-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IQaTxsWpJP8iwJ6ypiU+6+TqyZvrVrXPM7xhEiV+T+ThmJTEpwDx+4PNUTCuK96B JBLuEig836lt6QbKY32i+Q== 0000950123-96-005407.txt : 19961007 0000950123-96-005407.hdr.sgml : 19961007 ACCESSION NUMBER: 0000950123-96-005407 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19961004 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ON COMMAND CORP CENTRAL INDEX KEY: 0001020871 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 770436194 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-10407 FILM NUMBER: 96639604 BUSINESS ADDRESS: STREET 1: ONE TABOR CENTER STREET 2: 1200 SEVENTEENTH ST STE 1000 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3036267000 MAIL ADDRESS: STREET 1: ONE TABOR CENTER STREET 2: 1200 SEVENTEENTH STREET STE 1000 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: ASCENT ACQUISITION CORP DATE OF NAME CHANGE: 19960812 S-4/A 1 ON COMMAND CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996 REGISTRATION NO. 333-10407 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 3 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ON COMMAND CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 4841 77-0435194 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
---------------------------
ARTHUR M. AARON VICE PRESIDENT, ACTING GENERAL COUNSEL AND SECRETARY 3301 OLCOTT STREET c/o ASCENT ENTERTAINMENT GROUP, INC. SANTA CLARA, CALIFORNIA 95054 ONE TABOR CENTER (408) 496-1800 1200 SEVENTEENTH STREET, SUITE 2800 (Address, including Zip Code, and Telephone DENVER, COLORADO 80202 Number, including Area Code, of Registrant's (303) 626-7000 Principal Executive Offices) (Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)
Copy to: ROGER H. KIMMEL CHRISTINE FOURNIER LATHAM & WATKINS 885 THIRD AVENUE NEW YORK, NEW YORK 10022 (212) 906-1200 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective and upon consummation of the transactions described in the enclosed Information Statement/Prospectus. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ 2 ON COMMAND VIDEO CORPORATION 3301 Olcott Street Santa Clara, California 95054 (408) 496-1800 NOTICE OF CONSENT OF STOCKHOLDERS IN LIEU OF MEETING PURSUANT TO SECTION 228 OF THE DELAWARE GENERAL CORPORATION LAW On August 12, 1996, the Board of Directors of On Command Video Corporation ("OCV") approved an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger (the "Merger") of On Command Merger Corporation, a newly formed Delaware corporation ("Merger Sub"), with and into OCV. Merger Sub is a wholly owned subsidiary of On Command Corporation ("On Command Corporation"), a newly formed Delaware corporation. On Command Corporation has entered into an acquisition agreement (the "Acquisition Agreement") to acquire (the "Acquisition") all of the outstanding capital stock of Spectradyne, Inc. ("Spectradyne"), a wholly owned subsidiary of SpectraVision, Inc. ("SpectraVision"). SpectraVision and its domestic subsidiaries, including Spectradyne, have filed a petition for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). In the Merger, it is currently expected that each issued and outstanding share of OCV Common Stock will be converted into the right to receive the following: (i) approximately 2.84 shares (the "Initial Shares") of On Command Corporation Common Stock ("OCC Common Stock"), (ii) such additional number of shares of OCC Common Stock, if any, to which holders of OCV Common Stock may be entitled pursuant to a formula based upon the working capital of Spectradyne at the time of the consummation of the Acquisition (the "Reserved Stock") and (iii) warrants to purchase, on a cashless basis, approximately 18.61% of a share of OCC Common Stock (the "Series A Warrants"). Pursuant to the Acquisition Agreement, as consideration for the acquisition of the capital stock of Spectradyne, upon the consummation of the Acquisition On Command Corporation will issue to the creditors of SpectraVision pursuant to a distribution plan to be adopted by the Bankruptcy Court (i) an aggregate of 8,250,000 shares of OCC Common Stock, less the aggregate amount of Reserved Stock and (ii) warrants to purchase for cash an aggregate of 2,625,000 shares of OCC Common Stock for cash, at the same exercise price applicable to the Series A Warrants. The Initial Shares to be issued to holders of OCV Common Stock will represent, in the aggregate, 72.5%, (of which shares representing approximately 57.2% will be issued to Ascent Entertainment Group, Inc. or its wholly owned subsidiaries ("Ascent")), and the shares of OCC Common Stock to be issued to creditors of SpectraVision will represent, in the aggregate, 27.5%, of the total number of shares of OCC Common Stock to be issued pursuant to the Merger Agreement and the Acquisition Agreement, assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and the exercise of any warrants. The Board of Directors of OCV has determined that the Merger is in the best interests of OCV and its stockholders. Accordingly, the Board of Directors has unanimously approved the Merger Agreement and the transactions contemplated thereby. Certain stockholders of OCV, including Ascent, Robert Snyder, President, Chief Executive Officer and a director of OCV and Richard Fenwick, Sr., a director of OCV, who own, in the aggregate, approximately 86.5% of the outstanding shares of OCV Common Stock, acting pursuant to Section 228 of the Delaware General Corporation Law, have consented in writing to the adoption of the Merger Agreement and to the consummation of the Merger. Holders of OCV Common Stock who have not consented to the adoption of the Merger Agreement and who (a) deliver to OCV a written demand for appraisal of their shares of OCV Common Stock and (b) meet certain other statutory requirements, will be entitled to have the value of their shares appraised in accordance with Section 262 of the Delaware General Corporation Law. The Merger Agreement and the Acquisition Agreement are described in detail in the accompanying Information Statement/Prospectus and its annexes. You are urged to read all of these important materials carefully. By order of the Board of Directors Santa Clara, California /s/ Arthur M. Aaron ----------------------------------- October 7, 1996 Assistant Secretary 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. SUBJECT TO COMPLETION, DATED OCTOBER 4, 1996 ON COMMAND VIDEO CORPORATION INFORMATION STATEMENT ON COMMAND CORPORATION PROSPECTUS This Information Statement/Prospectus relates to the proposed merger (the "Merger") of On Command Merger Corporation ("Merger Sub"), a wholly owned subsidiary of On Command Corporation ("On Command Corporation"), with and into On Command Video Corporation ("OCV") pursuant to an Agreement and Plan of Merger, dated as of August 13, 1996 (the "Merger Agreement"), among On Command Corporation, Merger Sub and OCV. Simultaneously with the Merger, On Command Corporation will acquire (the "Acquisition") all of the outstanding capital stock of Spectradyne, Inc. ("Spectradyne"), a wholly owned subsidiary of SpectraVision, Inc. ("SpectraVision"). The Acquisition will be effected pursuant to an Acquisition Agreement, dated as of August 13, 1996 (the "Acquisition Agreement"), among On Command Corporation, Ascent Entertainment Group, Inc. (together with its wholly owned subsidiaries, "Ascent"), SpectraVision, the Official Creditors' Committee for SpectraVision, Spectradyne and the other domestic subsidiaries of SpectraVision. See "The Transactions." This Information Statement/Prospectus also constitutes a prospectus of On Command Corporation with respect to (a) 21,750,000 shares of common stock, $.01 par value per share, of On Command Corporation ("OCC Common Stock"), (b) such additional number of shares of OCC Common Stock, if any, to which holders of OCV Common Stock may be entitled pursuant to a formula based upon the working capital of Spectradyne at the time of the consummation of the Acquisition (the "Reserved Stock"), which On Command Corporation expects will not exceed approximately 650,000 shares of OCC Common Stock in the aggregate, and (c) warrants to purchase, on a cashless basis, 1,425,000 shares of OCC Common Stock (the "Series A Warrants"). In the Merger, each issued and outstanding share of OCV Common Stock will be converted into the right to receive (i) approximately 2.84 shares of OCC Common Stock, (ii) such additional number of shares of Reserved Stock, if any, to which holders of OCV Common Stock may be entitled and (iii) Series A Warrants to purchase, on a cashless basis, approximately 18.61% of a share of OCC Common Stock. See "The Transactions." WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN OCC COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 17. In connection with the Merger and the Acquisition, application has been made to list the OCC Common Stock and the Warrants on the Nasdaq National Market System under the symbols "ONCO" and "ONCOW," respectively. This Information Statement/Prospectus is first being mailed to holders of OCV Common Stock on or about October 7, 1996. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Information Statement/Prospectus is October 7, 1996. 4 TABLE OF CONTENTS
Page AVAILABLE INFORMATION........................................................................................... 6 SUMMARY......................................................................................................... 7 The Companies............................................................................................... 7 The Transactions............................................................................................ 8 Stockholders' Consent....................................................................................... 10 Exchange of Certificates.................................................................................... 10 Interests of Certain Persons in the Merger.................................................................. 10 Appraisal Rights............................................................................................ 10 Anticipated Accounting Treatment............................................................................ 11 Opinion of Allen & Company.................................................................................. 11 Listing of OCC Common Stock and Warrants.................................................................... 11 Certain Federal Income Tax Consequences..................................................................... 11 Risk Factors................................................................................................ 11 Comparative Market Prices and Dividend Policy............................................................... 12 Summary Pro Forma Financial Information..................................................................... 13 Historical Summary Selected Financial Information........................................................... 14 RISK FACTORS.................................................................................................... 16 Control by Ascent........................................................................................... 16 Restrictions on Debt Financings............................................................................. 16 Dependence on Additional Capital for Growth................................................................. 17 Integration of OCV and Spectradyne Businesses............................................................... 17 No Prior Public Market and Possible Volatility of Stock Price............................................... 17 Highly Competitive In-Room Entertainment Industry........................................................... 18 Dependence on Significant Customers......................................................................... 18 Dependence on Performance of Lodging Industry............................................................... 18 Risk of Technological Obsolescence.......................................................................... 18 Dependence on Key Personnel................................................................................. 19 Seasonality................................................................................................. 19 Anti-Takeover Protections................................................................................... 19 STOCKHOLDERS' CONSENT........................................................................................... 20 THE TRANSACTIONS................................................................................................ 21 General..................................................................................................... 21 Background of the Transactions.............................................................................. 21 The Merger.................................................................................................. 22 Merger Consideration................................................................................... 22 Effective Time......................................................................................... 23 Directors and Officers of the Surviving Corporation.................................................... 23 Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock Certificates; Fractional Shares.................................................................................. 23 Treatment of OCV Employee Stock Options................................................................ 25
2 5 Representations and Warranties......................................................................... 25 Pre- and Post-Closing Obligations...................................................................... 26 Conditions to the Consummation of the Merger........................................................... 26 Termination of the Merger Agreement.................................................................... 27 Regulatory Approvals................................................................................... 27 Fees and Expenses...................................................................................... 27 Amendment and Waiver................................................................................... 28 Interests of Certain Persons in the Merger............................................................. 28 Resale of OCC Common Stock and Warrants................................................................ 29 Appraisal Rights....................................................................................... 30 The Acquisition............................................................................................. 32 The Acquisition Agreement.............................................................................. 32 Assets Acquired........................................................................................ 32 Liabilities Assumed.................................................................................... 33 Acquisition Consideration.............................................................................. 35 Certain Definitions.................................................................................... 35 Closing Conditions and Other Pre-Closing Matters....................................................... 38 Representations and Warranties......................................................................... 40 The Warrants................................................................................................ 40 Exercisability; Expiration............................................................................. 40 Adjustments............................................................................................ 41 Registration; Exemption..................................................................................... 42 Registration Rights......................................................................................... 42 Anticipated Accounting Treatment............................................................................ 