
rate of exchange in effect during the period. Translation adjustments are
included within 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.
USE OF ESTIMATES, 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
30
<PAGE> 33
changes in any of the following areas could have a material adverse effect
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 major hotel chain
customers; ability to obtain additional capital to finance capital
expenditures; ability to maintain compliance with Credit Facility
covenants; ability to retain senior management and key employees; and
risks of technological developments.
RECENTLY ISSUED ACCOUNTING STANDARDS - In 1998, the Company early adopted
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. In 1999 and 1998, the Company capitalized approximately
$5,700,000 and $4,100,000 of costs, respectively, in accordance with this
SOP.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for
an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company
operates in one reportable segment (see Note 11).
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair
value and provides for hedge accounting when certain conditions are met.
SFAS No. 133, as amended by SFAS 137, is effective for all fiscal years
beginning after June 15, 2000. The Company does not believe that the
adoption of this statement will have a material impact on the Company's
financial position, results of operations or cash flows.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications had no
effect on net loss or total stockholders' equity.
3. VIDEO SYSTEMS
Video systems at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Installed video systems $ 524,167 $ 459,178
Construction in progress 48,590 46,431
---------- ----------
572,757 505,609
Accumulated depreciation (305,810) (237,729)
---------- ----------
Video systems, net $ 266,947 $ 267,880
========== ==========
</TABLE>
At December 31, 1999, the net basis of installed video systems included
items acquired under capital leases at a cost of $3,085,000, less
accumulated depreciation of $1,285,000.
31
<PAGE> 34
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Furniture and fixtures $ 3,523 $ 4,377
Machinery, computer equipment and software 22,514 15,568
Leased vehicles under capital leases 2,675 --
Buildings and leasehold improvements 1,672 1,453
-------- --------
30,384 21,398
Accumulated depreciation and amortization (12,740) (9,569)
-------- --------
Property and equipment, net $ 17,644 $ 11,829
======== ========
</TABLE>
Vehicles acquired under capital leases had a cost basis of $2,675,000 at
December 31, 1999, less accumulated amortization of $453,900.
5. REVOLVING CREDIT FACILITY
The Company currently has a $200 million credit facility (the "Credit
Facility"). The Credit Facility matures in November 2002 and, subject to
certain conditions, can be renewed for two additional years. At December
31, 1999, there was $20.0 million of available borrowings under the Credit
Facility, subject to certain covenant restrictions.
Revolving loans extended under the Credit Facility bear interest at the
London Interbank Offering Rate ("LIBOR") plus a spread that may range from
0.375% to 0.75% depending on certain operating ratios of the Company.
During 1999, the weighted average interest rate on the Credit Facility was
6.736%. In addition, a fee ranging from 0.1875% to 0.25% per annum is
charged on the unused portion of the Credit Facility, depending on certain
operating ratios of the Company. The Credit Facility contains customary
covenants and agreements, most notably, the inclusion of restrictions on
the Company's ability to pay dividends or make other distributions as well
as leverage and interest coverage covenants. The Company was in compliance
with such covenants at December 31, 1999. In order to meet its business
plan beyond the second quarter of 2000, the Company will need to raise
additional financing and re-negotiate the financial covenants in its
current Credit Facility. The Company is currently pursuing its
alternatives in this area. If the Company is unable to raise additional
financing, the Company would need to reduce its capital spending for the
year 2000 which would inhibit its ability to grow.
6. COMMITMENTS
OPERATING LEASES
The Company leases its principal facilities under a noncancelable
operating lease which expires in June 2004. 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 2000 to
2004.
Rental payments for the Company's principal facility were approximately
$1,690,000, $1,553,000,and $1,303,000 during the years ended December 31,
1999, 1998, and 1997, respectively. In 1997 the owner of this facility was
a minority stockholder. Rental expense under all operating leases was
approximately $2,145,000, $5,100,000, and $4,400,000, for the years ended
December 31, 1999, 1998, and 1997, respectively.
Future minimum annual payments under noncancelable operating leases at
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
<S> <C>
2000 $ 2,104
2001 1,915
2002 1,910
2003 1,850
2004 and thereafter 940
-------
Total $ 8,719
=======
</TABLE>
CAPITAL LEASES
During 1999, the Company amended certain of its operating lease
agreements, primarily for vehicles and equipment, that qualify such
amended leases as capitalized leases. Certain of these leases contain
restrictions including maintenance of certain operating ratios. Following
is a summary of future minimum lease payments for the Company's capital
lease obligations:
32
<PAGE> 35
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
<S> <C>
2000 $ 2,819
2001 1,820
--------
Total future minimum lease payments 4,639
Less amounts representing interest (348)
--------
Present value of future minimum lease payments 4,291
Less current portion 2,533
--------
Long-term portion of capital lease obligations $ 1,758
--------
</TABLE>
PURCHASE COMMITMENTS
Non-cancelable commitments for the purchase of video systems and office
equipment amounted to approximately $9,500,000 at December 31, 1999.
7. STOCKHOLDERS' EQUITY
STOCK OPTION PLAN
The Company adopted the 1996 Key Employee Stock Option Plan (the 1996
Plan), expiring in 2006, under which employees may be granted, among other
equity incentives, incentive or non-statutory 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 initially reserved for the plan.
The exercise price is set by the Company's 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 former officers, 1,426,874
options were granted in 1996 with a three-year vesting period. During
1998, 1,041,562 of such options were cancelled. During the year ended
December 31, 1999, $1,064,000 was recorded as stock-based compensation
expense due to the cashless exercise feature of such options. No such
expense was recorded in prior periods as the exercise price of such
options exceeded the fair market value of the Company's common stock.
33
<PAGE> 36
1997 NON-EMPLOYEE DIRECTORS STOCK PLAN
In May 1997, the Company adopted the Company's 1997 Non-Employee Directors
Stock Plan ("Directors Plan"). The Directors Plan authorizes the granting
of an annual award of 400 shares of the Company's common stock and,
pursuant to an amendment adopted in 1999, a one-time non-qualified option
to purchase 50,000 shares of the Company's common stock (a "Director
Option") to each Independent Director. The aggregate number of shares of
the Company's Common Stock which may be issued upon exercise of Directors
Options granted under the Directors Plan plus the number of shares which
may be awarded pursuant to the Directors Plan will not exceed 296,800,
subject to adjustment to reflect events such as stock dividends, stock
splits, recapitalizations, mergers or reorganizations of or by the
Company. In 1999 and 1998, 200,000 and 12,000 options were granted,
respectively. No options were granted in 1997.
The following is a summary of activity under all of the Company's Stock
Option Plans:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------
OPTIONS WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES EXERCISE
PRICE
<S> <C> <C> <C>
Balances, January 1, 1997 (314,345 exercisable
at a weighted-average price of $7.30) 771,197 2,181,565 $ 14.14
Granted (weighted-average fair value of $3.96) (324,000) 324,000 11.54
Exercised -- (68,506) 5.22
Canceled 63,250 (63,250) 12.63
---------- ----------
Balances, December 31, 1997 (814,178 exercisable
at a weighted-average price of $12.95) 510,447 2,373,809 14.09
Granted (weighted-average fair value of $4.62) (644,196) 644,196 13.22
Exercised -- (41,218) 6.00
Canceled 1,236,312 (1,236,312) 15.26
---------- ----------
Balances, December 31, 1998 (697,313 exercisable
at a weighted-average price of $12.43) 1,102,563 1,740,475 13.13
Granted (weighted-average fair value of $7.02) (1,270,500) 1,270,500 14.00
Increase in options authorized 200,000 --
Exercised -- (117,745) 5.00
Canceled 408,151 (408,151) 12.79
---------- ----------
Balances, December 31, 1999 (690,847 exercisable
at a weighted-average price of $12.77) 440,214 2,485,079 13.70
========== ==========
</TABLE>
34
<PAGE> 37
Additional information regarding options outstanding as of December 31,
1999 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>
$4.40-5.92 50,259 1.9 $ 5.30 50,259 $ 5.30
$7.04-9.34 334,012 8.1 $ 8.71 144,762 $ 8.62
$10.97-13.00 762,496 8.2 $ 12.53 191,779 $ 12.05
$14.78-18.25 1,337,712 9.2 $ 15.93 304,047 $ 15.75
--------- ---------
2,485,079 8.5 $ 13.70 690,847 $ 12.47
========= =========
</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, as the exercise price of the options is not less than the
fair market value of the underlying stock at the date of grant. 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
methods 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 1999, 1998, and 1997: expected life of 5.5 years for 1999,
1998, and 1997 grants; stock volatility of 45.9% and a risk free interest
rate of 6.41% for 1999 grants; stock volatility of 25% and risk free
interest rates of 6% for 1998 and 1997 grants; 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 awards had been amortized to expense over the
vesting period of the awards, pro forma net loss would have been
approximately $31,167,000 ($1.02 per basic and diluted share) in 1999,
$28,848,000 ($0.96 per basic and diluted share) in 1998 and $37,397,000
($1.24 per basic and diluted share) in 1997. However, the impact of
outstanding nonvested stock options granted prior to 1995 has been
excluded from the pro forma calculation; accordingly, the pro forma
adjustments are not indicative of future period pro forma adjustments,
when the calculation will apply to all applicable stock options.
EMPLOYEE STOCK PURCHASE PLAN
In August 1997, the Company adopted the Employee Stock Purchase Plan (the
"ESP Plan") which is intended to qualify under Section 423 of the Internal
Revenue Code. Under the terms of the ESP Plan, Company employees can
purchase the Company's common stock at a 10% discount from the market
value on the purchase date. As of December 31, 1999, 31,498 shares have
been purchased by Company employees.
ON COMMAND WARRANTS
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 former
SpectraVision bankruptcy estate for distribution to creditors; and $4
million 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.
35
<PAGE> 38
SHARES RESERVED FOR FUTURE ISSUANCE
Shares of common stock reserved for future issuance at December 31, 1999
are as follows:
<TABLE>
<S> <C>
Option Plans 2,925,293
ESP Plan 148,502
Warrants 7,500,000
----------
Total 10,573,795
==========
</TABLE>
8. INCOME TAXES
In conjunction with the SpectraVision acquisition (see Note 1), the
Company ceased being a member of Ascent's consolidated tax group.
Accordingly, OCC began filing a separate return commencing on October 6,
1996.
The provision (benefit) for income taxes for the years ended December 31
consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 162 -- 198
Foreign 38 (109) 635
------ ------ ------
200 (109) 833
Deferred:
Federal -- -- --
State -- -- --
Foreign -- -- (47)
------ ------ ------
-- -- (47)
------ ------ ------
Total 200 (109) 786
====== ====== ======
</TABLE>
The provision for income taxes differs from the amount obtained by
applying the federal statutory rate (35%) to loss before income taxes for
the years ended December 31 as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Tax benefit computed at federal statutory rate $(10,218) $ (9,126) $(11,385)
State tax benefit net of federal benefit (689) (1,080) (1,246)
Goodwill 1,690 1,750 1,750
Other 130 440 459
Foreign 38 (109) 588
-------- -------- --------
Valuation allowance 9,249 8,016 10,620
Provision for income taxes $ 200 $ (109) $ 786
======== ======== ========
</TABLE>
36
<PAGE> 39
Loss before income taxes for the years ended December 31 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Domestic $(26,359) $(23,438) $(31,800)
Foreign (2,835) (2,637) (728)
-------- -------- --------
Total $(29,194) $(26,075) $(32,528)
======== ======== ========
</TABLE>
Deferred income taxes, which result from the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Tax net operating loss and credit carryforwards $ 60,526 $ 40,021
Accruals not recognized for tax purposes 5,655 5,413
Other 2,755 2,850
Valuation allowance (56,650) (47,401)
-------- --------
Total deferred tax assets 12,286 883
Deferred tax liabilities:
Depreciation and amortization (12,267) (817)
Other (19) (66)
-------- --------
Total deferred tax liabilities (12,286) (883)
-------- --------
Net deferred tax liability $ -- $ --
======== ========
</TABLE>
The Company has federal net operating loss carryforwards of approximately
$151,000,000, which expire beginning in 2010. However, because of the
acquisition of SpectraVision by On Command Corporation, the pre-ownership
change net operating loss carryforwards (approximately $43,000,000
million) are subject under Section 382 of the Internal Revenue Code to an
annual limitation estimated to be approximately $6,000,000 million. In
addition, the Company has state net operating loss carryforwards of
approximately $111,000,000 which expire beginning in 2000. Certain of the
state net operating loss carryforwards (approximately $7,000,000 million)
are subject to the annual limitation under Section 382. Alternative
minimum tax credit carryforwards of approximately $1,595,000 and $251,000
are available to offset future regular federal and state tax liabilities,
respectively. Research and development tax credit carryforwards of
approximately $32,000 and $611,000 are available to offset future federal
and state tax liabilities, respectively.
Current federal and California state tax laws include substantial
restrictions on the utilization of net operating losses and tax credits in
the event of an "ownership change" of a corporation. Accordingly, the
Company's ability to utilize net operating loss and tax credit
carryforwards may be limited as a result of such "ownership change" as
defined. Such a limitation could result in the expiration of carryforwards
before they are utilized.
9. RELATED PARTY TRANSACTIONS
ASCENT ENTERTAINMENT GROUP, INC.
During 1996, the Company and Ascent entered into a Corporate Agreement, as
amended, 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 5), and indebtedness
incurred in the ordinary course of operations which together shall not
exceed $200 million through June 30, 2000; provided, however, that such
indebtedness may only be incurred in compliance with the financial
covenants contained in the Credit Facility, with any amendments to such
covenants subject to the written consent of Ascent.
37
<PAGE> 40
Effective October 8, 1996, the Company entered into an "Intercompany
Management Services Agreement" with Ascent under which Ascent would
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 such services were $100,000 per month. In 1999, 1998
and 1997, Ascent waived the management services fee due under the
Agreement. The Company had approximately $1,054,000 and $138,000 in
non-interest bearing payables to Ascent at December 31, 1999 and 1998,
respectively.
MAGINET CORPORATION
The Company had video system sales of approximately $0, $83,000 and
$751,000, in 1999, 1998 and 1997, respectively, and room revenues of
approximately $0, $0, and $150,000, in 1999, 1998 and 1997, respectively,
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, 1999 and 1998 was approximately $0 and
$40,000, respectively, (See Note 2 for additional discussion).
10. CONCENTRATION OF CREDIT RISK
The Company generates the majority of its revenues from the guest usage of
proprietary video systems located in various hotels primarily throughout
the United States, Canada, Mexico, Europe, Australia and the Far East. The
Company performs periodic credit evaluations of its installed hotel
locations and generally requires no collateral while maintaining
allowances for potential credit losses. 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%, 24%, and 21%,
of room revenues for the years ended December 31, 1999, 1998, and 1997,
respectively, while Holiday Inn Corporation accounted for 10%, 11%, and
11% of room revenues for the years ended December 31, 1999, 1998, and
1997, respectively. In addition, the Company earned revenues of
approximately $47,895,000, $22,955,000, and $22,000,000, which accounted
for 20%, 10%, and 10% of total room revenues for the years ended December
31, 1999, 1998, and 1997, respectively, from Hilton and its affiliates.
Hilton owns approximately 2,333,346 shares of the Company's common stock,
or 8.3% of the common stock at December 31, 1999. Accounts receivable from
Hilton and its affiliates at December 31, 1999 and 1998 was approximately
$1,600,000, and $1,400,000, respectively.
11. GEOGRAPHIC OPERATING INFORMATION
The following represents total revenues for the years ended December 31,
1999, 1998 and 1997 and long-lived assets (excluding goodwill) as of
December 31, 1999, 1998 and 1997 by geographic territory (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
LONG- LONG- LONG-
TOTAL LIVED TOTAL LIVED TOTAL LIVED
REVENUES* ASSETS REVENUES* ASSETS REVENUES* ASSETS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States $227,904 $251,448 $215,054 $254,769 $197,086 $270,540
Canada 13,034 21,021 12,690 17,984 13,251 6,596
All other foreign 12,010 14,931 11,076 10,506 11,766 7,130
-------- -------- -------- -------- -------- --------
Total $252,948 $287,400 $238,820 $283,259 $222,103 $284,266
======== ======== ======== ======== ======== ========
</TABLE>
*Net revenues are attributed to countries based on invoicing location of
customer.
38
<PAGE> 41
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 $10,000 per year) to this
plan, for which the Company, at the discretion of the Board or Directors,
may make matching contributions. Matching contributions made by the
Company were approximately $995,000, $773,000, and $711,000, for the years
ended December 31, 1999, 1998, and 1997, respectively.
13. LEGAL MATTERS
On September 11, 1998, OCC reached an agreement with LodgeNet
Entertainment Corporation ("LodgeNet") to settle all pending litigation
between the companies. As a result, the two providers of in-room
entertainment and information services to the lodging industry have
dismissed all pending litigation between the parties in United States
Federal District Courts in California and South Dakota, with no admission
of liability by either party. The terms of the confidential settlement
include a cross-license of each company's patented technologies at issue
to the other party and a covenant not to engage in patent litigation
against the other party for a period of five years. Each company is
responsible for its own legal costs and expenses, and in connection with
the multiple cross-licenses, OCC expects to receive royalty payments net
of legal fees and expenses in an aggregate amount of approximately $10.8
million. OCC received the first payment of approximately $2.9 million (net
of expenses) in September 1998, the second payment of $3.9 million (net of
expenses) in July, 1999 and expects to receive an additional payment of
approximately $3.95 million (net of expenses) in July 2000 although no
assurance can be given. OCC will be recognizing the additional royalty
revenue when the final cash payment is received.
In September 1998, OCV filed suit against MagiNet, alleging a breach by
MagiNet of a license agreement between OCV and MagiNet, and terminating
the license agreement. OCV has also demanded the payment of license fees
from MagiNet which OCC believes were due and payable under the License
Agreement and have not been paid by MagiNet. MagiNet has counter-claimed
against OCV, alleging that OCV breached the license agreement, and
alleging various torts by OCV in its relationship with MagiNet. While the
outcome of MagiNet's counter claim cannot be predicted with certainty, the
Company intends to defend itself vigorously and expects that any
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.
The Company is a defendant, and may be a potential defendant, in lawsuits
and claims arising in the ordinary course of its business. While the
outcomes of such claims, lawsuits, or other proceedings cannot be
predicted with certainty, management expects that such liability, to the
extent not provided for by insurance or otherwise, will not have a
material adverse effect on the financial condition of the Company.
39
<PAGE> 42
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DEC.31 SEPT. 30 JUNE 30 MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Revenues $ 61,399 $ 67,752 $ 62,564 $ 61,233
Direct costs of revenue 28,123 29,152 28,483 27,460
Operating expenses 39,276 40,941 40,089 38,330
Loss from operations (6,000) (2,341) (6,008) (4,557)
Net loss (9,090) (4,982) (8,460) (6,862)
Basic and diluted loss per share $ (0.30) $ (0.16) $ (0.28) $ (0.23)
1998
Revenues $ 59,082 $ 62,975 $ 60,895 $ 55,868
Direct costs of revenue 26,424 26,696 26,862 23,920
Operating expenses 37,278 37,555 38,705 37,530
Loss from operations (4,620) (1,276) (4,672) (5,582)
Net loss (7,076) (3,974) (7,078) (7,838)
Basic and diluted loss per share $ (0.23) $ (0.13) $ (0.23) $ (0.26)
</TABLE>
* * * * *
40
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
<PAGE> 44
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
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, 2000, and titles of executive officers of the Company, and
biographical information with respect to such officers.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Allan Goodson 42 Executive Vice President and Chief Operating Officer
Ronald D. Lessack 53 Senior Vice President, Operations
Richard C. Fenwick, Jr 43 Senior Vice President, Engineering
Paul J. Milley 46 Senior Vice President, and Chief Financial Officer
Jean A. deVera 50 Senior Vice President, Sales & Account Management
Arthur M Aaron 42 Acting General Counsel and Secretary
</TABLE>
Allan Goodson has been Executive Vice President and Chief Operating
Officer of On Command Corporation since January 2000. Prior thereto, Mr. Goodson
served as a founding partner and Chief Operating Officer of STC Cable Corp. from
April 1998 to June 1999. Prior to that he held the position of Executive Vice
President and Chief Operating Officer for TCI Great Lakes, Inc. from August 1992
to November 1995.
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.
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.
Paul J. Milley has been Senior Vice President, and Chief Financial
Officer since February 2000. Prior thereto, Mr. Milley was Senior Vice President
- - Finance since joining the Company in 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.
Jean A. deVera has been Senior Vice President, Sales & Account Manager
of On Command Corporation since October 1997, having been promoted from Vice
President, National Accounts, a title Ms. deVera held 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.
Arthur M. Aaron has been Acting General Counsel and Secretary since
April 1998. Mr. Aaron has been Executive Vice President, Business Affairs, of
Ascent Entertainment Group, Inc. since January 2000, and prior thereto was Vice
President, Business and Legal Affairs of Ascent since April 1995. Prior thereto,
he was a General Attorney in the office of the General Counsel of COMSAT
Corporation since July 1993.
42
<PAGE> 45
DIRECTORS OF THE REGISTRANT
James A. Cronin, III, 45, has been a Director of On Command Corporation
since its formation in July 1996 and was Vice President and Acting Chief
Financial Officer from July 1996 until September 1996 and Chairman and Acting
Chief Executive Officer from August 1999 to February 2000, at which time he
resigned as Acting Chief Executive Officer. Mr. Cronin was Executive Vice
President, Chief Financial Officer and Chief Operating Officer of Ascent from
November 1996 to January 2000, and prior thereto was Chief Operating Officer and
Executive Vice President, Finance for Ascent from June 1996 to November 1996.
Prior to joining Ascent, Mr. Cronin served as a financial and management
consultant from 1992 through June 1996. Mr. Cronin is also a Director of Landair
Services, Inc.
Richard D. Goldstein, 48, has been a Director of On Command Corporation
since November 1998. Mr. Goldstein has served as a Managing Director or Senior
Managing Director and as one of three principals of Alpine Capital Group Inc., a
merger advisory and investment/merchant banking firm in New York and related
entities (including Alpine Equity Partners L.P.) since 1990. From 1976 to 1990
Mr. Goldstein was with the law firm of Paul, Weiss, Rifkand, Wharton & Garrison,
where he became a partner in 1984. Mr. Goldstein is also a Director of US
Franchise Systems, Inc., a NASDAQ company that is a hotel franchisor.
Charles M. Lillis, 57, has been a director of On Command Corporation
since February 2000. Mr. Lillis is Chairman and Chief Executive Officer of
MediaOne Group. Prior thereto, Mr. Lillis was President and Chief Executive
Officer of MediaOne Group from April 1995 to May 1997, and prior to that time
was President of US WEST Diversified Group from 1991 to 1994 and was Executive
Vice President and Chief Planning Officer of US WEST, Inc. from 1987 to 1991.
Mr. Lillis joined US WEST in 1985 as Vice President of Strategic Marketing. Mr.
Lillis is also a member of the boards of directors of SuperValu, Inc. and
Ascent.