43 Reasons for the Transactions; Determination of the Board of Directors of OCV................................ 43 Opinion of Allen & Company.................................................................................. 44 SELECTED PRO FORMA FINANCIAL INFORMATION........................................................................ 47 HISTORICAL SELECTED FINANCIAL INFORMATION....................................................................... 48 OCV ....................................................................................................... 48 SpectraVision............................................................................................... 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................................... 50 Overview.................................................................................................... 50 Results of Operations....................................................................................... 50 OCV -- Historical...................................................................................... 50 SpectraVision -- Historical............................................................................ 54 Liquidity and Capital Resources............................................................................. 59 On Command Video Corporation........................................................................... 59 On Command Corporation................................................................................. 59 Seasonality................................................................................................. 60 Anticipated Accounting Treatment............................................................................ 61 BUSINESS........................................................................................................ 61 General..................................................................................................... 62 Industry Overview........................................................................................... 63 Operating and Growth Strategies............................................................................. 63 On Command Video Corporation................................................................................ 64 Services and Products.................................................................................. 64 Sales and Marketing.................................................................................... 66 Installation and Service Operations.................................................................... 67
3 6 Technology............................................................................................. 67 Manufacturing and Suppliers............................................................................ 67 Spectradyne, Inc............................................................................................ 68 Pay-Per-View Services.................................................................................. 68 Free-To-Guest Services................................................................................. 69 Interactive and Other Services.............................................................................. 69 Programming............................................................................................ 70 The EDS Servicing and Technology Agreement.................................................................. 70 Hotel Contracts........................................................................................ 71 Manufacturing.......................................................................................... 71 Competition............................................................................................ 71 Regulation.................................................................................................. 72 Patents, Trademarks and Copyrights.......................................................................... 73 Employees................................................................................................... 73 Properties.................................................................................................. 73 Legal Proceedings........................................................................................... 73 MANAGEMENT...................................................................................................... 74 Directors and the Executive Officers........................................................................ 74 Committees of the Board of Directors........................................................................ 74 Directors' Compensation..................................................................................... 74 Executive Compensation...................................................................................... 75 BENEFICIAL OWNERSHIP OF OCV AND OCC COMMON STOCK................................................................ 79 CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES.................................................................... 81 DESCRIPTION OF ON COMMAND CORPORATION CAPITAL STOCK............................................................. 85 General..................................................................................................... 85 OCC Common Stock............................................................................................ 85 On Command Corporation Preferred Stock...................................................................... 86 COMPARISON OF STOCKHOLDER RIGHTS................................................................................ 86 General..................................................................................................... 86 Voting Rights............................................................................................... 87 Dividends................................................................................................... 87 Board of Directors.......................................................................................... 88 Reports to Stockholders; Other Public Information........................................................... 89 Rights of Inspection........................................................................................ 89 Stockholder Meeting Procedures.............................................................................. 89 Stockholder Vote Required for Certain Actions............................................................... 90 Indemnification for Securities Act Liabilities.............................................................. 92 Stockholder Suits........................................................................................... 92 Appraisal Rights............................................................................................ 92 EXPERTS......................................................................................................... 94 LEGAL MATTERS................................................................................................... 94 INDEX TO PRO FORMA FINANCIAL STATEMENTS OF ON COMMAND CORPORATION............................................... P-1 INDEX TO FINANCIAL STATEMENTS OF ON COMMAND VIDEO CORPORATION................................................... F-1 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF SPECTRAVISION, INC. ..............................................F-22
4 7 ANNEXES Annex I Agreement and Plan of Merger Annex II Acquisition Agreement Annex III Warrant Agreement Annex IV Registration Rights Agreement Annex V Opinion of Allen & Company Annex VI Delaware General Corporation Law Section 262 5 8 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS INFORMATION STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ON COMMAND CORPORATION OR OCV. THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION IN WHICH IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF ON COMMAND CORPORATION OR OCV SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. AVAILABLE INFORMATION OCV currently is not subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). On Command Corporation currently is not subject to the periodic reporting and other informational requirements of the Exchange Act. In connection with the Merger and the issuance of the OCC Common Stock and the Series A Warrants, On Command Corporation will become subject to the informational requirements of the Exchange Act and in accordance therewith will file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Following the Merger, On Command Corporation will furnish to holders of OCC Common Stock annual reports containing audited consolidated financial statements prepared in accordance with generally accepted accounting principles ("GAAP"), with an opinion thereon by On Command Corporation's independent auditors, and will make available upon request all quarterly reports containing unaudited consolidated financial information prepared in accordance with GAAP. On Command Corporation has filed with the Commission a Registration Statement on Form S-4 (together with all amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of OCC Common Stock and the Series A Warrants to purchase OCC Common Stock to be issued to holders of OCV Common Stock pursuant to the Merger Agreement. This Information Statement/Prospectus does not contain all the information set forth in the Registration Statement, a portion of which has been omitted in accordance with the rules and regulations of the Commission. Such additional information may be obtained from the Commission's principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. SpectraVision is subject to the informational requirements of the Exchange Act and in accordance therewith files reports, proxy statements and other information with the Commission. The reports, proxy statements and other information filed by SpectraVision with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's Regional Offices at Suite 1300, Seven World Trade Center, New York, New York 10048, and The Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material also can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Information contained in this Information Statement/Prospectus relating to SpectraVision and its subsidiaries has been obtained from publicly available documents. 6 9 SUMMARY The following is a summary of certain information contained elsewhere in this Information Statement/Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained elsewhere in this Information Statement/Prospectus and the annexes hereto. OCV stockholders are urged to read this Information Statement/Prospectus and the annexes hereto carefully and in their entirety. THE COMPANIES On Command Corporation. On Command Corporation is a newly formed Delaware corporation and is currently a wholly owned subsidiary of Ascent. COMSAT Corporation ("COMSAT") owns 80.7% of the outstanding common stock of Ascent. From and after the closing date of the transactions contemplated by the Merger Agreement and the Acquisition Agreement (the "Closing Date"), and after giving effect to the Merger and the Acquisition (collectively, the "Transactions"), On Command Corporation will be a holding company the principal assets of which will be OCV, Spectradyne and On Command Development Corporation ("On Command Development"), each of which will operate as a separate, wholly owned subsidiary of On Command Corporation. The address of On Command Corporation's principal executive offices is 3301 Olcott Street, Santa Clara, California 95054 (telephone (408) 496-1800). OCV. OCV is the leading provider (by number of hotel rooms served) of on-demand in-room entertainment for the United States lodging industry. The OCV system is a patented video selection and distribution system that allows guests to select on a pay-per-view ("PPV") basis from up to 50 motion pictures on computer controlled television sets located in their rooms at any time. OCV also provides in-room viewing of free-to-guest programming of select cable channels (such as HBO, the Disney Channel, Showtime, ESPN and CNN) and other interactive services. OCV provides its services under long-term contracts primarily to business and luxury hotel chains such as Marriott, Hilton, Wyndham, Doubletree, Fairmont, Embassy Suites and Holiday Inn, and to other select hotels. OCV has experienced rapid growth in the past three years, increasing its base of installed on- demand rooms from approximately 37,000 rooms at the end of 1992 to approximately 419,000 rooms at June 30, 1996. The address of OCV's principal executive offices is 3301 Olcott Street, Santa Clara, California 95054 (telephone: (408) 496-1800). Spectradyne. Spectradyne, a subsidiary of SpectraVision, is a leading provider of interactive in- room video entertainment services to the lodging industry. Founded in 1971, SpectraVision originally developed and patented a system which provides in-room television viewing of recently released major and other motion pictures on a PPV basis. SpectraVision, through Spectradyne, subsequently expanded its services to include providing PPV movies in an on-demand format, delivering free-to-guest programming and providing interactive services that capitalize on Spectradyne's proprietary two-way communications equipment. Spectradyne has been a major provider of these services to the lodging industry since 1971 and, at June 30, 1996, provided PPV services to approximately 495,000 rooms in approximately 1,600 hotels. Spectradyne provides its services under contracts to hotel chains, hotel management companies and individually owned and franchised hotel properties. In June 1993, SpectraVision entered into a ten-year exclusive contract with Electronic Data Systems Corporation ("EDS") to install and maintain a digital satellite delivered hotel PPV system. By late 1994, the costs associated with the EDS contract combined with SpectraVision's high debt levels created financial difficulties for SpectraVision. In early 1995, SpectraVision determined that a financial restructuring would be required to ensure SpectraVision's long-term survival. SpectraVision conducted 7 10 restructuring negotiations with representatives of its secured and unsecured creditors during April and May 1995, working toward the development of an overall restructuring plan. In June 1995, SpectraVision concluded that a filing for reorganization under Chapter 11 of the Bankruptcy Code should be made in order to preserve the value of its assets and to ensure that the business had sufficient cash resources to continue operations while it completed the financial restructuring process. On June 8, 1995, SpectraVision and its domestic subsidiaries, including Spectradyne (collectively with SpectraVision, the "Debtors"), filed a petition for relief under the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), which cases were procedurally consolidated for joint administration as Case No. 95- 659 (collectively, the "Bankruptcy Case"). On Command Development. On Command Development, a newly formed subsidiary of On Command Corporation, has been formed to develop new technologies to be used by OCV and Spectradyne in order to support and improve OCV's and Spectradyne's operations and to develop new applications to be marketed by On Command Corporation, OCV and Spectradyne. THE TRANSACTIONS On April 19, 1996, SpectraVision, Ascent, OCV and an unsecured creditors' committee (the "Creditors' Committee"), which was appointed by the United States Trustee for the District of Delaware pursuant to Section 1102 of the Bankruptcy Code, entered into an agreement (the "Plan Sponsor Agreement") pursuant to which it was agreed that Ascent would be plan sponsor for the SpectraVision plan of reorganization (the "Plan") and that On Command Corporation, directly or indirectly, would acquire the assets or the capital stock and certain liabilities of OCV and Spectradyne, subject to the terms and conditions of the Plan Sponsor Agreement. The Merger Agreement, the Acquisition Agreement, the Warrant Agreement (as defined below) and the Registration Rights Agreement (as defined below) were or will be entered into to implement the Plan Sponsor Agreement. The Plan Sponsor Agreement. The Plan Sponsor Agreement provides that Ascent and the other stockholders of OCV will contribute all of the assets, leases, operations and businesses of OCV (and certain liabilities) in consideration for 72.5% of the OCC Common Stock. The Debtors will contribute substantially all of their assets and certain liabilities to On Command Corporation in consideration for 27.5% of the OCC Common Stock, subject to adjustment downward to the extent that the Debtors' net working capital has a negative balance at the closing of the Acquisition. The Plan Sponsor Agreement also provides that On Command Corporation will issue Warrants to purchase 20% of the OCC Common Stock on a fully diluted basis, of which warrants to purchase 13% of the OCC Common Stock will be distributed at the direction of Ascent and OCV and warrants to purchase 7% of the OCV Common Stock will be distributed to the Debtors. Of the Warrants distributable at the direction of Ascent and OCV, Warrants to purchase 9.2% of the OCC Common Stock will be issued to Gary Wilson Partners, financial advisors to Ascent and OCV, as partial consideration for services rendered pursuant to a letter agreement dated April 19, 1996. The Merger Agreement. At the Effective Time (as defined below), pursuant to the terms of the Merger Agreement, Merger Sub will merge with and into OCV, with OCV as the surviving corporation (the "Surviving 8 11 Corporation"). After giving effect to the Merger, the separate corporate existence of Merger Sub will cease. The Merger Agreement provides that the Certificate of Incorporation and Bylaws of OCV, as in effect immediately prior to the Effective Time, will be the Certificate of Incorporation and Bylaws of the Surviving Corporation. Upon consummation of the Merger, each share of OCV Common Stock that is issued and outstanding immediately prior to the Effective Time (other than shares of OCV Common Stock held by OCV or by its direct or indirect subsidiaries and Dissenting Shares (as defined below)), will be converted into the right to receive the following (the "Merger Consideration"): (i) approximately 2.84 shares of OCC Common Stock (the "Initial Shares"), (ii) such additional number of shares of Reserved Stock, if any, to which holders of OCV Common Stock may be entitled and (iii) Series A Warrants to purchase, on a cashless basis, approximately 18.61% of a share of OCC Common Stock. See "The Transactions--The Merger--Merger Consideration." The Initial Shares to be issued to holders of OCV Common Stock will represent, in the aggregate, 72.5% of the total number of shares of OCC Common Stock to be issued pursuant to the Merger Agreement and the Acquisition Agreement (of which shares representing approximately 57.2% will be issued to Ascent), assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and the exercise of any warrants. If the working capital of Spectradyne as of the Closing Date is less than $1,000,000, the number of shares of Reserved Stock to be issued to OCV stockholders will equal the product of 30,000,000 multiplied by a fraction, the numerator of which will be equal to the Reserved Amount (as defined herein) and the denominator of which will be equal to the numerator used in the calculation of the Warrant Exercise Price (as defined herein). The Warrant Exercise Price will be determined by dividing (i) the amount by which $550,000,000 exceeds the aggregate amount of debt of On Command Corporation and its subsidiaries that is outstanding as of the Closing Date after giving effect to the Transactions (including, but not limited to, the aggregate amount of debt incurred by On Command Corporation to perform all of its obligations under the Acquisition Agreement and the OCV Debt (as defined herein)) by (ii) 30,000,000. Based on a maximum Reserved Amount of $10,000,000 and on assumptions regarding the aggregate amount of debt of On Command Corporation as of the Closing Date that On Command Corporation believes to be reasonable as of the date of this Information Statement/Prospectus, (i) the maximum aggregate number of shares of Reserved Stock to be issued to OCV stockholders is not expected to exceed approximately 650,000 shares of OCC Common Stock in the aggregate and (ii) the Warrant Exercise Price is expected to be approximately $15.33 per share. See "The Transactions--The Acquisition--Certain Definitions." The assumptions on which these calculations are based could change prior to the Closing Date. As a result, the number of shares of Reserved Stock to which OCV will be entitled could be lower, and the Warrant Exercise Price could be higher or lower, than as set forth above. Cash will be paid in lieu of the issuance of fractional OCC Common Stock as described below under "The Transactions--The Merger--Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock Certificates; Fractional Shares." The Acquisition Agreement. The Acquisition Agreement provides that On Command Corporation will purchase all of the capital stock of Spectradyne. It also provides that certain assets held by affiliates of Spectradyne and the other Debtors will be transferred to Spectradyne prior to the acquisition of the Spectradyne capital stock by On Command Corporation. As consideration for the capital stock of Spectradyne, in accordance with the provisions of the Acquisition Agreement, On Command Corporation will issue to the creditors of the Debtors (collectively, the "Creditors"), or an agent on their behalf: (i) an aggregate of 8,250,000 shares of OCC Common Stock, less the aggregate amount of Reserved Stock and (ii) warrants to purchase for cash an aggregate of 2,625,000 shares of OCC Common Stock for cash, at the same exercise price applicable to the Series A Warrants. The shares of OCC Common Stock to be issued to the Creditors will represent, in the aggregate, 27.5% of the total number of shares of OCC Common Stock to be issued pursuant to the Merger Agreement and the Acquisition Agreement, assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and the exercise of any warrants. See "The Transactions--The Acquisition." The manner in which the number of shares of OCC Common Stock that constitutes Reserved Stock, if any, will be determined, and its allocation among the OCV stockholders and the Creditors, are described below under "The Transactions--The Acquisition." The Warrants. On the Closing Date, On Command Corporation and The Bank of New York, as warrant agent (the "Warrant Agent"), will enter into a warrant agreement (the "Warrant Agreement") pursuant to which On Command Corporation will issue (i) the Series A Warrants to purchase an aggregate of 1,425,000 shares of OCC Common Stock on a cashless basis to the stockholders of OCV, (ii) warrants to purchase for cash an aggregate of 2,625,000 shares of OCC Common Stock (the "Series B Warrants") to the Creditors and (iii) a warrant to purchase for cash an aggregate of 3,450,000 shares of OCC Common Stock (the "Series C Warrant") to Gary Wilson Partners in consideration for certain investment banking and advisory services provided in connection with the Transactions and for future advisory and other services to be rendered to On Command Corporation. 9 12 The exercise price for the shares of OCC Common Stock (the "Warrant Shares") purchasable upon exercise of the Series A Warrants, the Series B Warrants and the Series C Warrant (collectively, the "Warrants") will be determined as of the Closing Date, as described under the caption "The Transactions--The Warrants--Exercisability; Expiration." The exercise price for each Warrant and the number of Warrant Shares issuable per Warrant are subject to adjustment as described under the caption "The Transactions--The Warrants--Adjustments." The Warrants will be exercisable from and after the Closing Date (other than the Series C Warrant, which will not be exercisable until two years after the Closing Date) and, unless exercised prior to 5:00 p.m., New York City time, on the seventh anniversary of their issuance, will expire at that time. Registration Rights. Following the Transactions, any stockholder of OCV, including Ascent, that is deemed to be an "affiliate" of On Command Corporation as defined in Rule 144 under the Securities Act may resell its stock only pursuant to an effective registration statement under the Securities Act or in accordance with Rule 144 or another exemption under the Securities Act. See "The Transactions--The Merger--Resale of OCC Common Stock and Warrants." Following the Transactions, holders of approximately 17,500,000 shares of OCC Common Stock will be subject to such restrictions (before giving effect to the issuance of any Reserve Stock). Any OCV stockholder that owns 10% or more of the OCV Common Stock prior to the Effective Time (including, but not limited to, Ascent) and any Creditor who receives 10% or more of the OCC Common Stock upon initial issuance thereof in connection with the Transactions will be entitled to certain registration rights set forth in the Registration Rights Agreement (the "Registration Rights Agreement") described under the caption "The Transactions--Registration Rights." The holder of the Series C Warrant will also be entitled to certain registration rights under the Registration Rights Agreement. See "The Transactions--Registration Rights." STOCKHOLDERS' CONSENT Certain stockholders of OCV, including Ascent, Robert Snyder, President, Chief Executive Officer and a director of OCV, and Richard Fenwick, Sr., a director of OCV, who own, in the aggregate, approximately 86.5% of the outstanding shares of OCV Common Stock, acting pursuant to Section 228 of the Delaware General Corporation Law (the "DGCL"), have consented in writing to the adoption of the Merger Agreement and to the consummation of the Merger. As a result, pursuant to Section 228 of the DGCL, no special meeting of the stockholders of OCV is required to approve the Merger Agreement. EXCHANGE OF CERTIFICATES As soon as practicable after the Merger, holders of certificates that formerly represented shares of OCV Common Stock will receive a letter of transmittal containing instructions for the surrender of such certificates in exchange for certificates representing shares of OCC Common Stock and certificates representing Series A Warrants and, if the holder is entitled to a fractional share of OCC Common Stock, a check representing such cash payable in lieu of any fractional share of OCC Common Stock. See "The Transactions--The Merger--Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock Certificates; Fractional Shares." INTERESTS OF CERTAIN PERSONS IN THE MERGER Certain stockholders, members of the Board of Directors and management of OCV may be deemed to have certain interests in the Merger, in addition to their interests generally as stockholders of OCV. Immediately prior to consummation of the Transactions, Ascent will own approximately 78.9% of the outstanding OCV Common Stock. Following the consummation of the Transactions, Ascent will own approximately 57.2% of the OCC Common Stock, assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and the exercise of any Warrants. See "Beneficial Ownership of OCV and OCC Common Stock." In addition, in connection with the Transactions, On Command Corporation will enter into (i) the Corporate Agreement (as defined herein), pursuant to which, among other things, On Command Corporation will agree not to incur any indebtedness without Ascent's prior consent, other than indebtedness under the OCC Credit Facility (as defined herein) and refinancings thereof and indebtedness incurred in the ordinary course of business, which together shall not exceed $100 million in the aggregate, and (ii) the Services Agreement (as defined herein), pursuant to which Ascent will provide certain strategic planning, administrative, financial, legal and other services to On Command Corporation for an annual fee of $1.2 million and reimbursement of certain of Ascent's actual out-of-pocket expenses in connection with rendering such services (not including overhead and the cost of its personnel). After consummation of the Transactions, Ascent will no longer be obligated to provide funding to OCV and will have no obligation to fund the operatins of On Command Corporation. The OCV Board of Directors was aware of these interests of its directors and officers and considered them, among other matters, in approving the Merger Agreement and the transactions contemplated thereby. See "The Transactions--The Merger--Interests of Certain Persons in the Merger." APPRAISAL RIGHTS Holders of OCV Common Stock who have not consented to the adoption of the Merger Agreement and who (a) deliver to OCV a written demand for appraisal of their shares of OCV Common 10 13 Stock and (b) meet certain other statutory requirements, will be entitled to have the value of their shares appraised in accordance with Section 262 of the DGCL, a copy of which is included as Annex V to this Information Statement/Prospectus. See "The Transactions--The Merger--Appraisal Rights." ANTICIPATED ACCOUNTING TREATMENT The Transactions will be accounted for using the historical book value of the assets, liabilities and stockholders equity acquired from OCV by On Command Corporation and On Command Corporation's management's estimate of the fair value of Spectradyne's assets to be acquired and liabilities to be assumed by On Command Corporation. The final purchase price allocation for the Debtors' net assets will be determined at a future date (no later than one year from the Closing Date), which may result in adjustments to the preliminary allocation. However, in the opinion of On Command Corporation's management, the preliminary allocation of the purchase price reflects On Command Corporation's best estimate and all adjustments necessary to fairly state the pro forma financial information presented in this Information Statement/Prospectus. OPINION OF ALLEN & COMPANY Allen & Company, financial advisor to Ascent and OCV, has rendered written opinions, dated April 18, 1996, that, subject to certain assumptions, as of such date, the consideration to be received by the holders of Ascent common stock (indirectly as a result of Ascent's ownership of OCV Common Stock) and OCV Common Stock (directly as a result of the Transactions) pursuant to the transactions contemplated by the Plan Sponsor Agreement was fair, from a financial point of view, to the holders of Ascent common stock and OCV Common Stock. See "The Transactions--Opinion of Allen & Company." LISTING OF OCC COMMON STOCK AND WARRANTS The OCV Common Stock currently is not listed on any national securities exchange or quoted on any automated quotation system. Upon consummation of the Merger, the OCC Common Stock and the Warrants are expected to be listed on the Nasdaq National Market under the symbols "ONCO" and "ONCOW," respectively. CERTAIN FEDERAL INCOME TAX CONSEQUENCES On Command Corporation has received an opinion of Latham & Watkins, counsel to OCV, to the effect that, based upon certain representations of On Command Corporation, Merger Sub, Ascent and OCV, among others, the Merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and as a result, holders of OCV Common Stock will recognize no gain or loss upon the conversion of shares of OCV Common Stock into shares of OCC Common Stock and Series A Warrants, except for gain or loss for federal income tax purposes recognized on receipt of cash in lieu of any fractional share interest in OCC Common Stock. All holders of OCV Common Stock should read carefully the detailed discussion under the caption "Certain Federal Income Tax Consequences." RISK FACTORS Holders of OCV Common Stock should take into account the specific considerations set forth under "Risk Factors" as well as the other information set forth in this Information Statement/Prospectus. In particular, OCV stockholders should take into account the following risk factors: (i) following the Transactions, Ascent will have the ability to control On Command Corporation; (ii) due to restrictions on 11 14 Ascent and its principal stockholder, COMSAT, On Command Corporation will be subject to certain restrictions on its ability to raise capital through debt financing; (iii) On Command Corporation may be dependent on additional capital to implement its strategy; (iv) there can be no