Peter May, 57, has been a director of On Command Corporation since
February 2000. Mr. May is currently President and Chief Operating Officer of
Triarc Companies, Inc. Mr. May was President and Chief Operating Officer of
Triangle Industries, Inc. from 1983 to December 1988. Mr. May is a Trustee of
the University of Chicago and a member of the Advisory Council on the Graduate
School of Business of the University of Chicago. Mr. May is also a member of the
board of directors of Ascent.
J.C. Sparkman, 66, has been a Director of On Command Corporation since
November 1998. Mr. Sparkman served as Executive Vice President and Chief
Operating Officer of Tele-Communications, Inc. from 1987 until his retirement in
1995. Mr. Sparkman is a Director of TCI, Shaw Communications and Universal
Electronics, Inc.
J. David Wargo, 45, has been a Director of On Command Corporation since
November 1998. Mr. Wargo is President of Wargo & Company, Inc. Mr. Wargo is also
a Director of TV Guide, Inc.
Gary L. Wilson, 59, has been a Director of On Command Corporation since
September 1996. Mr. Wilson is chairman of the board and a principal investor in
NWA, Inc., parent of Northwest Airlines and several other transportation-related
subsidiaries. He served as co-chairman since 1991 and was named chairman in
1997. Mr. Wilson is a director of The Walt Disney Company. He joined The Walt
Disney Company in 1985 and served as executive vice president and chief
financial officer until 1990. He also serves on the board of trustees at Duke
University, the board of visitors at the Fuqua School of Business at Duke, and
also the board of overseers of The Wharton School at the University of
Pennsylvania. Mr. Wilson is a member of the board of directors of CB Richard
Ellis, Inc. and the National Collegiate Athletic Association Foundation.
43
<PAGE> 46
OTHER INFORMATION CONCERNING DIRECTORS
COMMITTEES
The Board has two standing committees, described below.
The Audit Committee consists of Messrs. Cronin, Wargo (Chairman) and
Wilson. The Committee makes recommendations to the Board of Directors concerning
the selection of independent public accountants; confers with the independent
public accountants to determine the scope of the audit that such accountants
will perform; receives reports from the independent public accountants and
transmits such reports to the Board of Directors, and after the close of the
fiscal year, transmits to the Board of Directors the financial statements
certified by such accountants; inquires into, examines and makes comments on the
accounting procedures of the Company and the reports of the Independent Public
Accountants; considers and makes recommendations to the Board of Directors upon
matters presented to it by the officers of the Company pertaining to the audit
practices and procedures adhered to by the Company; considers and makes
recommendations to the Board of Directors in respect of the financial affairs of
the Company, including matters related to the capital structure and
requirements, financial performance, dividend policy, capital and significant
capital commitments; and reviews and approves the Company's overall financial
policies and procedures, spending controls, systems integrity, balance sheet
reserve levels, and revenue and expense accountability. The Committee met two
times in 1999.
The Compensation Committee consists of Messrs. Goldstein (Chairman) and
Sparkman. The Committee approves long-term compensation for senior executives;
considers and makes recommendations to the Board of Directors with respect to:
programs for human resources development and management organization and
succession; salary and bonus for senior executives; and compensation matters and
policies and employee benefit and incentive plans; and exercises authority
granted to it to administer such plans. In addition, the Compensation Committee
recommends to the Board of Directors qualified candidates for election as
directors and as Chairman of the Board, and considers, acts upon or makes
recommendations to the Board of Directors with respect to such other matters as
may be referred to it by the Board of Directors, the Chairman of the Board or
the Chief Executive Officer. It will consider candidates recommended by
stockholders, if the recommendations are submitted in writing to the Secretary
of the Company. The Committee met three times during 1999.
DIRECTORS COMPENSATION
In May 1997 the Company adopted a compensation plan for Independent
Directors (defined as directors who are neither employees of the Company nor
officers or employees of Ascent, so long as Ascent, directly or indirectly holds
50% or more of the outstanding Common Stock of the Company). Independent
Directors receive an annual retainer of $6,000 in cash, payable quarterly; $500
for each Board meeting attended; and $500 for each official Committee of the
Board attended. Each Independent Director who is also a chairman of an official
Committee meeting of the Board receives an additional annual fee of $2,000
payable quarterly. In addition, the Board of Directors and the Company's
stockholders approved the 1997 Non-Employee Directors Stock Plan (the "Directors
Plan") to grant annual awards of the Company's Common Stock and options to
purchase the Company's Common Stock to Independent Directors. The Directors Plan
originally authorized the granting of an award of 400 shares of the Company's
Common Stock and a non-qualified option to purchase 4,000 shares of the
Company's Common Stock, priced at the fair market value on the date of grant, to
each Independent Director on an annual basis following the company's Annual
Stockholder meeting. Such options are exercisable as follows: 25% on the first
anniversary of the date of grant, 50% on the second anniversary of the date of
grant and 100% on the third anniversary of the date of grant.
In April 1999, the Board ratified and adopted an amendment to the
Director Plan, which amendment was approved by shareholders at the 1999 meeting.
Pursuant to the amendment the Independent Directors would continue to receive
400 shares annually, however, the annual grant to Independent Directors of an
option to purchase 4,000 shares of common stock of the Company was replaced with
a one-time grant of an option to purchase 50,000 shares of the Company's common
stock (the "Option"). Under the terms of the amendment, any Independent Director
who received an Option would not be eligible to receive an additional Option
until the fifth annual meeting after the original grant. The Options vest 25% on
the first anniversary of grant, and 25% and 50%, respectively, on the second and
third anniversaries,
44
<PAGE> 47
or 100% upon a change in control of the Company. In November 1999, the Board
acted to provide that an acquisition of Ascent would constitute a change in
control of the Company for purposes of the Directors Plan.
Mr. Cronin was an executive of Ascent from June 1996 through January
2000 and was on the Compensation Committee of On Command Corporation from
October 1996 through 1998. There were no compensation committee interlocks or
insider participation in compensation decisions during 1999.
COMPLIANCE WITH SECURITIES LAWS
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities, to file
initial reports of ownership and reports of changes in ownership with the SEC
and the NASDAQ National Market System. Such persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file. The Company has undertaken the obligation to make these filings on behalf
of its directors and executive officers.
Based solely on its review of copies of such forms received and filed
by it with respect to 1999, or written representations from certain reporting
persons, the Company believes that all of its directors and executive officers
and persons who own more than 10% of the Company's registered equity have
complied with the reporting requirements of Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation received for the three
fiscal years ended December 31, 1999 by the (i) Chairman and former Acting Chief
Executive Officer, (ii) the former President and Chief Operating Officer, (iii)
the Senior Vice President, Operations of OCC and, previously, OCV, (iv) the
Senior Vice President, Finance, and (v) the Senior Vice President, Engineering
of OCC and, previously, OCV (the officers being hereafter referred to as the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------- -------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS COMPENSATION
POSITION(1) YEAR ($) ($) ($)(2) ($) (#)(3) ($)(4)
<S> <C> <C> <C> <C> <C> <C> <C>
James A. Cronin, III 1999 500,000 200,000 -0- -0- -0- $ 33,699
Chairman and Acting 1998 498,846 375,000 -0- -0- -0- 16,069
Chief Executive Officer 1997 400,000 350,000 -0- -0- 297,500* 13,177
Brian A.C. Steel 1999 360,833 156,791 -0- -0- -0- $ 18,365
President and 1998 294,617 250,000 -0- -0- -0- 19,520
Chief Operating 1997 290,000 203,000 172,467 -0- -0- 483,894
Officer
Ronald D. Lessack 1999 217,500 60,300 -0- -0- 50,000 5,852
Senior Vice 1998 205,500 57,000 -0- -0- 48,200 6,320
President, 1997 193,500 70,000 -0- -0- 10,000* 5,572
Operations
Paul J. Milley 1999 194,375 57,500 -0- -0- 50,000 5,528
Senior Vice 1998 181,249 54,000 -0- -0- 50,000 5,000
President, CFO 1997 174,996 44,000 30,000 -0- -0- 61,403
Richard Fenwick, Jr 1999 204,375 50,500 -0- -0- 50,000 5,324
Senior Vice 1998 178,958 45,000 -0- -0- 35,300 6,320
President, 1997 165,000 40,000 -0- -0- 10,000* 4,984
Engineering
</TABLE>
45
<PAGE> 48
(1) Mr. Cronin served as Acting Chief Executive Officer of the Company from
August 1999 through February 2000 and the compensation above is
compensation for his serving as Executive Vice President, Chief
Operating Officer and Chief Financial Officer of Ascent. Mr. Steel
resigned as President, Chief Operating Officer and a director of the
Company on August 6, 1999.
(2) Other Annual Compensation consists of tax reimbursements for the
amounts shown. Other Annual Compensation shown for 1997, 1998 and 1999
does not include perquisites and other personal benefits because the
aggregate amount of such compensation does not exceed the lesser of (i)
$50,000 or (ii) 10% of the combined salary and bonus for the Named
Executive Officer in each year.
(3) All options marked with an asterisk (*) are Stock Appreciation Rights
("SARs") that were issued in exchange for Ascent employee stock
options, which options were canceled in connection with the grant of
the SARs. In connection with Mr. Steel's resignation, 16,055 OCC
options held by Mr. Steel were cancelled.
(4) For 1999, other compensation includes: (i) contributions by the Company
on behalf of the executive to the Company's 401(k) plan, (ii) life
insurance premiums for policies in excess of $50,000 face value, (iii)
auto allowance and (iv) for Mr. Cronin, unused credits under the Ascent
cafeteria plan.
<TABLE>
<CAPTION>
401(k) INSURANCE AUTO
Name MATCHING PREMIUM ALLOWANCE CREDITS TOTAL
<S> <C> <C> <C> <C> <C>
James A. Cronin, III $ 0 $ 0 $ 13,199 $ 20,500 $ 33,699
Brian A.C. Steel 5,000 165 13,200 -0- 18,365
Ronald D. Lessack 5,000 852 -0- -0- 5,852
Paul J. Milley 5,000 528 -0- -0- 5,528
Richard Fenwick, Jr 5,000 324 -0- -0- 5,324
</TABLE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
- ---------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL GRANT DATE
SECURITIES OPTIONS GRANTED TO EXERCISE OR EXPIRATION DATE PRESENT VALUE
UNDERLYING EMPLOYEES IN FISCAL BASE PRICE $(3)
NAME OPTIONS YEAR(2) ($/SH)
GRANTED(#)(1)
- -------------------- ------------- ------------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Richard Fenwick, Jr. 50,000 4% $16.00 12/07/09 $413,108
Ronald Lessack 50,000 4% $16.00 12/07/09 $413,108
Paul Milley 50,000 4% $16.00 12/07/09 $413,108
</TABLE>
46
<PAGE> 49
(1) The options expire ten years from grant date and vest 50% annually over
two years.
(2) The total number of options granted to OCC employees in 1999 was
1,070,500.
(3) On Command used the Black-Scholes option pricing model to determine
grant date present values using the following assumptions: stock price
volatility of 45.9%, a five to six year option term, a risk-free rate
of return of 6.41%, and no dividend yield. Forfeitures are reflected as
they occur. The use of this model is in accordance with SEC rules;
however the actual value of an option will be measured by the
difference between the stock price and the exercise price on the date
the option is exercised.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
THE FOLLOWING TABLE SETS FORTH INFORMATION ON (i) OPTIONS EXERCISED BY
THE NAMED EXECUTIVE OFFICERS IN 1999, AND (ii) THE NUMBER AND VALUE OF THEIR
UNEXERCISED OPTIONS AT DECEMBER 31, 1999.