assurance that On Command Corporation can successfully integrate the businesses of OCV and Spectradyne; (v) there is no prior public market for the OCC Common Stock and the price of the OCC Common Stock is subject to possible volatility; (vi) the in-room entertainment industry is highly competitive; (vii) the loss of certain significant customers would have a material adverse effect on On Command Corporation's business; (viii) On Command Corporation's business will be dependent on the performance of the lodging industry; (ix) On Command Corporation's assets are subject to the risk of technological obsolescence; (x) On Command Corporation may be dependent on certain key personnel of OCV and Ascent with respect to the operations at On Command Corporation after the closing of the Transactions; (xi) On Command Corporation's business may be subject to seasonality; and (xii) certain anti-takeover provisions in On Command Corporation's Certificate of Incorporation and Bylaws, as well as certain provisions of the DGCL, could increase the difficulty of effecting a change of control of On Command Corporation, thereby potentially depriving stockholders from realizing a premium over the prevailing market price of the Common Stock. FOR A MORE DETAILED DISCUSSION OF THESE AND OTHER RISK FACTORS IN CONNECTION WITH THE MERGER AND ACQUISITION, SEE "RISK FACTORS." COMPARATIVE MARKET PRICES AND DIVIDEND POLICY Prior to the Transactions, neither the OCC Common Stock nor the OCV Common Stock were listed on a national securities exchange or the Nasdaq National Market. Prior to the Merger, Ascent will be the sole stockholder of On Command Corporation. As a result, no meaningful comparison between the market prices of the OCC Common Stock and the OCV Common Stock can be made. Since 1992, neither On Command Corporation nor OCV have declared or paid dividends on their common stock, except that OCV has declared a contingent dividend to holders of its common stock on September 18, 1996 payable out of some or all of the proceeds of the exercise of the Hilton Option (as defined herein). See "Beneficial Ownership of OCV and OCC Common Stock." For each of On Command Corporation and OCV, the declaration and payment of dividends are subject to the discretion of the Board of Directors. It is the current policy of each of On Command Corporation and OCV to retain earnings, if any, to finance the operations and expansion of each of On Command Corporation's and OCV's businesses. Any determination as to the payment of dividends in the future will depend upon, among other things, general business conditions, On Command Corporation's or OCV's respective earnings, financial conditions, capital needs and other factors deemed pertinent by their respective boards of directors, including limitations, if any, on the payment of dividends under state law and under any existing indebtedness of On Command Corporation or OCV, as the case may be. For a discussion of limitations on the ability to pay dividends contained in existing indebtedness of On Command Corporation, see "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources." 12 15 SUMMARY PRO FORMA FINANCIAL INFORMATION The following summary pro forma financial information of On Command Corporation is derived from the financial statements of OCV and the consolidated financial statements of SpectraVision included elsewhere herein and give pro forma effect to the Transactions as if they had occurred on January 1, 1995 with respect to the statement of operations data, and on June 30, 1996 with respect to the balance sheet data. See "Available Information." The summary pro forma financial information is not necessarily indicative of what the results of operations or the financial position of On Command Corporation would have been had the Transactions occurred on such dates, nor is such data necessarily indicative of the results of operations or financial position of On Command Corporation that can be expected for any future periods or at any future date. The following summary pro forma financial information should be read together with the Financial Statements of OCV, the Consolidated Financial Statements of SpectraVision and the Pro Forma Financial Statements of On Command Corporation included elsewhere in this Information Statement/Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED Six Months Ended DECEMBER 31, 1995 June 30, 1996 ----------------- ---------------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues........................................................... $226,045 $120,502 Total costs and expenses........................................... 243,011 126,706 Loss from operations............................................... (16,966) (6,204) Net loss........................................................... (23,638) (8,839) Net loss per common and equivalent share........................... (0.79) (0.29) Shares used in per share calculations (in thousands)............... 30,000 30,000 OTHER DATA: EBITDA(1).......................................................... $ 44,599 $ 31,503 Rooms served at end of period...................................... 911,406 915,218 Hotels served at end of period..................................... 3,109 3,141
AT JUNE 30, 1996 ---------------------- (Dollars in thousands, except per share data) BALANCE SHEET DATA: Total assets................................................................................ $391,339 Total debt.................................................................................. 70,568 Total stockholders' equity.................................................................. 271,877 Book value per share........................................................................ 9.06
- ----------------- (1) Earnings before interest expense, income taxes, depreciation and amortization and excluding certain extraordinary or nonrecurring events ("EBITDA") is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 13 16 HISTORICAL SUMMARY SELECTED FINANCIAL INFORMATION The historical summary selected financial information of OCV and the historical summary selected consolidated financial information of SpectraVision have been derived from their respective historical financial statements and should be read in conjunction with such financial statements and notes thereto, included elsewhere in this Information Statement/Prospectus, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Interim financial information as of and for the six months ended June 30, 1996 and June 30, 1995 reflect, in the opinion of the managements of OCV and SpectraVision, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information. Results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the fiscal year as a whole. OCV
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------- ------------------ 1995 1994 1993 1996 1995 -------- -------- -------- -------- -------- (Dollars in thousands, except per share data) INCOME STATEMENT DATA: Total net revenues ....................... $102,059 $ 81,609 $ 30,204 $ 62,490 $ 51,331 Total direct costs of revenues ........... 48,817 47,786 12,912 27,940 27,531 Total operating expenses ................. 45,091 27,976 14,955 30,674 19,524 Income from operations ................... 8,551 5,847 2,337 3,876 4,276 Net income ............................... 4,902 3,456 1,358 1,624 2,508 Net income applicable to common stock .... 4,261 2,856 1,179 1,301 2,174 Net income per common and equivalent share .................................. 0.62 0.51 0.30 0.16 0.36 Shares used in per share calculations (in thousands) ............................. 6,833 5,571 3,896 7,903 6,015 OTHER DATA: EBITDA(1) ................................ $ 37,288 $ 23,381 $ 10,157 $ 25,169 $ 15,772 Cash dividends per share ................. -- -- -- -- -- Rooms served at end of period ............ 361,000 248,000 124,000 419,000 307,000 Hotels served at end of period ........... 1,221 751 272 1,500 996 BALANCE SHEET DATA (AT END OF PERIOD): Total assets ............................. $211,005 $138,884 $ 92,363 $232,915 $ -- Total debt ............................... 15,942 1,025 1,842 29,270 -- Redeemable common stock .................. 11,684 11,043 10,443 12,007 -- Total stockholders' equity ............... 169,804 108,949 67,817 173,214 -- Book value per share ..................... 23.33 -- -- 23.80 --
- -------------------- (1) EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 14 17 SPECTRAVISION
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ ------------------------- 1995 1994 1993 1996 1995 -------- -------- -------- -------- -------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Total revenues ......................... $ 123,986 $ 142,384 $ 162,993 $ 58,012 $ 65,208 Total direct costs ..................... 52,813 58,015 58,834 27,088 25,884 Write-down of hotel contracts .......... -- 196,256 -- -- -- Loss before extraordinary items ........ (73,645) (254,284) (43,057) (22,786) (38,729) Extraordinary loss ..................... (915) -- (2,699) -- (915) Net loss ............................... (74,560) (254,284) (45,756) (22,786) (39,644) Net loss per common and equivalent share before extraordinary items and cumulative effect of change in accounting principle ................... (3.07) (10.60) (2.37) (0.95) (1.65) Shares used in per share calculation (in thousands) ............. 23,984 23,984 18,178 23,984 23,984 OTHER DATA: EBITDA(1) .............................. $ 866 $ 19,148 $ 55,790 $ 2,734 $ 8,756 Cash dividends per share ............... -- -- -- -- -- Rooms served at end of period .......... 550,406 635,378 684,599 496,218 608,146 Hotels served at end of period ......... 1,888 2,308 2,442 1,641 2,148 BALANCE SHEET DATA (AT END OF PERIOD): Total assets ........................... $ 205,622 $ 242,822 $ 409,478 $ 194,637 -- Total debt ............................. 28,667 510,563 436,557 41,298 -- Liabilities subject to settlement under reorganization ....................... 579,587 -- -- 576,040 -- Stockholders' deficit .................. (447,608) (373,025) (118,614) (472,165) -- Book value per share ................... (18.66) -- -- (19.69) --
- ------------------- (1) EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 15 18 RISK FACTORS OCV stockholders should be aware that the distribution and ownership of OCC Common Stock in exchange for OCV Common Stock involves certain risk factors, including those which could adversely affect the value of their holdings described below and elsewhere in this Information Statement/Prospectus. Because in the Merger the OCV Common Stock will be converted into the right to receive OCC Common Stock and Series A Warrants, OCV stockholders should consider carefully the information set forth under the captions "Description of On Command Corporation Capital Stock" and "Comparison of Stockholder Rights" in addition to the following factors. CONTROL BY ASCENT Following the consummation of the Transactions, Ascent will own approximately 57.2% of the OCC Common Stock, assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and the exercise of any Warrants. See "Beneficial Ownership of OCV and OCC Common Stock." Accordingly, Ascent will have the ability to control the management and policies of On Command Corporation and the outcome of matters submitted to the stockholders for approval, including the election of directors. See "The Transactions--The Merger--Interests of Certain Parties in the Merger." In turn, COMSAT owns 80.7% of Ascent outstanding common stock. RESTRICTIONS ON DEBT FINANCINGS Pursuant to an agreement to be entered into between Ascent and On Command Corporation (the "Corporate Agreement"), On Command Corporation will agree, among other things, not to incur any indebtedness without Ascent's prior written consent, other than indebtedness under the credit facility to be entered into by On Command Corporation in connection with the Transactions (the "OCC Credit Facility") and indebtedness incurred in the ordinary course of operations, which together shall not exceed $100 million in the aggregate; provided that not more than $50 million of such indebtedness may constitute long-term debt. See "The Transactions-The Merger--Interests of Certain Persons in the Merger." Restrictions on On Command Corporation's ability to incur additional debt could adversely affect On Command Corporation's plans for growth, its ability to develop new products and technologies and its ability to meet its liquidity needs. See "--Dependence on Additional Capital for Growth" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, pursuant to a corporate agreement between Ascent and COMSAT (the "COMSAT Agreement"), Ascent has agreed not to incur any indebtedness, other than under Ascent's existing credit facility (and refinancings thereof) and indebtedness incurred in the ordinary course of business, which together shall not exceed $175 million in the aggregate, without COMSAT's consent. In contemplation of the closing of the Transactions, COMSAT has consented to permit Ascent to incur consolidated indebtedness (including indebtedness of On Command Corporation) of up to $216 million in the aggregate; provided that: (i) not more than $50 million of such indebtedness may constitute long-term debt; and (ii) indebtedness in excess of $175 million may only be incurred to satisfy funding requirements for 1996. A primary purpose of the COMSAT Agreement is, and a primary purpose of the Corporate Agreement will be, to require Ascent and On Command Corporation to coordinate their capital requirements with COMSAT so that COMSAT can monitor its compliance with the regulations of the Federal Communications Commission (the "FCC") applicable to the capital structure and debt financing activities of COMSAT and its consolidated subsidiaries. COMSAT is required to submit a financial plan to the FCC for review annually. Under existing FCC guidelines, COMSAT is subject to a maximum long-term debt to total capital ratio of 45%, a limit of $200 million in short-term debt and interest coverage ratio of 2.3 to 1. COMSAT has requested a temporary decrease in the interest coverage ratio, which is measured at year end, to a minimum of 1.9 to 1 for the 1996 plan year and an increase in the short-term debt limit to $325 million as long as the financial statements of Ascent are consolidated with those of COMSAT. COMSAT has informed Ascent that COMSAT was in compliance with both the long-term debt to total capital ratio and the short-term debt limit at June 30, 1996 and expects to be in compliance with those guidelines and the interest coverage ratio guidelines at December 31, 1996 if the short-term debt limit and the interest coverage ratio are modified as requested. If the FCC approves COMSAT's request, COMSAT has further informed Ascent that it expects that the cash flows from operations and COMSAT's consolidated short-term borrowing capacity, including indebtedness authorized under Ascent's credit facility and the 16 19 refinancing thereof and the OCC Credit Facility, will be sufficient to fund COMSAT's aggregate cash requirements for the balance of 1996. A number of factors could cause the funding requirements of COMSAT, Ascent and On Command Corporation to differ materially from those projected, including, but not limited to, the performance of their respective operating subsidiaries, unanticipated costs associated with the consummation of the Transactions or integration of SpectraVision's and OCV's businesses, the level of ticket sales and other revenues by Ascent's professional sports franchises, and market conditions. Management of On Command Corporation and Ascent believe that the $100 million limit on On Command Corporation's indebtedness and the $216 million aggregate limit on Ascent's indebtedness will be adequate to fund their respective operations through the end of 1996. For 1997, management of On Command Corporation and Ascent believe that it will be necessary for On Command Corporation to seek approval from Ascent to increase its debt limit, and for Ascent to seek approval from COMSAT to increase its debt limit. As part of Ascent's 1997 operating and capital planning process, Ascent's management will request that COMSAT increase Ascent's debt limit beginning in January 1997. There can be no assurance, however, that COMSAT will approve any increase in Ascent's debt limit. If Ascent were not to obtain approval to increase its debt limit, it is highly unlikely that Ascent would approve an increase in On Command Corporation's debt limit. If On Command Corporation's debt limit were not increased, On Command Corporation may be required to reduce or reschedule planned capital investments, reduce cash outlays, reduce debt, sell assets or sell equity. Finally, COMSAT has informed Ascent that if COMSAT were to fail to satisfy one or more of the FCC guidelines as of an applicable measurement date, COMSAT would be required to seek advance FCC approval of future financing activities on a case by case basis. If such approval were not granted, On Command Corporation could be required to reduce or reschedule planned capital investments, reduce cash outlays, reduce debt or sell assets. DEPENDENCE ON ADDITIONAL CAPITAL FOR GROWTH The growth of On Command Corporation's business requires substantial investment on a continuing basis to finance capital expenditures and related expenses. Historically, OCV has relied on capital provided by Ascent and cash flow from operations to finance its growth. However, Ascent is not obligated to provide any additional capital or debt financing to OCV or On Command Corporation after the closing of the Transactions. On Command Corporation intends to use cash flow from operations and additional borrowings (subject to the limitations discussed under "--Restrictions on Debt Financings") to support its growth. Whether or when On Command Corporation can achieve cash flow levels sufficient to support its anticipated growth cannot be accurately predicted. Unless such cash flow levels are achieved, On Command Corporation may require additional borrowings or the sale of debt or equity securities (subject to the limitations described under "--Restrictions on Debt Financings"), or some combination thereof, to provide funding for growth or, alternatively, may have to reduce growth to a level that can be supported by internally generated cash flow. On Command Corporation can give no assurances with respect to the impact on the results of operations and financial condition if On Command Corporation is required to reduce growth to a level that can be supported by internally generated cash flow. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." INTEGRATION OF OCV AND SPECTRADYNE BUSINESSES Although OCV and Spectradyne will remain distinct entities, the full benefits of On Command Corporation serving as a holding company for each of OCV and Spectradyne will require the coordination of operating systems, financial reporting, sales, marketing and management. This will require substantial attention from the management of On Command Corporation. In addition, successfully integrating the businesses of OCV and Spectradyne may require additional capital. See "--Dependence on Additional Capital for Growth." There can be no assurance that the businesses of OCV and Spectradyne can be successfully integrated. The inability to successfully integrate the businesses of OCV and Spectradyne could have a material adverse effect on the financial condition or results of operations of On Command Corporation. NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Closing Date, there has been no public market for OCC Common Stock or the Warrants. Although application will be made to list the OCC Common Stock and Warrants on the Nasdaq National Market, there can be no assurance that an active public market will develop or be sustained or as to the prices at which the OCC Common Stock and Warrants will trade following the Closing Date. Further, the stock markets may experience volatility that affects the market prices of 17 20 companies in ways unrelated to the operating performance of such companies. These market fluctuations may adversely affect the market price of the OCC Common Stock or Warrants. HIGHLY COMPETITIVE IN-ROOM ENTERTAINMENT INDUSTRY The hotel in-room entertainment industry is highly competitive. Due to the high level of penetration in the United States lodging industry already achieved by participants in the in-room entertainment industry and the low rate of construction and expansion of hotel properties in the United States, most of the growth opportunities in the in-room entertainment industry currently involve securing contracts to serve hotels that are already being served by a competing vendor, expanding internationally and broadening the range of services provided. These circumstances have led to increasing competition for contract renewals, particularly at hotels operated by major hotel chains. There can be no assurance that On Command Corporation will obtain new contracts with hotels currently served by other vendors or that On Command Corporation will be able to retain contracts with the hotels served by OCV and Spectradyne when those contracts expire. The loss by On Command Corporation of one or more of the major hotel chain customers, such as Marriott, Hyatt or Hilton, could have a material adverse impact on On Command Corporation's results of operations. See "--Dependence on Significant Customers." In addition, there are a number of potential competitors that could utilize their existing infrastructure to provide in-room entertainment to the lodging industry, including cable companies (including wireless cable), telecommunications companies and direct-to-home and direct broadcast satellite companies. Some of these potential competitors already are providing free-to-guest services to hotels and testing video-on- demand. Some of these potential competitors have substantially greater resources than On Command Corporation will have after consummation of the Transactions. See "Business--Competition." DEPENDENCE ON SIGNIFICANT CUSTOMERS Marriott, Hilton and Hyatt accounted for approximately 16.0%, 6.7% and 5.4%, respectively, of On Command Corporation's pro forma revenues for the year ended December 31, 1995. The loss of any of these customers, or the loss of a significant number of other hotel chain customers, could have a material adverse effect on On Command Corporation's results of operations or financial condition. See "Business--OCV" and "--Spectradyne." DEPENDENCE ON PERFORMANCE OF LODGING INDUSTRY The business of each of OCV and Spectradyne is, and the business of On Command Corporation will be, closely linked to the performance of the hotel industry. Declines in hotel occupancy as a result of general business, economic, seasonal and other factors can have a significant adverse impact on On Command Corporation's results of operations. See "Business--On Command Video Corporation" and "--Spectradyne, Inc." RISK OF TECHNOLOGICAL OBSOLESCENCE Technology in the entertainment and communications industry is continuously changing as new technologies and developments continue to be introduced. There can be no assurance that future technological advances will not result in improved equipment or software systems that could adversely affect On Command Corporation's competitive position. In order to remain competitive, On Command Corporation must maintain the programming enhancements, engineering and technical capability and flexibility to respond to customer demands for new or improved versions of its systems and new 18 21 technological developments, and there can be no assurance that On Command Corporation will have the financial or technological resources to be successful in doing so. DEPENDENCE ON KEY PERSONNEL On Command Corporation's success will be dependent upon the contributions of its executive officers, especially Robert M. Kavner, its President and Chief Executive Officer, Brian A.C. Steel, its Executive Vice President, Chief Financial Officer and Chief Operating Officer, and Robert Snyder, its Vice Chairman. The loss of the services of such executive officers could have a material adverse effect on On Command Corporation. On Command Corporation's success also depends on its continued ability to attract and retain highly skilled and qualified personnel. There can be no assurance that On Command Corporation or its subsidiaries will be successful in attracting and retaining such personnel. Messrs. Kavner and Steel have entered into employment agreements with On Command Corporation, and Mr. Snyder has entered into an employment agreement with OCV. See "Management." SEASONALITY The business of each of OCV and Spectradyne is, and the business of On Command Corporation will be, seasonal, with higher revenues per room realized during the summer months and lower revenues per room realized during the winter months due to business and vacation travel patterns. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Seasonality." ANTI-TAKEOVER PROTECTIONS Following the consummation of the Transactions, Ascent will own approximately 57.2% of the OCC Common Stock, assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and the exercise of any Warrants. See "Beneficial Ownership of OCV and OCC Common Stock." Accordingly, On Command Corporation will not be able to engage in any strategic transactions without the approval of Ascent. Even if Ascent's interest in On Command Corporation were reduced below such level, On Command Corporation's Certificate of Incorporation contains certain provisions that could make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of On Command Corporation. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of OCC Common Stock. Certain of such provisions allow On Command Corporation to issue preferred stock with rights senior to those of the OCC Common Stock and impose various procedural and other requirements which could make it more difficult for stockholders to effect certain corporate actions. See "Description of On Command Corporation Capital Stock" and "Comparison of Stockholder Rights." 19 22 STOCKHOLDERS' CONSENT Pursuant to the Certificate of Incorporation of OCV, the approval and adoption of the Merger Agreement requires the affirmative vote of the holders of record of two-thirds of the shares of OCV Common Stock. Section 228 of the DGCL provides that any action which may be taken at any annual or special meeting of stockholders of a Delaware corporation may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action to be taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action. Certain stockholders of OCV, including Ascent, Robert Snyder, President, Chief Executive Officer and a director of OCV and Richard Fenwick, Sr., a director OCV, who own, in the aggregate, approximately 86.5% of the outstanding shares of OCV Common Stock, acting pursuant to Section 228 of the DGCL, have consented in writing to the adoption of the Merger Agreement and to the consummation of the Merger. As a result, pursuant to Section 228 of the DGCL, no special meeting of the stockholders of OCV is required to approve the Merger Agreement. Holders of OCV Common Stock who have not consented to the adoption of the Merger Agreement and who (a) deliver to OCV a written demand for appraisal of their shares of OCV Common Stock and (b) meet certain other statutory requirements, will be entitled to have the value of their shares appraised in accordance with Section 262 of the DGCL, a copy of which is included as Annex VI to this Information Statement/Prospectus. See "The Transactions--The Merger--Appraisal Rights." 20 23 THE TRANSACTIONS GENERAL This section of the Information Statement/Prospectus describes certain aspects of the proposed Transactions, including the principal terms of the Merger Agreement, the Acquisition Agreement, the Warrant Agreement and the Registration Rights Agreement. A copy of the Merger Agreement is attached to this Information Statement/Prospectus as Annex I and is incorporated herein by reference; a copy of the Acquisition Agreement is attached to this Information Statement/Prospectus as Annex II and is incorporated herein by reference; a copy of the Warrant Agreement is attached to this Information Statement/Prospectus as Annex III and is incorporated herein by reference; and a copy of the Registration Rights Agreement is attached to this Information Statement/Prospectus as Annex IV and is incorporated herein by reference. The descriptions set forth below of the terms of the Merger Agreement, the Acquisition Agreement, the Warrant Agreement and the Registration Rights Agreement are qualified in their entirety by reference to such Annexes. All stockholders of OCV are urged to read each of the Merger Agreement, the Acquisition Agreement, the Warrant Agreement and the Registration Rights Agreement in its entirety. BACKGROUND OF THE TRANSACTIONS In June 1993, SpectraVision entered into a ten-year exclusive contract with EDS to install and maintain a digital satellite delivered hotel PPV system. By late 1994, the costs associated with the EDS contract combined with SpectraVision's high debt levels created financial difficulties for SpectraVision. In early 1995, SpectraVision determined that a financial restructuring would be required to ensure SpectraVision's long-term survival. SpectraVision conducted restructuring negotiations with representatives of its secured and unsecured creditors during April and May 1995, working toward the development of an overall restructuring plan. In June 1995, SpectraVision concluded that a filing for reorganization under Chapter 11 of the Bankruptcy Code should be made in order to preserve the value of its assets and to ensure that the business had sufficient cash resources to continue operations while it completed the financial restructuring process. On June 8, 1995, the Debtors filed the Bankruptcy Case in the Bankruptcy Court. In April 1995, Gary Wilson Partners approached Ascent to discuss methods for Ascent to capitalize on SpectraVision's financial difficulties. Ascent retained Gary Wilson Partners to assist and advise Ascent and OCV as to a potential transaction involving SpectraVision. On June 23, 1995, the Creditors' Committee was appointed by the United States Trustee for the District of Delaware pursuant to Section 1102 of the Bankruptcy Code. The Creditors' Committee has the right to review and object to certain business transactions and to participate in the negotiation of SpectraVision's plan of reorganization. In November 1995, the Bankruptcy Court authorized SpectraVision to retain Salomon Brothers Inc to assist SpectraVision in maximizing the value of the SpectraVision estate by conducting a bidding process. The objective of the bidding process was to select a plan sponsor to reorganize SpectraVision. The plan sponsor's incentives were: (i) to include protection for the plan sponsor by requiring any new bid to be at least $4.0 million higher than the plan sponsor's bid; (ii) a breakup fee of $2.0 million; and (iii) expense reimbursement of up to $400,000. The proposed schedule for the bidding process was for bids to be submitted by January 5, 1996. Based on Ascent's earlier communications with SpectraVision and the apparent inability of SpectraVision to obtain a settlement with EDS, in November 1995 Ascent determined that it would not participate in the bidding process. On December 20, 1995, the Bankruptcy Court approved the proposed bidding process (the "Procedures Order"), but moved the date for submitting bids to January 29, 1996. In January 1996, pursuant to the Procedures Order, the Debtors solicited bids from third parties for financial restructuring 21 24 proposals that would allow the Debtors to emerge from bankruptcy pursuant to a business combination with a third party. During December 1995 and January 1996, SpectraVision and EDS filed motions in the Bankruptcy Court relating to whether the EDS contract would be accepted or rejected on an ongoing basis. On January 18, 1996, SpectraVision and EDS entered into an interim agreement that was filed with the Bankruptcy Court for approval. The agreement resolved certain issues regarding field service amounts owed to EDS in a way that Ascent management believed signalled EDS's willingness to accept a plan of reorganization that could drastically reduce SpectraVision's obligations to EDS. In subsequent conversations with EDS personnel, Ascent management determined that EDS would be open to negotiating an agreement with Ascent