AGGREGATED OPTION EXERCISES IN 1999, AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
Underlying Unexercised Value of In-The Money
OPTIONS AT 12/31/99 OPTIONS AT 12/31/99
---------------------- ---------------------
SHARES
UNDERLYING UN- UN-
OPTIONS VALUE EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
NAME EXERCISED REALIZED (#) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
James A. Cronin, III -0- -0- -0- -0- -0- -0-
Ascent -0- -0- 148,750 148,750 $470,496 $470,496
Brian A.C. Steel 175,000 $511,000 73,851 -0- -0- -0-
Ronald D. Lessack -0- -0- 105,440 114,560 $497,034 $340,832
Ascent -0- -0- 10,000 -0- $ 31,630 -0-
Paul J. Milley -0- -0- 40,000 110,000 $113,090 $336,810
Richard Fenwick, Jr 10,000 $ 59,200 95,760 104,240 $712,517 $289,882
Ascent -0- -0- 10,000 -0- $ 31,630 -0-
</TABLE>
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
In September 1996, the Company and Mr. Steel entered into an employment
agreement that expired on September 11, 2000. Pursuant to the agreement, Mr.
Steel's initial base salary was $290,000 per year, subject to increases at the
discretion of the Board of Directors of the Company. Under the agreement, Mr.
Steel was eligible for annual bonuses based on performance measures determined
by the Compensation Committee with a target bonus equal to 70% of Mr. Steel's
base salary for achieving 100% of the target level for the performance measures.
In addition, Mr. Steel was granted options to purchase 385,312 shares of OCC
Common Stock, exercisable at the following per-share prices: (i) 80% of such
options at a per-share price equal to $15.33 and (ii) 20% of such options at a
per-share price equal to $16.40. The options vested 25% on September 11, 1997
and an additional 25% on September 11, 1998, and the remaining 50% were to vest
on September 11, 1999. Under the agreement the options expire at the earlier of
(i) three months after the date upon which Mr. Steel is terminated for "cause"
47
<PAGE> 50
(as defined in the employment agreement); (ii) one year after Mr. Steel's
employment agreement is terminated as a result of death or (iii) on September
11, 2006.
In addition, the employment agreement for Mr. Steel provides that upon
a "Change of Control Event" (as defined in the agreement), Mr. Steel will be
entitled to elect to terminate his employment with the Company and, for the
longer of (a) the remainder of the term of his employment agreement as if such
agreement had not been terminated and (b) one year following the date of such
termination (such period being the "Duration Period"), will receive: (i) his
then current base salary; (ii) an annual bonus equal to 70% of his then current
base salary for each year during the Duration Period; and (iii) all other
benefits provided pursuant to the employment agreement. A "Change of Control
Event" is defined in the employment agreement as an affirmative determination,
either jointly by Mr. Steel and the Board of Directors or pursuant to an
arbitration which Mr. Steel has the right to invoke, that any "change of
control" of the Company (defined as an event as result of which (i) a single
person or entity other than Ascent or its affiliates owns 50% or more of the
voting stock of the Company or (ii) a single person or entity other than COMSAT
Corporation ("COMSAT") or its affiliates (which as of the date of the employment
agreements held approximately 80% of the outstanding Common Stock of Ascent, but
which consummated the distribution of its 80.67% ownership interest in Ascent to
the COMSAT shareholders on June 27, 1997) owns directly or indirectly 50% or
more of the voting stock of Ascent) or prospective change of control would be
reasonably likely to have a materially detrimental effect on either the
day-to-day circumstances of Mr. Steel's employment, or the compensation payable
to Mr. Steel under his employment agreement.
On December 28, 1998, On Command and Mr. Steel entered into an
amendment to Mr. Steel's employment agreement. Pursuant to the amendment, Mr.
Steel assumed the title of President and Chief Operating Officer of OCC through
September 11, 2000, while reporting directly to the Chief Executive Officer and
Board of Directors of OCC, and if there was no Chief Executive Officer, then to
the Chairman. In addition, under the terms of the amendment (i) Mr. Steel's base
salary was increased to $375,000 per year and (ii) if OCC failed to review Mr.
Steel's compensation prior to June 1, 1999 or revise such compensation prior to
August 1, 1999, then Mr. Steel would be entitled to terminate his employment
with OCC and receive (a) his then base salary for a year from such termination,
and (b) a pro-rated annual bonus for the year in which employment was
terminated, and (iii) if Mr. Steel terminated his employment pursuant to the
foregoing clause (ii), then a pro-rated portion of the options previously
granted to Mr. Steel under OCC's stock option plans that were scheduled to vest
during the year of such termination, would vest as of the date of such
termination. Although OCC and Mr. Steel entered into negotiations regarding his
position and compensation at OCC during the above time periods, Mr. Steel's
compensation was not revised prior to August 1 and on August 6, 1999, Mr. Steel
resigned from OCC pursuant to the terms of his amended employment agreement.
On January 7, 2000, On Command and Allan Goodson entered into an
employment agreement that expires on January 7, 2002. Pursuant to the agreement,
Mr. Goodson's initial base salary under the agreement is $300,000 per year,
subject to increases at the discretion of the Board of Directors of OCC. Under
the agreement, Mr. Goodson is eligible for annual bonuses based on performance
measures determined by the OCC Compensation Committee with a target bonus equal
to 70% of Mr. Goodson's base salary for achieving 100% of the target level for
the performance measures. In addition, Mr. Goodson has been granted options to
purchase 100,000 shares of OCC Common Stock, exercisable at a per-share price
equal to $15.90625. The options vest 50% on January 7, 2001 and 50% on January
7, 2002. The options will expire at the earliest of: (i) three months after the
date upon which Mr. Goodson is terminated for "cause" (as defined in the
employment agreement); (ii) one year after Mr. Goodson's employment agreement is
terminated as a result of death; or (iii) on January 7, 2010. Mr. Goodson's
agreement does not contain "change-of-control" provisions.
In addition, Mr. Goodson's agreement provides that if Mr. Goodson is
terminated without "cause" (as defined in the agreement) or upon any substantial
reduction (except in connection with the termination of his employment
voluntarily by Mr. Goodson, or by the Company for "cause") by the Company of Mr.
Goodson's responsibilities as Executive Vice President and Chief Operating
Officer of the Company, or the Company is in material default of the agreement,
then: (i) there shall be no forfeiture of any rights or interests related to
fringe benefits granted under the agreement, including, without limitation, the
SARs and any other stock-based incentives, except that half of his 100,000
options will vest, to the extent not previously vested, and the other half of
which will be canceled, immediately upon such termination becoming effective and
final; (ii) the executive shall receive current base salary, fringe benefits and
the annual bonus outlined in the agreement for the longer of (a) the
48
<PAGE> 51
remainder of the employment period under the agreement or (b) one year following
the date of such termination, with no obligation to seek other employment and no
offset to the amounts paid by the Company if other employment is obtained; and
(iii) all other benefits provided pursuant to the agreement shall be received by
the executive.
In February 1999, the Company adopted a change of control severance
plan for the Company's executive officers at or above the level of vice
president (the "Severance Plan"). Under the Severance Plan, such employees are
eligible for certain payments and benefits, if within one year of a Change of
Control, such employee's employment is either terminated by the Company for any
reason other than death, disability or cause, or is terminated by the employee
for good reason. "Change of Control" is defined as any event as a result of
which any single entity or "group" (as defined in Rule 13d-5 of the Exchange
Act) other than Ascent or a group of which Ascent is a part owns more than fifty
percent (50%) of the voting stock of the Company.
Under the Severance Plan eligible employees would be entitled to salary
continuation of from six months to twelve months depending upon the employee's
length of service, an annual bonus prorated to the effective date of
termination, and during the relevant period of salary continuation, continued
participation in OCC's benefit plans. In addition, stock options held by an
eligible employee would become 100% vested immediately and remain exercisable
for one year.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, which is composed of two directors, Richard
Goldstein (Chairman) and J.C. Sparkman, is responsible for establishing and
administering the Company's executive compensation philosophy. Set forth below
is the Committee's report on the 1999 compensation of the executive officers of
the Company, including Mr. Steel, the former President and Chief Operating
Officer of the Company (who resigned August 6, 1999), and the other executive
officers of the Company whose compensation is discussed below under "Executive
Compensation" (collectively, the "Named Executive Officers").
ANNUAL COMPENSATION
Each of the Named Executive Officer's annual compensation for 1999 was
based on the Company's executive compensation philosophy that emphasizes
risk-based performance incentives as a key component of both annual and
long-term compensation.
In 1999 Mr. Steel's compensation was based upon his amended employment
agreement, and was paid through August 6, 1999, the date of his resignation as
President, Chief Operating Officer and a director of the Company. (See Executive
Compensation -- Employment Agreements.) Mr. Cronin, who served as Acting Chief
Executive Officer of the Company from August 1999 through February 2000,
received no compensation from the Company in 1999. Mr. Cronin's compensation for
his duties as Executive Vice President, Chief Operating Officer and Chief
Financial Officer of Ascent is reflected in the compensation table on page 43.
The other Named Executive Officers' annual base salary rates were
consistent with competitive salary ranges developed by the Company. These salary
ranges are based on market data for technology companies of comparable revenue
in the same geographic area. Annual salary adjustments take into account
individual Named Executive Officers' achievements during the prior year towards
key Company-wide objectives set annually, as well as the Named Executive
Officers' performance of their individual responsibilities.
The bonus opportunities for the Named Executive Officers for 1999 were
based on corporate goals for the year and specified strategic and/or other
operating objectives established by management in consultation with the
Compensation Committee. Distributions to the Named Executive Officers under the
executive bonus plan are reviewed and determined by the Compensation Committee
on an annual basis. The bonus targets for the Named Executive Officers, other
than Mr. Steel, are allocated among the individual executive officers with
reference to responsibilities, performance and goal achievement of individual
executive officers.
The annual bonus target for Mr. Steel is as set forth in his employment
agreement which provides for target bonuses in an amount equal to seventy
percent of base salary for Mr. Steel for achieving certain performance
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<PAGE> 52
measures as approved by the Compensation Committee. For 1999, Mr. Steel's bonus
of $156,791 was based on the severance provisions of his employment agreement,
which provided for a bonus of seventy percent of base salary pro-rated through
August 6, 1999.
Bonuses for Messrs. Fenwick, Lessack and Milley were based on the
achievement of one or more strategic or operating measures as compared to
planned performance for the Company, as well as Mr. Cronin's evaluations of each
individual executive officer's achievement of his performance objectives for the
year. The Board reviewed and approved the Compensation Committee's bonus
recommendations for each of the Named Executive Officers.
LONG TERM COMPENSATION
In connection with Mr. Steel's hiring by the Company in September 1996,
the Board, with the review and approval of Ascent's Compensation Committee and
Board of Directors, awarded Mr. Steel stock options to purchase 385,312 shares
of OCC Common Stock. The options vested 25% after one year and an additional 25%
after two years, and the remaining 50% were to vest after three years. The
options were to expire 10 years after the grant. Mr. Steel's employment
agreement was amended in December 1998 to provide that under certain
circumstances the remaining 50% would vest pro rata upon his termination of
employment and would expire one year thereafter. Eighty percent of the shares
purchasable upon exercise of each option were purchasable at a price per share
of $15.33 and the remaining twenty percent were purchasable at $16.40 per share.
The intent in granting the options was to create an immediate and significant
link between Mr. Steel's compensation and the interests of OCC's stockholders.
The size of the option award and the vesting schedule were effectively based
upon the practices of companies engaging in public offerings.
At the time of his resignation from the Company, Mr. Steel vested in
369,257 of his 385,312 options and had one year from the date of his
resignation, August 6, 1999, in which to exercise the options.