and OCV for the provision of service to On Command Corporation on an interim basis, on terms that could make the transaction attractive. In consideration of the EDS position, on January 29, 1996, representatives of Ascent submitted a proposal to acquire substantially all of SpectraVision's assets. On February 1, 1996, the Bankruptcy Court approved the interim agreement between SpectraVision and EDS. On April 19, 1996, SpectraVision, Ascent, OCV and the Creditors' Committee entered into the Plan Sponsor Agreement pursuant to which it was agreed that Ascent would be plan sponsor for the SpectraVision plan of reorganization and that On Command Corporation, directly or indirectly, would acquire the assets or the capital stock and certain liabilities of OCV and Spectradyne, subject to the terms and conditions of the Plan Sponsor Agreement. The Merger Agreement, the Acquisition Agreement, the Warrant Agreement and the Registration Rights Agreement were or will be entered into to implement the Plan Sponsor Agreement. On September 13, 1996, the Bankruptcy Court entered an order and judgment (the "Confirmation Order") confirming SpectraVision's First Amended Joint Plan of Reorganization, dated August 2, 1996, as supplemented on August 27, 1996 and modified on September 11, 1996 (as supplemented and modified, the "Plan"). The Plan incorporates the terms of the Transactions contained in this Information Statement/Prospectus. As of the date of this Information Statement/Prospectus there have not been any objections to or appeals of the Confirmation Order. THE MERGER Upon the terms and subject to the conditions of the Merger Agreement and in accordance with the DGCL, at the Effective Time, Merger Sub will merge with and into OCV. OCV will be the Surviving Corporation in the Merger, and will continue its corporate existence under Delaware law under the name On Command Video Corporation. At the Effective Time, the separate corporate existence of Merger Sub will cease. The Certificate of Incorporation and Bylaws of OCV, as in effect immediately prior to the Effective Time, will be the Certificate of Incorporation and Bylaws of the Surviving Corporation, until thereafter amended or repealed in accordance with their terms and as provided by law. Merger Consideration Upon consummation of the Merger, each share of OCV Common Stock that is issued and outstanding immediately prior to the Effective Time (other than shares of OCV Common Stock held by OCV or by its direct or indirect subsidiaries and Dissenting Shares), will be converted into the right to receive the Merger Consideration, which shall include the following: (i) approximately 2.84 shares of OCC Common Stock, (ii) such additional number of shares of Reserved Stock, if any, to which holders of OCV Common Stock may be entitled as described below under "--The Acquisition," and (iii) Series A Warrants to purchase, on a cashless basis, approximately 18.61% of a share of OCC Common Stock. The Initial Shares to be issued to holders of OCV Common Stock will represent, in the aggregate, 72.5% of the total number of shares of OCC Common Stock to be issued pursuant to the Merger Agreement and the Acquisition Agreement (of which shares representing approximately 57.2% will be issued to Ascent), assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and the exercise of any Warrants. Cash will be paid in lieu of the issuance of fractional shares of OCC Common Stock as described below under "--Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock Certificates; Fractional Shares." 22 25 Holders of OCV Common Stock who (i) have not consented to the adoption of the Merger Agreement, (ii) have demanded appraisal rights with respect to their OCV Common Stock in accordance with Section 262 of the DGCL and (iii) have perfected (or who have not effectively withdrawn or lost) their rights to appraisal and payment under Section 262 of the DGCL, will be required to exchange their shares of OCV Common Stock (the "Dissenting Shares") for a cash payment in the amount of the appraised value of such shares. Such holders will not be entitled to receive any of the Merger Consideration. See "--Appraisal Rights." All holders of OCV Common Stock who do not satisfy all of the requirements to perfect appraisal rights described in this paragraph will be required to exchange their shares of OCV Common Stock for the Merger Consideration. None of the shares of OCC Common Stock or Series A Warrants that would have been issued pursuant to the Merger Agreement in exchange for Dissenting Shares if such Dissenting Shares had been converted into the Merger Consideration will be issued to any holder of OCV Common Stock or any other person or entity in connection with the Transactions. The Merger Consideration (including the number of shares of OCC Common Stock and Series A Warrants issuable to an OCV stockholder upon exchange of such stockholder's shares of OCV Common Stock pursuant to the Merger) and the Series C Warrant was determined through arms'-length negotiations between Ascent and OCV on the one hand and the Debtors and the Creditors' Committee on the other hand. In consideration for certain investment banking and advisory services provided to Ascent and OCV in connection with the Transactions and for future advisory and other services to be rendered to On Command Corporation, Ascent agreed with Gary Wilson Partners to direct On Command Corporation to issue the Series C Warrant, which represents the ability to purchase approximately 9.2% of the OCC Common Stock that would be issued and outstanding (after exercise of all of the Warrants) at the Warrant Exercise Price (as defined below) to Gary Wilson Partners. As described further below, Ascent and Gary Wilson Partners have agreed to certain limitations and rights related to the Series C Warrant. Effective Time The effective time of the Merger (the "Effective Time") will be the time of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware or such later time as is specified in such Certificate of Merger. The Closing of the Merger (the "Closing") will take place as promptly as practicable following satisfaction or waiver of the conditions set forth in the Merger Agreement (other than those conditions which, by their terms, are to be satisfied at the Closing) unless another date is agreed to in writing by On Command Corporation, Merger Sub and OCV. Subject to certain limitations, the Merger Agreement may be terminated by either On Command Corporation or OCV if, among other reasons, the Transactions have not been consummated on or prior to October 30, 1996. See "--Conditions to the Consummation of the Merger" and "--Termination." Directors and Officers of the Surviving Corporation Following the Merger, Charles Lyons, Robert M. Kavner and James A. Cronin, III, will be the directors of the Surviving Corporation until their respective successors are duly elected or appointed and qualified, and the officers of OCV immediately prior to the Effective Time will be the officers of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation. Conversion of OCV Common Stock; Procedures for Exchange of OCV Stock Certificates; Fractional Shares 23 26 The conversion of shares of OCV Common Stock (other than shares of OCV Common Stock held by OCV or by any direct or indirect subsidiary of OCV, which shares of OCV Common Stock will be cancelled in the Merger, and other than Dissenting Shares) into the right to receive the Merger Consideration will occur at the Effective Time. As soon as practicable after the Effective Time, OCV will send a letter of transmittal form to each holder of OCV Common Stock. The letter of transmittal form will contain instructions with respect to the surrender of certificates representing shares of OCV Common Stock in exchange for certificates representing shares of OCC Common Stock and certificates representing the Series A Warrants for which the shares represented by the certificates so surrendered are exchangeable pursuant to the Merger Agreement. OCV STOCKHOLDERS SHOULD NOT FORWARD OCV STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS INSTRUCTING THEM WHERE TO SEND SUCH CERTIFICATES. As soon as practicable after the Effective Time, each holder of an outstanding certificate or certificates that prior thereto represented shares of OCV Common Stock shall, upon surrender to OCV of such certificate or certificates and acceptance thereof by OCV, be entitled to a certificate or certificates representing the whole number of shares of OCC Common Stock and the number of Series A Warrants into which the aggregate number of shares of OCV Common Stock previously represented by such certificate or certificates surrendered shall have been converted pursuant to the Merger Agreement, plus any cash payable in lieu of any fractional share of OCC Common Stock. OCV shall accept such certificates upon compliance with such reasonable terms and conditions as it may impose in order to effect an orderly exchange thereof in accordance with normal exchange practices. After the Effective Time, there shall be no further transfer on the records of OCV of certificates representing shares of OCV Common Stock, and if such certificates are presented to OCV for transfer, they shall be cancelled against delivery of certificates for shares of OCC Common Stock and certificates for Series A Warrants pursuant to the Merger Agreement. Until surrendered in accordance with the Merger Agreement, each certificate for shares of OCV Common Stock will be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration as contemplated by the Merger Agreement. No interest will be paid or will accrue on any cash payable in lieu of any fractional share of OCC Common Stock. On the Final Distribution Date (as defined below), each holder of an outstanding certificate representing OCV Common Stock that has been surrendered to, and accepted by, On Command Corporation shall be entitled to receive one or more certificates representing the whole number of shares of Reserved Stock, if any, into which such certificate representing OCV Common Stock has been converted pursuant to the Merger Agreement, plus any cash payable in lieu of any fractional share of Reserved Stock. No certificates representing fractional shares of OCC Common Stock shall be issued upon the surrender of certificates representing OCV Common Stock. With respect to each holder of OCV Common Stock that would have been entitled to receive a fractional share of OCC Common Stock, such holder shall be entitled to receive in lieu of such fractional share an amount of cash equal to the product of the average of the high and low trading price for the OCC Common Stock for the five trading days immediately following the Effective Time and the fractional share of OCC Common Stock that such holder would have been entitled to receive. 24 27 No dividends or other distributions with respect to OCC Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered certificate for shares of OCV Common Stock with respect to the OCC Common Stock issuable in respect thereof, and no cash payment in lieu of fractional shares will be paid to any such holder, until the surrender of such certificate in accordance with the Merger Agreement. Subject to the effect of applicable laws, following surrender of any such certificate, On Command Corporation will pay to the holder of the certificate representing whole shares of OCC Common Stock issued in exchange therefor, without interest, to the holder of such certificate all of the dividends and distributions that would have been paid to such holder if its certificate representing OCV Common Stock had been exchanged for OCC Common Stock immediately after the Effective Time. No Warrant shall provide any holder with the right to purchase a fractional share of OCC Common Stock. In the event that any holder of OCV Common Stock would be entitled to receive a Warrant to purchase a fractional share of OCC Common Stock, the number of shares of OCC Common Stock that such holder will have the right to purchase pursuant to such Warrant shall be rounded to the nearest whole number. Treatment of OCV Employee Stock Options The Merger Agreement provides that, prior to the Effective Time, the Board of Directors of OCV will adopt appropriate resolutions and take all other actions necessary to provide for the cancellation, as of the Effective Time, of all the outstanding stock options (the "Employee Stock Options") previously granted under the On Command Video Corporation 1987 Stock Option Plan (the "OCV Stock Option Plan"), whether or not then vested or exercisable. As of the Effective Time, or as soon as practicable thereafter, there will be substituted for each outstanding Employee Stock Option an equivalent option (each, a "New Employee Stock Option") to purchase shares of OCC Common Stock pursuant to the On Command Corporation Stock Option Plan. The number of shares of OCC Common Stock that a holder of any New Employee Stock Option will be entitled to purchase, the price at which shares of OCC Common Stock will be purchasable upon the exercise of any New Employee Stock Option, and the dates on which any New Employee Stock Option will vest and become exercisable will be determined by On Command Corporation's Board of Directors based upon the conversion ratio for OCV Common Stock. As of the Effective Time, (i) the On Command Corporation Stock Option Plan will become effective, and (ii) the OCV Stock Option Plan will terminate and OCV will ensure that following the Effective Time, subject to receipt of New Employee Stock Options, no holder of an Employee Stock Option or any participant in the OCV Stock Option Plan will have any right thereunder to acquire capital stock of OCV or the Surviving Corporation. See "Management--Stock Incentive Plans." Representations and Warranties The Merger Agreement contains representations and warranties of OCV that the financial statements of OCV that were supplied to the Debtors and the Creditors' Committee present fairly in accordance with GAAP (except as otherwise set forth in the notes thereto) the financial condition and results of operations at and for the period reported on therein; that there has been no material adverse change in such financial condition or results of operations of OCV prior to the Effective Time, and that no grounds exist that would allow any of OCV's five largest (by number of rooms served by OCV) hotel customers, or any of OCV's major studio suppliers or free-to-guest programming suppliers, to terminate their existing service contracts with OCV. 25 28 Pre- and Post-Closing Obligations In the Merger Agreement, OCV, On Command Corporation and Merger Sub agree that (i) prior to the Closing Date OCV shall operate its business in the ordinary course as conducted on April 19, 1996 and will use its best efforts to maintain favorable relationships with its major hotel customers; (ii) except as otherwise provided for in the Merger Agreement, OCV shall not incur any indebtedness other than OCV Debt (as defined below) prior to the Effective Time; (iii) if the Debtors desire to lease OCV equipment pursuant to one or more equipment leases and (a) such equipment is compatible with the Debtors' existing technology or OCV provides support services to the Debtors on terms similar to those it previously provided to COMSAT Video Enterprises, Inc. and (b) installation of such equipment will not breach any of the Debtors' contracts with the hotels it serves, then OCV shall have the right but not the obligation to lease such OCV equipment to the Debtors pursuant to one or more equipment leases; (iv) none of OCV, On Command Corporation and Merger Sub shall enter into any agreement that would adversely affect (a) its ability to perform its obligations under the Merger Agreement or (b) the rights of any other person or entity under the Merger Agreement, the Acquisition Agreement or the Procedures Order (as defined below); (v) On Command Corporation and OCV shall (a) cause any necessary filings with any governmental agency to be made expeditiously and (b) use their reasonable best efforts to obtain any necessary government or third-party approvals (including, without limitation, any filings or registrations with the Commission or state securities regulatory authorities); (vi) OCV shall use its reasonable best efforts to estimate the aggregate amount of OCV Debt that will be outstanding as of the Effective Time, which amount shall be used to calculate the Warrant Exercise Price; (vii) promptly after the date of the Merger Agreement, (a) On Command Corporation and OCV shall prepare and file with the Commission this Information Statement/Prospectus and On Command Corporation shall prepare and file with the Commission a Registration Statement on Form S-4, in which this Information Statement/Prospectus will be included as a prospectus, (b) each of On Command Corporation and OCV shall use its reasonable best efforts to have the Registration Statement declared effective under the Securities Act as soon as practicable after such filing and (c) OCV will use its reasonable best efforts to cause this Information Statement/Prospectus to be mailed to OCV's stockholders as soon as practicable after the Registration Statement has been declared effective under the Securities Act; (viii) On Command Corporation shall use its reasonable best efforts to cause the OCC Common Stock and Warrants to be issued to the holders of OCV Common Stock and the Creditors pursuant to the Merger Agreement and the Acquisition Agreement to be approved for listing on a securities exchange, subject to official notice of issuance, prior to the Closing Date, or at On Command Corporation's election, to be listed on the Nasdaq National Market; and (ix) OCV shall cooperate with On Command Corporation in connection with On Command Corporation obtaining the financing required to pay up to $40,000,000 of the DIP Loan (as defined below). The parties to the Merger Agreement further agree that after the Closing, OCV and On Command Corporation shall take such additional actions, and execute and deliver such additional documents and instruments, as may be reasonably necessary or appropriate to effect the transactions contemplated by, and to carry out the intent of, the Merger Agreement. The Merger Agreement also provides that, prior to the Effective Time, Ascent and its affiliates may enter into agreements with On Command Corporation with respect to the provision of management services, matters of corporate governance, technology licensing, tax sharing and other operating matters, subject to the approval of On Command Corporation's Board of Directors and on terms at least as favorable as may be available to On Command Corporation in comparable third-party transactions. See "--Interests of Certain Persons in the Merger." Conditions to the Consummation of the Merger 26 29 The obligation of OCV to consummate the Merger is subject to the satisfaction of each of the following conditions: (a) all consents and approvals required to consummate the Merger shall have been obtained; (b) as of the Closing Date, no court has entered an order that enjoins, restrains or prohibits the consummation of the Merger; (c) a registration statement covering both the OCC Common Stock and the Series A Warrants to be issued to OCV's stockholders as part of the Merger Consideration pursuant to the Merger Agreement shall have been filed with, and declared effective by (and no stop order or other action has been taken, and no proceeding has been commenced, to enjoin distribution of such shares) the Commission, and such OCC Common Stock and Series A Warrants shall have been qualified under all applicable state securities laws; and (d) prior to or contemporaneously with the consummation of the Merger, On Command Corporation (or, at the election of On Command Corporation, a wholly owned subsidiary of On Command Corporation) shall have acquired all of the capital stock of Spectradyne pursuant to and in accordance with the terms of the Acquisition Agreement. Termination of the Merger Agreement The Merger Agreement may be terminated by OCV prior to the Effective Time upon the occurrence of either of the following events (each, a "Termination Event"): (i) On Command Corporation has not acquired all of the capital stock of Spectradyne on or before October 30, 1996 or (ii) the Acquisition Agreement has been terminated for any reason. OCV may elect to exercise its right to terminate the Merger Agreement by sending a written notice (a "Termination Notice") to the other parties in the manner provided in the Merger Agreement. In the event of the termination of the Merger Agreement, the Merger Agreement will become void and there will be no liability on the part of any party thereto to any other party thereto. Regulatory Approvals The consummation of the Acquisition is conditioned upon, and the Merger Agreement is accordingly also conditioned upon (unless such condition is waived in writing by On Command Corporation), among other things, the issuance of an order by the Bankruptcy Court that confirms the Plan and as to which (i) both (a) the time to seek reconsideration, rehearing, or new trial by the rendering court (a "Post-Trial Motion"), and (b) the time (including time resulting from a timely filed motion under Rule 8002(c) under the Federal Rules of Bankruptcy Procedure) to appeal or to seek a petition for review or certiorari (hereinafter, an "Appellate Court Review"), has expired (without regard to whether time to seek relief of a judgment under Rule 60(b) of the Federal Rules of Civil Procedure or Rule 9024 of the Federal Rules of Bankruptcy Procedure has expired); and (ii) either (a) no Post-Trial Motion or request for Appellate Court Review is pending, or (b) a Post-Trial Motion or a request for Appellate Court Review is pending but the subject order of judgment has not been stayed, amended, modified or reversed by a court of competent jurisdiction or, if stayed, such stay has been vacated or is no longer in effect. Without limiting the foregoing, the pendency of, or request for, a Post-Trial Motion or an Appellate Court Review will not prevent an order from becoming final and being implemented, absent the entry of a stay by a court of competent jurisdiction and the continuation thereof. On September 13, 1996, the Bankruptcy Court entered the Confirmation Order and, as of the date of this Information Statement/Prospectus, there has been no Post-Trial Motion or request for Appellate Court Review. The waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 with respect to the Acquisition has expired. Fees and Expenses Except as described below, each party to the Merger Agreement shall bear its own expenses in connection with the Merger Agreement and the transactions contemplated thereby, regardless of whether the transactions contemplated by the Merger Agreement and the Acquisition Agreement are consummated. 27 30 The costs of registering the OCC Common Stock and the Series A Warrants and the costs of preparing and filing the Form S-4 Registration Statement containing this Information Statement/Prospectus will be paid by On Command Corporation. In the event that any OCC Common Stock and/or Warrants being issued to the Creditors are required to be registered under the Securities Act, all of the fees and expenses incurred in connection with such registration shall be paid by On Command Corporation. Amendment and Waiver The Merger Agreement may be altered or amended only by an instrument in writing by all the parties thereto. Except as otherwise contemplated by the Merger Agreement, neither On Command Corporation nor OCV may assign its rights or delegate its obligations under the Merger Agreement without the prior written consent of the other. The representations and warranties of OCV in the Merger Agreement shall expire on the Closing Date and neither OCV nor On Command Corporation shall have any liability after the Closing Date for any breach of any of its representations, warranties, covenants or agreements under the Merger Agreement; provided, however, that notwithstanding anything to the contrary in the Merger Agreement, following consummation of the Merger, the respective obligations of On Command Corporation and OCV (i) relating to the payment of the Merger Consideration and (ii) to take such additional actions, and execute and deliver such additional documents and instruments, as may be reasonably necessary or appropriate to effect the transactions contemplated by, and to carry out the intent of, the Merger Agreement, shall, in each case, survive the consummation of the Merger. Interests of Certain Persons in the Merger Certain stockholders, members of the Board of Directors and management of OCV may be deemed to have certain interests in the Merger, in addition to their interests generally as stockholders of OCV. All of such additional interests are described below, to the extent material, and except as described below such persons have, to the best knowledge of On Command Corporation and OCV, no material interests in the Merger apart from those of stockholders generally. The OCV Board of Directors was aware of these interests of its directors and officers and considered them, among other matters, in approving the Merger Agreement and the transactions contemplated thereby. As of September 15, 1996, Ascent beneficially owned and was entitled to vote 6,038,650 shares of OCV Common Stock, representing approximately 78.9% of the shares of OCV Common Stock, as adjusted to give effect to the exercise by Hilton of its option to purchase OCV Common Stock, which is expected to be exercised immediately prior to the Effective Time. See "Beneficial Ownership of OCV and OCC Common Stock." Upon consummation of the Transactions, Ascent will beneficially own at least 17,154,572 shares of OCC Common Stock, or approximately 57.2% of the total number of shares of OCC Common Stock (assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and the exercise of any Warrants), and will be able, among other things, to approve any corporate action requiring majority stockholder approval, including the election of a majority of the board of directors, certain amendments to On Command Corporation's Certificate of Incorporation and Bylaws and any other matter submitted to a vote of On Command Corporation stockholders, without the consent of the other stockholders of On Command Corporation. In addition, through its control of the Board of Directors of On Command Corporation, Ascent will be able to influence certain decisions, including decisions with respect to On Command Corporation's dividend policy, On Command Corporation's access to capital (including the decision to incur additional indebtedness or issue additional shares of OCC Common Stock), mergers or other business combinations involving On Command Corporation, the acquisition or disposition of assets by On Command Corporation and any change in control of On Command Corporation. 28 31 On Command Corporation and Ascent will enter into a management services agreement (the "Services Agreement") pursuant to which Ascent will provide certain strategic planning, administrative, financial, legal and other services to On Command Corporation. Pursuant to the Services Agreement, On Command Corporation will pay to Ascent (i) an annual fee of $1.2 million payable monthly and (ii) certain of Ascent's actual out-of-pocket expenses in connection with the Services Agreement (not including overhead and the cost of its personnel). Further, On Command Corporation will indemnify Ascent from (i) all damages from Ascent's performance of services under the Services Agreement unless such damages are caused by willful breach by Ascent or willful misconduct or gross negligence by Ascent's employees and (ii) On Command Corporation's failure to fulfill its obligations under the Services Agreement. Ascent will indemnify On Command Corporation from damages arising from willful breach by Ascent or gross negligence or willful misconduct by Ascent's employees in the performance of the Services Agreement. The initial term of the Services Agreement will expire December 31, 1997, subject to renewal by On Command Corporation for one additional one-year term. On Command Corporation and Ascent will also enter into the Corporate Agreement that will govern certain other relationships and arrangements between On Command Corporation and Ascent. Pursuant to the Corporate Agreement, for so long as Ascent owns the largest percentage (and at least 40%) of the outstanding OCC Common Stock, On Command Corporation will propose nominees to the board of directors such that the board would consist of at least a majority of members designated by Ascent and two independent directors who are neither employees nor directors of Ascent nor employees of On Command Corporation. In addition, for so long as Ascent owns the largest percentage (and at least 40%) of the outstanding OCC Common Stock, On Command Corporation will agree not to incur any indebtedness, other than under the OCC Credit Facility (and refinancings thereof) and indebtedness incurred in the ordinary course of business, which together shall not exceed $100 million (not more than $50 million of which may be long term debt), or issue any equity securities or any securities convertible into equity securities without Ascent's prior consent. On Command Corporation will agree in the Corporate Agreement, for so long as Ascent owns the largest percentage (and at least 40%) of the outstanding OCC Common Stock, to utilize reasonable cash management procedures and to use its reasonable best efforts to minimize On Command Corporation's excess cash holdings. As a consequence, the ability of On Command Corporation to utilize the OCC Credit Facility will be subject to the limitations described above. Certain members of the Board of Directors and management of OCV may be deemed to have certain interests in the Merger in addition to their interests generally as OCV stockholders. In particular, Messrs. Cronin, Kavner and Lyons, each a director of OCV, will become directors of On Command Corporation upon completion of the Merger, and Mr. Kavner will become President and Chief Executive Officer of On Command Corporation upon completion of the Merger. Messrs. Cronin, Kavner and Lyons, however, will not be receiving any compensation in connection with their services as directors of On Command Corporation. Resale of OCC Common Stock and Warrants The shares of OCC Common Stock and Series A Warrants issued to OCV stockholders as Merger Consideration pursuant to the Merger will not be subject to any restrictions on transfer arising under the Securities Act, except for shares or Warrants issued to any OCV stockholder, including Ascent, who may be deemed to be an "affiliate" of On Command Corporation or OCV for purposes of Rule 144 under the Securities Act. It is expected that each such affiliate will enter into an agreement with On Command Corporation providing that such affiliate will not transfer any OCC Common Stock received in the Merger except in compliance with the Securities Act. This Information Statement/Prospectus does not cover resales of OCC Common Stock received by any person who may be deemed to be such an affiliate of On Command Corporation or OCV, including Ascent. The shares of OCC Common Stock issuable upon exercise of the Series A Warrants will be exempt from registration requirements pursuant to Section 3(a)(9) of the Securities Act. 29 32 Pursuant to the Confirmation Order (as defined below), the shares of OCC Common Stock and Series B Warrants issued as consideration pursuant to the Acquisition Agreement are exempt from the registration requirements of the Securities Act pursuant to Section 1145 of the Bankruptcy Code. Appraisal Rights Holders of OCV Common Stock are entitled to appraisal rights under Section 262 of the DGCL, the text of which is attached as Annex VI hereto. The description of appraisal rights contained in this Information Statement/Prospectus is qualified in its entirety by reference to Section 262 of the DGCL. If the Merger is completed, holders of OCV Common Stock who did not consent to the Merger and who have fully complied with the provisions of Section 262 of the DGCL may have the right to require OCV to pay them the appraised value of their OCV Common Stock in cash. Shares of OCV Common Stock that are outstanding immediately prior to the Effective Time and that are held by OCV stockholders who (a) have not consented to the Merger, (b) have delivered to OCV a