In December 1999, Messrs. Lessack, Fenwick and Milley each received an
award of a non-qualified stock option to purchase 50,000 shares of On Command
common stock pursuant to the Company's 1996 Key Employee Stock Plan. Each grant
vests 50% annually over two years and the amounts of the options awarded were
based on internal guidelines developed by the Company in an effort to be
competitive with other long-term incentive compensation for comparable positions
in technology companies. The Compensation Committee, in making the grant,
recognized the importance of increasing the link between senior management's
compensation and the interests of On Command's stockholders. The size of the
awards and the vesting schedule were determined in an effort to be competitive
with other companies in similar industries. All of the options will expire 10
years after the date of grant.
COMPENSATION COMMITTEE
Richard Goldstein, Chairman
J. C. Sparkman
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<PAGE> 53
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following graph and chart compare the cumulative total shareholder return on
the Company's common stock, including the reinvestment of dividends, with the
return on the NASDAQ Index and a Company-constructed peer group.(1) On October
10, 1996, the Company's common stock began publicly trading. The performance
graph sets forth the return on $100 invested in On Command Corporation common
stock and the two stock indices from October 10, 1996 to December 31, 1999.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ON COMMAND CORPORATION, NASDAQ INDEX AND PEER GROUP INDEX(1)
[GRAPH]
<TABLE>
<CAPTION>
10/10/96 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C>
On Command Corp. $100 $ 67 $ 54 $ 38 $ 78
NASDAQ Index $100 $104 $128 $180 $333
Peer Group Index $100 $ 84 $ 81 $112 $312
</TABLE>
Assumes $100 invested on October 10, 1996 in the Common Stock of On Command
Corp., the NASDAQ Index and Peer Group Index (weighted by market
capitalization). Total return assumes reinvestment of dividends and common stock
equivalents.
(1) The Company-constructed peer group is weighted annually by market
capitalization and consists of publicly-traded companies including Advanced
Radio Telecom Corporation, Ascent Entertainment Group, LodgeNet
Entertainment Corporation and Youthstream Media Networks. United Pan-Europe
Communications (an ADR) acquired @Entertainment in August 1999.
@Entertainment was included in the peer group through July 1999 after which
their data was no longer available.
51
<PAGE> 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK OWNERSHIP OF FIVE PERCENT HOLDERS
As of March 20, 2000, the record date, approximately [30,436,423]
shares of Common Stock were issued and outstanding. To the knowledge of the
Company, based upon Schedules 13G or 13D filed with the Securities and Exchange
Commission (the "SEC" or "Commission"), the following persons were the only
beneficial owners of more than five percent of the Company's Common Stock as of
December 31, 1999.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of Common Stock
Beneficial Owner Beneficial Ownership Issued and Outstanding
<S> <C> <C>
Ascent Entertainment Group, Inc.(1) 18,274,091 56.5%
1225 Seventeenth Street, Ste. 1800
Denver, CO 80202
Credit Suisse First Boston(2) 2,969,952 9.8%
11 Madison Avenue
New York, NY 10010
Hilton Hotels Corporation(3) 2,486,132 8.3%
9336 Civic Center Drive
Beverly Hills, CA 90210
Merrill Lynch & Co., Inc.(4) 2,153,239 7.11%
800 Scudders Mill Road
Plainsboro, NJ 08536
Merrill Lynch Corporate Bond Fund(5) 1,184,150 5.19%
800 Scudders Mill Road
Plainsboro, NJ 08536
Gary Wilson(6) 1,810,000 5.7%
9665 Wilshire Blvd., Suite 200
Beverly Hills, CA 90212
</TABLE>
- ------------------------
(1) Ascent Entertainment Group, Inc. ("Ascent") holds sole voting and
dispositive power over 17,150,299 shares of Common Stock of On Command
Corporation and 1,123,792 Series A Warrants of On Command Corporation.
(2) Based on information contained in Schedule 13G/A filed with the Commission
and dated February 14, 2000. Credit Suisse First Boston shares voting and
dispositive power over 2,969,952 shares of Common Stock with its
consolidated subsidiaries to the extent that they constitute a part of the
Credit Suisse First Boston business unit which is engaged in corporate and
investment banking, trading, private equity investment and derivatives
business on a world-wide basis.
(3) Hilton Hotels Corporation holds 2,333,346 shares of Common Stock of On
Command Corporation and 152,782 Series A Warrants of On Command
Corporation.
(4) Based on information contained in Schedule 13G filed with the Commission
and dated February 4, 2000. Merrill Lynch & Co., Inc., ("MLI") is the
beneficial owner of 2,153,239 shares of OCC Common Stock (7.11%) (sole
voting and dispositive power: 0 shares and shared voting and dispositive
power: 2,153,239 shares) as parent holding company of Merrill Lynch Asset
Management Group, which is comprised of registered investment advisors to
various registered investment companies.
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<PAGE> 55
(5) Based on information contained in Schedule 13G filed with the Commission
and dated February 4, 2000. Merrill Lynch Corporate Bond Fund, Inc.
("Fund") is the beneficial owner of 1,569,811 shares of OCC Common Stock
(5.19%) (sole voting and dispositive power: 0 shares and shared voting and
dispositive power: 1,569,811 shares).
(6) Mr. Wilson holds 1,810,000 Series C Warrants to purchase Common Stock of
OCC with an exercise price of $15.33 per share.
COMMON STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 2000, by all directors
and nominees, by each of the executive officers named in the Summary
Compensation Table on page 45, and by all directors and executive officers as a
group. Under rules of the SEC, beneficial ownership includes any shares over
which an individual has sole or shared voting power or investment power, and
also any shares that the individual has the right to acquire within 60 days
through the exercise of any stock option or other right.
<TABLE>
<CAPTION>
Ascent Entertainment Group, Inc.
Name(1) Common Stock Common Stock
- ----- ------------ --------------------------------
<S> <C> <C>
James A. Cronin, III -- --
Richard Fenwick, Jr 102,820 (3) --
Richard D. Goldstein 12,900 (2) --
Alan Goodson -- --
Ronald D. Lessack 115,080 (5) 820
Charles Lillis -- 4,000 (11)
Peter May -- -- (10)
Paul J Milley 50,000 (7) --
J.C. Sparkman 12,900 (6) --
Brian A.C. Steel 73,851 (9) --
J. David Wargo 12,900 (4) --
Gary Wilson 1,827,700 (8) --
All Executive Officers
And Directors as a group
(14 persons) 2,206,951 6,339
</TABLE>
(1) Unless otherwise indicated, each person has sole voting and investment
powers over the shares listed, and no director or executive officer
beneficially owns more than 1.0% of the Common Stock of the Company or
Ascent.
(2) Includes vested options to purchase 12,500 shares of On Command Common
Stock.
(3) Includes vested options to purchase 102,820 shares of Common Stock and
186 Series A Warrants of OCC.
(4) Includes vested options to purchase 12,500 shares of On Command Common
Stock.
(5) Includes vested options to purchase 115,080 shares of Common Stock and
186 Series A Warrants of OCC.
(6) Includes vested options to purchase 12,500 shares of On Command Common
Stock.
(7) Includes vested option to purchase 50,000 shares of On Command Common
Stock.
(8) Mr. Wilson holds 1,810,000 Series C Warrants to purchase common stock
of On Command with an exercise price of $15.33 per share and vested
options to purchase 16,500 shares of On Command Common Stock.
(9) Includes vested options to purchase 73,851 shares of On Command Common
Stock.
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<PAGE> 56
(10) Mr. May disclaims beneficial ownership of 2,876,700 shares of Ascent
Common Stock which are directly held by Ascent Acquisition Group, LLC,
an entity which is 50% owned by Triarc Companies, Inc. ("Triarc"). Mr.
May is a director, President and Chief Operating Officer of Triarc.
(11) Includes vested options to purchase 4,000 shares of Ascent Common
Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH ASCENT
MERGER AGREEMENT
On February 22, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Liberty Media Corporation ("Liberty") and
Liberty AEG Acquisition, Inc. ("Merger Sub"), an indirect wholly-owned
subsidiary of Liberty. Prior to Ascent entering into the Merger Agreement, the
OCC Board of Directors approved the Merger Agreement. Pursuant to the Merger
Agreement, Merger Sub commenced a Tender Offer (the "Offer") offering Ascent
stockholders $15.25 in cash for each share of Ascent common stock. Liberty
commenced the offer on February 29, 2000 and under its terms and subject to its
conditions, the Offer will expire on March 27, 2000, unless extended pursuant to
the Merger Agreement. The Offer is conditioned on the tender of at least a
majority of the Ascent shares as well as other customary conditions. Under the
Merger Agreement and subject to the terms thereof, following the Offer, Merger
Sub will be merged with and into Ascent (the "Merger") and all shares not
purchased in the Offer (other than Shares held by Liberty, Merger Sub or Ascent,
or shares held by dissenting stockholders) will be converted into the right to
receive $15.25 per Share in cash.
Ascent owns approximately 56.6% of the Company's issued and outstanding
Common Stock. For so long as Ascent continues to own more than 50% of the
outstanding voting stock of the Company, Ascent will be able, among other
things, to approve any corporate action requiring majority stockholder approval,
including the election of a majority of the Company's directors, effect
amendments to the Company's Certificate of Incorporation and Bylaws and approve
any other matter submitted to a vote of the stockholders without the consent of
the other stockholders of the Company. In addition, through its representation
on the Board of Directors, Ascent is able to influence certain decisions,
including decisions with respect to the Company's dividend policy, the Company's
access to capital (including the decision to incur additional indebtedness or
issue additional shares of Common Stock), mergers or other business combinations
involving the Company, the acquisition or disposition of assets by the Company
and any change in control of the Company.
The Company and Ascent have entered into a Management Services
Agreement pursuant to which Ascent provides certain management services,
including insurance, administration, coordination and advisory services
regarding corporate financing, employee benefits administration, public
relations and other corporate functions to the Company and makes available
certain of its employee benefit plans to the Company's employees. Pursuant to
the Services Agreement, Ascent is entitled to the payment of (i) an annual fee
of $1.2 million, (ii) the actual cost to Ascent of the benefits provided to the
Company's employees and (iii) certain of Ascent's actual out-of-pocket expenses
in connection with the Services Agreement (not including overhead and the cost
of its personnel). Further, the Company will indemnify Ascent from all damages
from Ascent's performance of services under the Services Agreement unless such
damages are caused by willful breach by Ascent or willful misconduct or gross
negligence by Ascent's employees in fulfilling its obligations under the
Services Agreement. Ascent will indemnify the Company from damages arising from
willful breach by Ascent or gross negligence or willful misconduct by Ascent's
employees in the performance of the Services Agreement. The Services Agreement
is for an initial term through December 31, 1999, renewable for additional
one-year terms by Ascent upon notice to On Command which election Ascent may
exercise as long as it and its subsidiaries own at least 50% of the outstanding
Common Stock. The Services Agreement is subject to the termination by either
party upon 60 days prior notice if Ascent fails to own the largest percentage
and at least 40% of the Company's outstanding securities.
The Company and Ascent have also entered into a Corporate Agreement
that governs certain other relationships and arrangements between the Company
and Ascent. Pursuant to the Corporate Agreement, for so long as Ascent
beneficially owns, directly or indirectly, the largest percentage (and at least
40%) of the outstanding securities of the Company entitled to be cast for the
election of directors, Ascent may propose, at each election of
54
<PAGE> 57
directors, a slate of directors, or in the case of vacancies, individual
directors, for election so that at all times during the term of the Corporate
Agreement, a majority of the Board of Directors of the Company is comprised of
persons designated by Ascent. In addition, pursuant to the Corporate Agreement,
as amended, for so long as Ascent owns the largest percentage (and at least 40%)
of the outstanding OCC Common Stock (i) the Company will not incur any
indebtedness, other than that under its existing Credit Facility (and
refinancings thereof) and indebtedness incurred in the ordinary course of
business which together shall not exceed $200 million in the aggregate through
June 30, 2000, or issue any equity securities or any securities convertible into
equity securities without Ascent's prior consent, (ii) the Company may not amend
its Certificate of Incorporation or Bylaws without Ascent's prior consent, and
(iii) the Company will utilize reasonable cash management procedures and use its
reasonable best efforts to minimize the Company's excess cash holdings.
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<PAGE> 58
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, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to the Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of On Command
Corporation is included:
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.
(a)(3) EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT
EXHIBIT
NO. DESCRIPTION
3.1 Certificate of Amended and Restated Certificate of Incorporation of On
Command Corporation, which is incorporated by reference to Exhibit 3.1
of Form S-4.
3.2 Bylaws of On Command Corporation, which is incorporated by reference to
Exhibit 3.3 of Form S-4.
3.3 Amendment to Bylaws dated as of November 23, 1998, which is
incorporated by reference to Exhibit 3.3 to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
3.4 Amendment to Bylaws dated as of August 5, 1999.
4.1 Registration Rights Agreement by and among On Command Corporation and
the other parties named therein, which is incorporated by reference to
Exhibit 4.1 of 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 Exhibit
4.2 of 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 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 Exhibit 10.4 of Form
S-4 (confidential treatment granted).
10.3* Amended and Restated Employment Agreement between On Command
Corporation and Robert Kavner, dated as of December, 1998, which is
incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
10.4* Amendment to Employment Agreement between On Command Corporation and
Brian Steel, dated as of December 31, 1998, which is incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
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<PAGE> 59
10.5* Employment and Consulting Agreement, dated November 20, 1991, between
Robert Snyder and On Command Video Corporation which is incorporated by
reference to Exhibit 10.9 of Form S-4.
10.6 Standard Lease, dated June, 1996, between Berg & Berg Developers, and
On Command Video Corporation (Incorporated by reference to Exhibit
10.10 of the Annual Report on Form 10-K for the year ended December 31,
1996 ("OCC 1996 Form 10-K")).
10.7 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)).
10.8* 1996 Key Employee Stock Plan (Incorporated by reference to Exhibit
10.13 of the OCC 1996 Form 10-K).
10.9* 1997 Employee Stock Purchase Plan (Incorporated by reference to Exhibit
4(c) of Form S-8 filed August 8, 1997).
10.10* Amended and restated 1997 Non-Employee Directors Stock Plan.
10.11 First Amended and Restated Credit Agreement dated as of November 24,
1997, between On Command Corporation and the Lenders Named Therein and
NationsBank of Texas, N.A., which is incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.12 Change of Control Severance Plan for Executive Officers. (Incorporated
by reference to Exhibit 10.12 of the Annual Report on Form 10-K for the
year-ended December 31, 1998).
21.1 Subsidiaries of On Command Corporation.
23.1 Independent Auditors' Consent.
23.2 Independent Auditors' Consent.
23.3 Independent Auditors' Consent.
27 Financial Data Schedule.
* Indicates compensatory plan or arrangement.
(B) REPORTS
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
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<PAGE> 60
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 27, 2000.
On Command Corporation
By: /s/ ALLAN H. GOODSON
--------------------
Allan H. Goodson
Executive Vice President and Chief
Operating 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/ ALLAN H. GOODSON Executive Vice President and Chief March 27, 2000
- ------------------------------ Operating Officer
Allan H. Goodson (Principal Executive Officer)
/s/ PAUL J. MILLEY Senior Vice President, Finance March 27, 2000
- ------------------------------ (Principal Accounting and Financial Officer)
Paul J. Milley
/s/ JAMES A. CRONIN, III Chairman of the Board March 27, 2000
- ------------------------------
James A. Cronin, III
/s/ RICHARD D. GOLDSTEIN Director March 27, 2000
- ------------------------------
Richard D. Goldstein
/s/ CHARLES M. LILLIS Director March 27, 2000
- ------------------------------
Charles M. Lillis
/s/ PETER MAY Director March 27, 2000
- ------------------------------
Peter May
/s/ J.C. SPARKMAN Director March 27, 2000
- ------------------------------
J.C. Sparkman
/s/ J. DAVID WARGO Director March 27, 2000
- ------------------------------
J. David Wargo
/s/ GARY L. WILSON Director March 27, 2000
- ------------------------------
Gary L. Wilson
</TABLE>
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<PAGE> 61
ON COMMAND CORPORATION
SCHEDULE II
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
Charged to
Description Balance at Beginning Costs Balance at End
of Period or Expenses Deductions of Period
- ----------- -------------------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
From January 1, 1999 to December 31, 1999
Deferred tax asset valuation allowance $ 47,401,000 9,249,000 -- $ 56,650,000
Bad debt allowance 1,484,000 1,137,000 334,000 2,287,000
From January 1, 1998 to December 31, 1998
Deferred tax asset valuation allowance $ 39,385,000 8,016,000 -- $ 47,401,000
Bad debt allowance 1,630,000 982,000 1,128,000 1,484,000
From January 1, 1997 to December 31, 1997
Deferred tax asset valuation allowance $ 28,765,000 10,620,000 -- $ 39,385,000
Bad debt allowance 629,000 1,001,000 -- 1,630,000
</TABLE>
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<PAGE> 62
OFFICERS
Allan Goodson
Executive Vice President and Chief Operating
Officer
Richard C. Fenwick, Jr.
Senior Vice President, Engineering
Ronald D. Lessack
Senior Vice President, Operations
Paul J. Milley
Senior Vice President, Finance
Arthur M. Aaron
Acting General Counsel and Secretary
Jean A. deVera
Senior Vice President, Account Management
DIRECTORS
James A. Cronin, Chairman
Peter May
President, Chief Operating Officer
and Director of Triarc Companies, Inc.
Charles M. Lillis
Chief Executive Officer and Chairman
Media One Group
Gary L. Wilson
Chairman, Northwest Airlines, Inc.
Richard D. Goldstein
Senior Managing Director, Alpine Capital Group
Director, US Franchise Systems, Inc;
Roberts Radio LLC; and The Berkshire
Bank
J. David Wargo
President, Wargo & Company, Inc.
Director, TV Guide, Inc.
J.C. Sparkman
Director, TCI; Shaw Communications;
and Universal Electronics, Inc.
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
Website Address: http://stock.bankofny.com
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
Shareholder Relations Department - 11E
PO Box 11258
Church Street Station
New York, New York 10286
E-Mail Address: Shareowner-
[email protected]
60
<PAGE> 63
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following graph and chart compare the cumulative total shareholder return on
the Company's common stock, including the reinvestment of dividends, with the
return on the NASDAQ Index and a Company-constructed peer group.(1) On October
10, 1996, the Company's common stock began publicly trading. The performance
graph sets forth the return on $100 invested in On Command Corporation common
stock and the two stock indices from October 10, 1996 to December 31, 1999.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ON COMMAND CORPORATION, NASDAQ INDEX AND PEER GROUP INDEX(1)
[GRAPH]
<TABLE>
<CAPTION>
10/10/96 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C>
On Command Corp. $100 $ 67 $ 54 $ 38 $ 78
NASDAQ Index $100 $104 $128 $180 $333
Peer Group Index $100 $ 84 $ 81 $112 $312
</TABLE>
Assumes $100 invested on October 10, 1996 in the Common Stock of On Command
Corp., the NASDAQ Index and Peer Group Index (weighted by market
capitalization). Total return assumes reinvestment of dividends and common stock
equivalents.
(1) The Company-constructed peer group is weighted annually by market
capitalization and consists of publicly-traded companies including Advanced
Radio Telecom Corporation, Ascent Entertainment Group, LodgeNet
Entertainment Corporation and Youthstream Media Networks. United Pan-Europe
Communications (an ADR) acquired @Entertainment in August 1999.
@Entertainment was included in the peer group through July 1999 after which
their data was no longer available.
61
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Amended and Restated Certificate of Incorporation of On
Command Corporation, which is incorporated by reference to Exhibit 3.1
of Form S-4.
3.2 Bylaws of On Command Corporation, which is incorporated by reference to
Exhibit 3.3 of Form S-4.
3.3 Amendment to Bylaws dated as of November 23, 1998, which is
incorporated by reference to Exhibit 3.3 to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
3.4 Amendment to Bylaws dated as of August 5, 1999.
4.1 Registration Rights Agreement by and among On Command Corporation and
the other parties named therein, which is incorporated by reference to
Exhibit 4.1 of 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 Exhibit
4.2 of 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 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 Exhibit 10.4 of Form
S-4 (confidential treatment granted).
10.3* Amended and Restated Employment Agreement between On Command
Corporation and Robert Kavner, dated as of December, 1998, which is
incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
10.4* Amendment to Employment Agreement between On Command Corporation and
Brian Steel, dated as of December 31, 1998, which is incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.5* Employment and Consulting Agreement, dated November 20, 1991, between
Robert Snyder and On Command Video Corporation which is incorporated by
reference to Exhibit 10.9 of Form S-4.
10.6 Standard Lease, dated June, 1996, between Berg & Berg Developers, and
On Command Video Corporation (Incorporated by reference to Exhibit
10.10 of the Annual Report on Form 10-K for the year ended December 31,
1996 ("OCC 1996 Form 10-K")).
10.7 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)).
10.8* 1996 Key Employee Stock Plan (Incorporated by reference to Exhibit
10.13 of the OCC 1996 Form 10-K).
10.9* 1997 Employee Stock Purchase Plan (Incorporated by reference to Exhibit
4(c) of Form S-8 filed August 8, 1997).
10.10* Amended and restated 1997 Non-Employee Directors Stock Plan.
10.11 First Amended and Restated Credit Agreement dated as of November 24,
1997, between On Command Corporation and the Lenders Named Therein and
NationsBank of Texas, N.A., which is incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.12 Change of Control Severance Plan for Executive Officers. (Incorporated
by reference to Exhibit 10.12 of the Annual Report on Form 10-K for the
year-ended December 31, 1998).
21.1 Subsidiaries of On Command Corporation.
23.1 Independent Auditors' Consent.
23.2 Independent Auditors' Consent.
23.3 Independent Auditors' Consent.
27 Financial Data Schedule.
* Indicates compensatory plan or arrangement.
</TABLE>
<PAGE> 1
EXHIBIT 3.4
ON COMMAND CORPORATION
AMENDMENT TO BYLAWS
Article VIII of the Bylaws is hereby deleted in its entirety and replaced with
the following:
ARTICLE VIII
INDEMNIFICATION
Each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director or officer of the corporation, whether the basis of
such proceeding is alleged action in an official capacity as a director or
officer or in any other capacity while serving as a director or officer, shall
be indemnified and held harmless by the corporation to the fullest extent
authorized or permitted by the General Corporation Law of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the corporation to provide broader
indemnification rights than said law permitted the corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid or
to be paid in settlement) actually and reasonably incurred by such person in
connection with such action, suit or proceeding, and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such person;
provided, however, that, except as provided in the following paragraph, the
corporation shall indemnify any such person seeking indemnification in
connection with an action, suit or proceeding (or part thereof) initiated by
such person only if such action, suit or proceeding (or part thereof) was
authorized by the Board of Directors. The right to indemnification conferred in
this Article shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such action, suit or
proceeding in advance of its final disposition; provided, however, that, if the
General Corporation Law of Delaware requires, the payment of such expenses
incurred by a director or officer in his capacity as such in advance of the
final disposition of any such action, suit or proceeding shall be made only upon
receipt by the corporation of an undertaking by or on behalf of such director or
officer to repay all amounts so advanced if it shall ultimately be determined
that such director or officer is not entitled to be indemnified under this
Article or otherwise. The corporation may, by action of the Board of Directors,
provide indemnification to employees and agents of the corporation with the same
scope and effect as the foregoing indemnification of directors and officers.
<PAGE> 2
If a claim under the preceding paragraph is not paid in full by
the corporation within 30 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the corporation) that the claimant has
not met the standards of conduct which make it permissible under the General
Corporation Law of Delaware for the corporation to indemnify the claimant for
the amount claimed, but the burden of proving such defense shall be on the
corporation. Neither the failure of the corporation (including the Board of
Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he has met the applicable
standard of conduct set forth in the General Corporation Law of Delaware, nor an
actual determination by the corporation (including the Board of Directors,
independent legal counsel or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Article shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, the Certificate of Incorporation, a
provision of these Bylaws (as they may be amended), agreement, vote of
stockholders or disinterested directors or otherwise.
The corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the corporation
would have the power to indemnify such person against such expense, liability or
loss under the General Corporation Law of Delaware.
<PAGE> 1
EXHIBIT 10.10
AMENDED AND RESTATED
ON COMMAND CORPORATION
1997 NON-EMPLOYEE DIRECTORS STOCK PLAN
On Command Corporation (the "Company"), a Delaware corporation, hereby
adopts this Amended and Restated 1997 Non-employee Directors Stock Plan (the
"Plan"), effective upon the later to occur of: (i) affirmative vote of at least
50.1% of the Company's stockholders and (ii) the initial registration statement
filed with the Securities and Exchange Commission (the "SEC" or "Commission")
covering the shares subject to this Plan (as set forth in Article II, Section 1
below) is effective or deemed effective, for the benefit of its eligible
Independent Directors (as such term is defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for Directors of the Company to
further the growth, development and financial success of the Company by
personally benefiting through the ownership of Company stock and rights which
recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
Directors considered essential to the long range success of the Company by
offering them an opportunity to own stock in the Company and rights which will
reflect the growth, development and financial success of the Company.
ARTICLE I
DEFINITIONS
I.1 General. Wherever the following terms are used in this Plan they
shall have the meaning specified below, unless the context clearly indicates
otherwise.
I.2 "Board" shall mean the Board of Directors of the Company.
I.3 "Code" shall mean the Internal Revenue Code of 1986, as amended.
I.4 "Common Stock" shall mean the common stock of the Company, par
value $.01 per share, and any equity security of the Company issued or
authorized to be issued in the future, but excluding any warrants, options or
other rights to purchase Common Stock. Debt securities of the Company
convertible into Common Stock shall be deemed equity securities of the Company.
I.5 "Company" shall mean On Command Corporation, a Delaware
corporation.
I.6 "Corporate Transaction" shall mean any of the following
stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State in which the Company is incorporated, form a holding company or
effect a similar reorganization as to form whereupon this Plan and all Options
are assumed by the successor entity;
<PAGE> 2
(b) the sale, transfer, exchange or other disposition of all
or substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions to
clause (a), above; or
(c) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or person different from those who held such securities
immediately prior to such merger.
I.7 "Director" shall mean a member of the Board.
I.8 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
I.9 "Fair Market Value" of a share of Common Stock as of a given date
shall be (i) the mean between the highest and lowest selling price of a share of
Common Stock on the principal exchange on which shares of Common Stock are then
trading, if any, on such date, or if shares were not traded on such date, then
on the closest preceding date on which a trade occurred, or (ii) if Common Stock
is not traded on an exchange, the mean between the closing representative bid
and asked prices for the Common Stock on such date as reported by NASDAQ or, if
NASDAQ is not then in existence, by its successor quotation system; or (iii) if
Common Stock is not publicly traded, the Fair Market Value of a share of Common
Stock as established by the Board acting in good faith.
I.10 "Independent Director" shall mean a Director who is not an
employee of the Company nor an officer or employee of Ascent Entertainment
Group, Inc. so long as Ascent Entertainment, Inc., directly or indirectly holds
50% or more of the outstanding Common Stock.
I.11 "Option" shall mean a stock option granted under Article III of
this Plan.
I.12 "Optionee" shall mean an Independent Director granted an Option
under this Plan.
I.13 "Plan" shall mean the 1997 Non-employee Directors Stock Plan.
I.14 "Registration Statement" shall mean the Company's Form S-8
Registration Statement to be filed with the Securities and Exchange Commission
in connection with this Plan.
I.15 "Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange
Act, as such Rule may be amended from time to time.
I.16 "Stock Award" shall mean an award of shares of Common Stock.
I.17 "Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50 percent
or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
I.18 "Termination of Directorship" shall mean the time when an Optionee
ceases to be a Director for any reason, including, but not by way of limitation,
a termination by resignation, failure to be elected, death or retirement. The
Board, in its sole and absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Directorship.
2
<PAGE> 3
ARTICLE II
SHARES SUBJECT TO PLAN
II.1 Shares Subject to Plan. The shares of stock subject to Options and
Stock Awards shall be Common Stock, initially shares of the Company's Common
Stock, par value $.01 per share. The aggregate number of such shares which may
be issued upon exercise of such options or upon any such awards under the Plan
shall not exceed 310,000 (Three hundred ten thousand).
II.2 Unexercised Options. If any Option expires or is cancelled without
having been fully exercised, the number of shares subject to such Option but as
to which such Option was not exercised prior to its expiration or cancellation
may again be optioned hereunder, subject to the limitations of Section II.1.
ARTICLE III
GRANTING OF OPTIONS
III.1 Eligibility. Each Independent Director of the Company shall be
eligible to be granted Options at the times and in the manner set forth in
Section III.2.
III.2 Granting of Options. Each individual serving as an Independent
Director on November 23, 1998, or elected and serving as an Independent Director
following such date, shall be granted an Option to acquire 50,000 shares of
Common Stock as of either November 23, 1998 for those Independent Directors who
are then members of the Board of Directors, or as of the date such individual
first commences serving as an Independent Director thereafter. Any Independent
Director who receives such an Option will not be eligible to receive an
additional Option until the fifth annual meeting of stockholders after the
original grant.
ARTICLE IV
TERMS OF OPTIONS
IV.1 Option Agreement. Each Option shall be evidenced by a written
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Board shall determine, consistent with this Plan.
IV.2 Option Price. The price per share of the shares subject to each
Option shall be the Fair Market Value of a share of Common Stock on the date of
grant of the Option.
IV.3 Option Term. The term of an Option shall be ten (10) years from
the date the Option is granted.
3
<PAGE> 4
IV.4 Option Vesting
(a) Except as set forth below in subsection (b), each Option
shall vest as follows:
<TABLE>
<CAPTION>
PERCENT OF OPTION
TIME FROM GRANT DATE WHICH IS EXERCISABLE
- -------------------- --------------------
<S> <C>
Prior to the first anniversary of the Grant Date 0%
On the first anniversary of the Grant Date 25%
On the second anniversary of the Grant Date 50%
On the third anniversary of the Grant Date 100%
</TABLE>
(b) No portion of an Option which is unexercisable at
Termination of Directorship shall thereafter become exercisable.
IV.5 Consideration. In consideration of the granting of an Option, the
Optionee shall agree, in the written Stock Option Agreement, to serve as an
Independent Director of the Company or any Subsidiary until the next annual
meeting of stockholders of the Company. Nothing in this Plan or in any Stock
Option Agreement hereunder shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Optionee at any time for any reason whatsoever, with or without
good cause.
ARTICLE V
EXERCISE OF OPTIONS
V.1 Partial Exercise. An exercisable Option may be exercised in whole
or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Board may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares.
V.2 Manner of Exercise. All or a portion of an exercisable Option shall
be deemed exercised upon delivery of all of the following to the Secretary of
the Company or his/her office:
(a) A written notice complying with the applicable rules
established by the Board stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;
(b) Such representations and documents as the Board, in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Board may, in its absolute
discretion, also take whatever additional actions it deems appropriate to effect
such compliance including, without limitation, placing legends on share
certificates and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant
to Section X.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is exercised.
However, at the discretion of the Board the terms of the Option may (i) allow a
delay in payment up to thirty (30) days from the date the Option, or portion
thereof, is exercised; (ii) allow payment, in whole or in part, through the
delivery of shares of Common Stock owned by the Optionee for a period of not
less than six months, duly endorsed for transfer to the Company with a Fair
4
<PAGE> 5
Market Value on the date of delivery equal to the aggregate exercise price of
the Option or exercised portion thereof; (iii) allow payment, in whole or in
part, through the delivery of property of any kind which constitutes good and
valuable consideration; (iv) allow payment, in whole or in part, through the
delivery of a full recourse promissory note bearing interest (at no less than
such rate as shall then preclude the imputation of interest under the Code) and
payable upon such terms as may be prescribed by the Board, or (v) allow payment
through any combination of the consideration provided in the foregoing
subparagraphs (ii), (iii) and (iv). In the case of a promissory note, the Board
may also prescribe the form of such note and the security to be given for such
note. The Option may not be exercised, however, by delivery of a promissory note
or by a loan from the Company when or where such loan or other extension of
credit is prohibited by law.
V.3 Certain Timing Requirements. At the discretion of the Board, shares
of Common Stock issuable to the Optionee upon exercise of the Option may be used
to satisfy the Option exercise price or the tax withholding consequences of such
exercise, in the case of persons subject to Section 16 of the Exchange Act, only
(i) during the period beginning on the third business day following the date of
release of the quarterly or annual summary statement of sales and earnings of
the Company and ending on the twelfth business day following such date or (ii)
pursuant to an irrevocable written election by the Optionee to use shares of
Common Stock issuable to the Optionee upon exercise of the Option to pay all or
part of the Option price or the withholding taxes made at least six months prior
to the payment of such Option price or withholding taxes.
V.4 Conditions to Issuance of Stock Certificates. The Company shall not
be required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;
(b) The completion of any registration or other qualification
of such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other governmental
regulatory body which the Board shall, in its absolute discretion, deem
necessary or advisable;
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Board shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Board may establish from time to time for reasons
of administrative convenience; and
(e) The receipt by the Company of full payment for such
shares, including payment of any applicable withholding tax.
V.5 Rights as Stockholders. The holders of Options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in respect
of any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
V.6 Ownership and Transfer Restrictions. The Board, in its discretion,
may impose such restrictions on the ownership and transferability of the shares
purchasable upon the exercise of an Option as it deems appropriate. Any such
restriction shall be set forth in the respective Stock Option Agreement and may
be referred to on the certificates evidencing such shares.
5
<PAGE> 6
V.7 Limitations on Exercise of Options. No Option may be exercised to
any extent by anyone after the first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the
Optionee's death;
(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his/her permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death or his/her permanent and total disability, unless the Optionee dies within
said three-month period;
(d) a Corporate Transaction; provided, however, that any
Option granted or deemed regranted within six months of such Corporate
Transaction shall remain exercisable until the expiration of six months and one
day from the later of the date such Option was granted or the date such Option
was deemed regranted; or
(e) The expiration of ten years from the date the Option was
granted.
ARTICLE VI
STOCK AWARDS
VI.1 Eligibility. Each Independent Director of the Company shall be
eligible to be granted Stock Awards at the times and in the manner set forth in
Section VI.2.
VI.2 Granting of Stock Awards
(a) On the date that the Company's Registration Statement is
declared or deemed to be effective by the Securities Exchange Commission, each
individual then serving as an Independent Director (or nominated for election at
the first shareholder's meeting to elect Directors following such date) shall be
granted a Stock Award of 400 shares of Common Stock.
(b) As of the close of each annual shareholder's meeting at
which Directors are elected, each individual then serving as an Independent
Director shall be granted a Stock Award of 400 shares of Common Stock.
ARTICLE VII
ADMINISTRATION
VII.1 Duties and Powers of Board. It shall be the duty of the Board to
conduct the general administration of this Plan in accordance with its
provisions. The Board shall have the power to interpret this Plan and the
agreements pursuant to which Options are granted, and to adopt such rules for
the administration, interpretation, and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules. Any such
grant under this Plan need not be the same with respect to each Optionee.
6
<PAGE> 7
VII.2 Majority Rule. The Board shall act by a majority of its members
in attendance at a meeting at which a quorum is present or by a memorandum or
other written instrument signed by all members of the Board.
VII.3 Compensation; Professional Assistance; Good Faith Actions. All
expenses and liabilities which members of the Board incur in connection with the
administration of this Plan shall be borne by the Company. The Board may, employ
attorneys, consultants, accountants, appraisers, brokers, or other persons. The
Board, the Company and the Company's officers and Directors shall be entitled to
rely upon the advice, opinions or valuations of any such persons. All actions
taken and all interpretations and determinations made by the Board in good faith
shall be final and binding upon all Optionees, the Company and all other
interested persons. No members of the Board shall be personally liable for any
action, determination or interpretation made in good faith with respect to this
Plan or Options, and all members of the Board shall be fully protected by the
Company in respect of any such action, determination or interpretation.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
VIII.1 Not Transferable. Options under this Plan may not be sold,
pledged, assigned, or transferred in any manner other than by will or the laws
of descent and distribution. No Option or interest or right therein shall be
liable for the debts, contracts or engagements of the Optionee or his/her
successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect.
During the lifetime of the Optionee, only he may exercise an Option (or
any portion thereof) granted to him under the Plan. After the death of the
Optionee, any exercisable portion of an Option may, prior to the time when such
portion becomes unexercisable under the Plan or the applicable Stock Option
Agreement, be exercised by his/her personal representative or by any person
empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution.
VIII.2 Amendment, Suspension or Termination of this Plan. Unless sooner
terminated under this Section VIII.2, the Plan will terminate after the
expiration of ten years from the date the Registration Statement is declared or
deemed to be effective by the Securities and Exchange Commission. The Plan may
be wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Board. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board, no action of the Board may, except as provided in Section VII.3,
increase the limits imposed in Section II.1 on the maximum number of shares
which may be issued under this Plan, and no action of the Board may be taken
that would otherwise require stockholder approval as a matter of applicable law,
regulation or rule. Notwithstanding the foregoing, except as permitted by the
applicable exemptive conditions of Rule 16b-3, the provisions of this Plan
relating to formula grants of Options and Stock Awards to Directors, including
the amount, price and timing thereof, shall not be amended more than once in any
six-month period other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the respective rules
thereunder. No amendment, suspension or termination of this Plan shall, without
the consent of the holder of Options and Stock Awards, alter or impair any
rights or obligations under any Options or Stock Awards theretofore granted,
unless the award itself otherwise expressly so provides. No Options or Stock
Awards may be granted during any period of suspension or after termination of
this Plan.
7
<PAGE> 8
VIII.3 Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events.
(a) Subject to Section VIII.3(e), in the event that the Board
determines that any dividend or other distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Board's sole discretion, affects the
Common Stock such that an adjustment is determined by the Board to be
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option or Stock Award then the Board shall, in such manner as it may deem
equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or
other securities or property) with respect to which Options may be granted under
the Plan, or which may be granted as Stock Awards (including, but not limited
to, adjustments of the limitations in Section II.1 on the maximum number and
kind of shares which may be issued),
(ii) the number and kind of shares of Common Stock
(or other securities or property) subject to outstanding Options and in the
number and kind of shares of outstanding Stock Awards, and
(iii) the grant or exercise price with respect to any
Option.
(b) Subject to Section VIII.3(e), in the event of any
corporate transaction or other event described in Section VIII.3(a) which
results in shares of Common Stock being exchanged for or converted into cash,
securities (including securities of another corporation) or other property, the
Board will have the right to terminate this Plan as of the date of the event or
transaction, in which case all Options and Stock Awards granted under this Plan
shall become the right to receive such cash, securities or other property, net
of any applicable exercise price.
(c) Subject to Sections VIII.3(c)(vii) and VIII.3(e), in the
event of any corporate transaction or other event described in Section VIII.3(a)
or any unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Board in its discretion is hereby authorized to take any one or
more of the following actions whenever the Board determines that such action is
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to any Option or Stock Award under this Plan, to facilitate such transactions or
events or to give effect to such changes in laws, regulations or principles:
(i) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Board may provide, either
automatically or upon the Optionee's request, for either the purchase of any
such Option for an amount of cash equal to the amount that could have been
attained upon the exercise of such Option or realization of the Optionee's
rights had such Option been currently exercisable or payable or the replacement
of such Option or Stock Award with other rights or property selected by the
Board in its sole discretion;
8
<PAGE> 9
(ii) In its sole and absolute discretion, the Board
may provide, either by the terms of such Option or by action taken prior to the
occurrence of such transaction or event that it cannot be exercised after such
event;
(iii) In its sole and absolute discretion, and on
such terms and conditions as it deems appropriate, the Board may provide, either
by the terms of such Option or by action taken prior to the occurrence of such
transaction or event, that for a specified period of time prior to such
transaction or event, such Option shall be exercisable as to all shares covered
thereby, notwithstanding anything to the contrary in (i) Section IV.4 or (ii)
the provisions of such Option;
(iv) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Board may provide, either by
the terms of such Option or Stock Award or by action taken prior to the
occurrence of such transaction or event, that upon such event, such option,
right or award be assumed by the successor corporation, or a parent or
subsidiary thereof, or shall be substituted for by similar options, rights or
awards covering the stock of the successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices;
(v) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Board may make adjustments in
the number and type of shares of Common Stock (or other securities or property)
subject to outstanding Options, and in the number and kind of outstanding Stock
Awards and/or in the terms and conditions of (including the grant or exercise
price), and the criteria included in, outstanding options, rights and awards and
options, rights and awards which may be granted in the future; and
(vi) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Board may provide either by
the terms of a Stock Award or by action taken prior to the occurrence of such
event that, for a specified period of time prior to such event, the restrictions
imposed under a Stock Award Agreement upon some or all shares of the Stock Award
may be terminated.
(vii) None of the foregoing discretionary terms of
this Section VIII.3(c) shall be permitted with respect to Options and Stock
Awards to the extent that such discretion would be inconsistent with the
requirements of Rule 16b-3. In the event of a Corporate Transaction, to the
extent that the Board does not have the ability under Rule 16b-3 to take or to
refrain from taking the discretionary actions set forth above, each Option shall
be exercisable as to all shares covered thereby during the five days immediately
preceding the consummation of such Corporate Transaction and subject to such
consummation, notwithstanding anything to the contrary in Section IV.4 and
except as provided in Section V.7(d), Options cannot be exercised following such
event.
(d) Subject to Section VIII.3(e) and VIII.8, the Board may, in
its discretion, include such further provisions and limitations in any Option or
Stock Award agreement or certificate, as it may deem equitable and in the best
interests of the Company.
(e) No adjustment or action described in this Section VIII.3
or in any other provision of the Plan shall be authorized to the extent that
such adjustment or action would violate Section
9
<PAGE> 10
16 or the exemptive conditions of Rule 16b-3. The number of shares of Common
Stock subject to any option, right or award shall always be rounded to the next
whole number.
VIII.4 Approval of Plan by Stockholders. This Plan, and any amendment
hereto that requires approval of the Company's stockholders, will be submitted
for the approval of the Company's stockholders within twelve months after the
date of the Board's initial adoption of this Plan. Options and Stock Awards may
be granted prior to such stockholder approval, provided that such Options shall
not be exercisable prior to the time when this Plan is approved by the
stockholders, and provided further that if such approval has not been obtained
at the end of said twelve-month period, all Options and Stock Awards previously
granted under this Plan shall thereupon be cancelled and become null and void.
VIII.5 Forfeiture Provisions. Pursuant to its general authority to
determine the terms and conditions applicable to awards under the Plan, the
Board shall have the right (to the extent consistent with the requirements of
Rule 16b-3) to provide, in the terms of Options or other awards made under the
Plan, or to require the recipient to agree by separate written instrument, that
(a) any proceeds, gains or other economic benefit actually or constructively
received by the recipient upon any receipt or exercise of the award, or upon the
receipt or resale of any Common Stock underlying such award, must be paid to the
Company, and (b) the award shall terminate and any unexercised portion of such
award (whether or not vested) shall be forfeited, if (i) a Termination of
Directorship occurs prior to a specified date, or within a specified time period
following receipt or exercise of the award, or (ii) the recipient at any time,
or during a specified time period, engages in any activity in competition with
the Company, or which is inimical, contrary or harmful to the interests of the
Company, as further defined by the Board.
VIII.6 Limitations Applicable to Section 16 Persons. Notwithstanding
any other provision of this Plan, the Plan and any Option or Stock Award granted
to a Director who is then subject to Section 16 of the Exchange Act, shall be
subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of
the Exchange Act) that are requirements for the application of such exemptive
rule. To the extent permitted by applicable law, the Plan, Options and Stock
Awards granted or awarded hereunder shall be deemed amended to the extent
necessary to conform to such applicable exemptive rule.
VIII.7 Effect of Plan Upon Options and Compensation Plans. The adoption
of this Plan shall not affect any other compensation or incentive plans in
effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for employees or Directors of the Company or any
Subsidiary or (ii) to grant or assume options or other rights otherwise than
under this Plan in connection with any proper corporate purpose including but
not by way of limitation, the grant or assumption of options in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.
VIII.8 Compliance with Laws. This Plan, the granting and vesting of
Options under this Plan and the issuance and delivery of shares of Common Stock
under Options or Stock Awards granted hereunder are subject to compliance with
all applicable federal and state laws, rules and regulations (including but not
limited to state and federal securities law and federal margin requirements) and
to such approvals by any listing, regulatory or governmental authority as may,
in the opinion of counsel for the
10
<PAGE> 11
Company, be necessary or advisable in connection therewith. Any securities
delivered under this Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Company, provide such
assurances and representations to the Company as the Company may deem necessary
or desirable to assure compliance with all applicable legal requirements. To the
extent permitted by applicable law, the Plan, Options and Stock Awards granted
hereunder shall be deemed amended to the extent necessary to conform to such
laws, rules and regulations.
VIII.9 Titles. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of this Plan.
VIII.10 Governing Law. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
11
<PAGE> 1
Exhibit 21.1
Subsidiaries of On Command Corporation
On Command Development Corporation
On Command Video Corporation
SpectraVision, Inc.
Spectradyne International, Inc.
On Command Hong Kong Limited
On Command Australia Pty Limited
On Command (Thailand) Limited
Spectradyne Singapore Pfc Limited
On Command Canada, Inc.
Kalevision Systems, Inc. Canada
Spectradyne International, Inc. Sucursal en Mexico
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-16957 and 333-33149 of On Command Corporation on Form S-8 of our report
dated March 3, 2000, appearing in the Annual Report on Form 10-K of On Command
Corporation for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
San Jose, California
March 24, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement of
On Command Corporation on Form S-3 of our report dated March 3, 2000, appearing
in the Annual Report on Form 10-K of On Command Corporation for the year ended
December 31, 1999 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
San Jose, California
March 24, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-33149 on Form S-8 of On Command Corporation of
our report dated March 3, 2000 appearing in the Annual Report on Form 10-K of
On Command Corporation for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
San Jose, California
March 24, 2000
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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