written demand for appraisal of such OCV Common Stock prior to October 27, 1996 (20 days from the date of notice hereunder) in the manner provided in Section 262 of the DGCL and (c) have held continuously such OCV Common Stock from the date of the written demand for appraisal through the Effective Time ("Dissenting Shares"), shall not be converted into or represent the right to receive the Merger Consideration, but instead the holders thereof shall be entitled to payment of the appraised value of such Dissenting Shares in accordance with Section 262 of the DGCL. If, however, any holder of Dissenting Shares (i) subsequently delivers a written withdrawal of such holder's demand for appraisal of such Dissenting Shares within 60 days after the Effective Time (or thereafter with the written approval of OCV), (ii) any holder fails to perfect such holder's entitlement to appraisal rights as provided in such Section 262, or (iii) if neither any holder of Dissenting Shares nor OCV has filed a petition with the Delaware Court of Chancery demanding a determination of the value of all Dissenting Shares within 120 days after the Effective Time, such holder or holders shall forfeit the right to appraisal of such Dissenting Shares and such Dissenting Shares may thereupon be deemed to have been converted into the right to receive, and to have become exchangeable for, as of the Effective Time, the Merger Consideration. FAILURE TO TAKE ANY NECESSARY STEPS WILL RESULT IN A TERMINATION OR WAIVER OF THE RIGHTS OF THE HOLDER UNDER SECTION 262 OF THE DGCL. A PERSON HAVING A BENEFICIAL INTEREST IN OCV COMMON STOCK THAT IS HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A TRUSTEE OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE REQUIREMENTS OF SECTION 262 IN A TIMELY MANNER IF SUCH PERSON ELECTS TO DEMAND APPRAISAL OF SUCH SHARES. Any holder of record of OCV Common Stock electing to demand the appraisal of such shares of OCV Common Stock under Section 262 of the DGCL must (a) deliver to OCV, prior to October 27, 1996 (20 days from the date of notice hereunder), a written demand for appraisal of such shares and (b) not consent to the adoption of the Merger Agreement. Failure to consent to the Merger Agreement does not constitute such a demand. A holder of record of OCV Common Stock electing to take such action must do so by a separate written demand that reasonably informs OCV of such holder's identity and of such holder's intention thereby to demand the appraisal of such holder's shares of OCV Common Stock. Only the holder of record of OCV Common Stock is entitled to assert appraisal rights for the OCV Common Stock registered in that holder's name. The demand should be executed by or for the holder of record, fully and correctly, as the holder's name appears on the holder's stock certificates. If 30 33 the OCV Common Stock is owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity, and if the OCV Common Stock is owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all owners. An authorized agent, including one of two or more joint owners, may execute the demand for appraisal for a holder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, the agent is acting as agent for the record owner or owners. A record holder, such as a broker, who holds OCV Common Stock as nominee for the beneficial owners may exercise the holder's right of appraisal with respect to the OCV Common Stock held for all or less than all of such beneficial owners. In such case, the written demand should set forth the number of shares of OCV Common Stock covered by the written demand. Where no number of shares of OCV Common Stock is expressly mentioned, the demand will be presumed to cover all shares of OCV Common Stock standing in the name of the record owner. Within 120 days after the Effective Time, OCV or any holder of OCV Common Stock who has satisfied the foregoing conditions and is otherwise entitled to appraisal rights under Section 262 of the DGCL, may file a petition in the Delaware Court of Chancery demanding a determination of the value of the stock of all such holders. Holders of OCV Common Stock seeking to exercise appraisal rights should not assume that OCV will file a petition with respect to the appraisal of the value of their Dissenting Shares or that OCV or On Command Corporation will initiate any negotiations with respect to the "fair value" of such Dissenting Shares. Accordingly, holders of OCV Common Stock seeking to assert appraisal rights should regard it as their obligation to initiate all necessary action with respect to the perfection of their appraisal rights within the time periods prescribed in Section 262. At any time within 60 days after the Effective Time, any OCV stockholder who has demanded appraisal of his OCV Common Stock shall have the right to withdraw his demand for appraisal and to accept the Merger Consideration. Within 120 days after the Effective Time, any holder of OCV Common Stock who has complied with the requirements for the exercise of appraisal rights, as discussed above, is entitled, upon written request, to receive from OCV a statement setting forth the aggregate number of shares of OCV Common Stock the holders of which did not consent to the approval of the Merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such OCV Common Stock. OCV is required to mail such statement within 10 days after it receives a written request therefor. If a petition for an appraisal is timely filed, after a hearing on such petition, the Delaware Court of Chancery will determine which holders of OCV Common Stock are entitled to appraisal rights and will appraise the Dissenting Shares owned by such holders, determining their "fair value" exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the "fair value." Any such judicial determination of the "fair value" of the Dissenting Shares could be based upon considerations other than or in addition to the price paid in the Merger and the market value of the Dissenting Shares, including asset values, earnings value and any other valuation considerations generally accepted in the investment community including, if appropriate, factors such as dividends, earnings prospects, the nature of the enterprise and any other facts which could be ascertained as of the date of the Merger which throw any light on future prospects of On Command Corporation. The value so determined for Dissenting Shares could be more or less than the Merger Consideration to be paid pursuant to the Merger. The costs of the appraisal proceeding may be determined by the Delaware Court of Chancery and taxed upon the parties as the Delaware Court of Chancery deems equitable in the circumstances. Upon application of a holder of OCV Common Stock, the Delaware Court of Chancery may order all or a portion of the expenses incurred by any such holder in connection with the appraisal proceeding, including, without 31 34 limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of the shares entitled to an appraisal. Any holder of OCV Common Stock who has duly demanded an appraisal in compliance with Section 262 will not be entitled to vote the Dissenting Shares subject to such demand for any purpose or be entitled to the payment of dividends or other distributions on those Dissenting Shares (other than those payable or deemed to be payable to OCV stockholders of record as of a date prior to the Effective Time). A holder of OCV Common Stock will fail to perfect, or effectively lose, such holder's right to appraisal if no petition for appraisal is filed with the Delaware Court of Chancery within 120 days after the Effective Time, or if after the Effective Time such holder delivers to OCV a written withdrawal of such holder's demand for an appraisal and an acceptance of the Merger, except that any such attempt to withdraw made more than 60 days after the Effective Time will require the written approval of OCV. In the event an appraisal proceeding is instituted in a timely manner, such proceeding may not be dismissed as to any holder of OCV Common Stock who has perfected such stockholder's right of appraisal without the approval of the Delaware Court of Chancery. Any demands, notices, certificates or other documents to be delivered to OCV prior to the Merger or to the Surviving Corporation after the Merger may be sent to: On Command Video Corporation, 3301 Olcott Street, Santa Clara, California 95054, Attention: Secretary. THE ACQUISITION The Acquisition Agreement The Acquisition Agreement provides that On Command Corporation will purchase all of the capital stock of Spectradyne. It also provides that certain assets held by affiliates of Spectradyne will be transferred to Spectradyne prior to the acquisition of the Spectradyne capital stock by On Command Corporation. Assets Acquired The assets to be owned by Spectradyne on the Closing Date will include all of the Debtors' assets and properties (including, without limitation, all tangible, intangible, real and personal assets and properties of the Debtors, wherever located, other than the Excluded Assets (as defined below) (the "Assets"). The Assets include all rights of the Debtors under the following: (i) all contracts, leases and licenses assumed by the Debtors at the written direction of On Command Corporation or Ascent under the Acquisition Agreement and (ii) all other contracts, leases and licenses that both (a) have been entered into by the Debtors since the commencement of the Bankruptcy Case in the ordinary course of business or that have been assumed by the Debtors pursuant to an order of the Bankruptcy Court and (b) with respect to the Non-Spectradyne Debtors are identified on a schedule to the Acquisition Agreement. The Assets also include: (i) all copyrights, patents, trademarks, tradenames, slogans, logos, service marks, computer software, data processing files, systems and programs, business lists, trade secrets, sales and operating plans and other similar intangible property owned by the Debtors; (ii) all permits, permissions, consents and other authorizations issued for the operation of the Debtors' businesses by any governmental agency; (iii) all personal property and equipment owned by the Debtors; (iv) all real property owned by the Debtors identified on a schedule to the Acquisition Agreement; (v) all of the capital stock and other equity interests owned by any of the Debtors in each corporation, limited liability 32 35 company, foreign company, limited partnership, general partnership and other entity (other than another Debtor), each of which is identified on a schedule to the Acquisition Agreement; (vi) all current assets, including cash and cash equivalents, as well as all claims of the Debtors against all persons and entities (other than another Debtor) other than (a) certain claims retained by the Debtors and (b) the cash retained by the Debtors in accordance with the Acquisition Agreement to make administrative and priority payments under the Plan, which amount shall have been approved by the Bankruptcy Court; and (vii) all records relating to the Debtors' businesses and the Assets (including but not limited to all books of account, customer lists, supplier lists, employee personnel files, tax records and information, local public records file materials, engineering data, logs, programming records, consultants' reports, budgets, financial reports and projections, and sales, operating and business plans, that relate to or are used in the operation of any Debtor's business or necessary or desirable to show compliance with any law or regulation applicable to any Debtor's business). Notwithstanding the foregoing, the Assets shall not include any of the following (collectively, the "Excluded Assets"): (i) the contracts, leases, licenses, assets and properties of Spectradyne identified as Excluded Assets on a schedule to the Acquisition Agreement; (ii) the assets and properties, if any, of the Non-Spectradyne Debtors not being contributed to Spectradyne as identified on a schedule to the Acquisition Agreement; (iii) all contracts, leases and licenses of the Non-Spectradyne Debtors other than those identified on a schedule to the Acquisition Agreement; (iv) the claims of each Non-Spectradyne Debtor against any other Non-Spectradyne Debtor; (v) all causes of action and avoidance powers of the Debtors other than the causes of action and avoidance powers related to, or derived from, the leases and executory contracts assumed by and/or assigned to Spectradyne; (vi) any real estate owned by the Non-Spectradyne Debtors that is not identified on a schedule to the Acquisition Agreement; and (vii) to the extent necessary, a reasonable amount of funds to be retained by the Debtors to make administrative and priority payments under the Plan, which amount shall have been approved by the Bankruptcy Court. "Non-Spectradyne Debtors" means the Debtors other than Spectradyne. Liabilities Assumed On Command Corporation shall not assume any responsibility for any of the Debtors' liabilities or obligations other than as expressly set forth in the Acquisition Agreement. Specifically, On Command Corporation shall assume and pay all of the Debtors' liabilities under the DIP Loan (as defined below) on the Closing Date up to a maximum amount of $40,000,000 with proceeds under a financing facility to be entered into by On Command Corporation and/or its subsidiaries on such terms and conditions as shall be satisfactory to On Command Corporation in its sole discretion after consultation with the Debtors and the Creditors' Committee; provided, however, that so long as On Command Corporation is a consolidated subsidiary of COMSAT under GAAP, On Command Corporation shall be subject to Ascent's intercompany agreements with COMSAT. In addition, subject to certain limitations, On Command Corporation shall be responsible for paying the allowed administrative expenses (the "Allowed Administrative Expenses") and all amounts payable by the Debtors (the "Cure Payments") to cure any defaults under the contracts and leases that were (i) assumed by the Debtors pursuant to an order of the Bankruptcy Court (exclusive of certain contracts and leases assumed at the direction of Ascent or On Command Corporation pursuant to the Acquisition Agreement), or (ii) entered into by the Debtors in the ordinary course of their businesses since the commencement of the Bankruptcy Case; provided, that the amounts payable by On Command Corporation with respect to such Allowed Administrative Payments and Cure Payments shall only be for certain liabilities previously identified and shall not exceed the amounts specified in the addendum to the Plan Sponsor Agreement. 33 36 On Command Corporation also shall be responsible for paying all of the Cure Payments payable by the Debtors with respect to, and On Command Corporation shall assume all of the Debtors' other obligations under, the contracts and leases assumed by the Debtors at the written direction of Ascent or On Command Corporation pursuant to the Acquisition Agreement. On Command Corporation also shall assume all of the Debtors' obligations under any equipment leases with OCV. On the Closing Date, subject to certain conditions discussed below, Spectradyne will assume the Current Liabilities identified on the Pre-Closing Balance Sheet (exclusive of the current liabilities of the foreign subsidiaries of Debtors, which shall remain the obligations of such foreign subsidiaries) up to a maximum amount not to exceed the Current Liabilities specified in the Pre-Closing Balance Sheet; provided, however, that if the Adjusted Current Liabilities set forth on the Pre-Closing Balance Sheet exceed the Maximum Assumable Amount, the Current Liabilities to be assumed by Spectradyne will be reduced until the Adjusted Current Liabilities equals the Maximum Assumable Amount, in which case On Command Corporation will designate the Current Liabilities that will not be assumed by Spectradyne and the Debtors' Estates (as defined below) shall remain liable for all Current Liabilities not assumed by Spectradyne. The Current Liabilities assumed by Spectradyne described in this paragraph (collectively, the "Assumed Liabilities") shall be paid by Spectradyne in accordance with the terms of such liabilities. Subject to certain limitations set forth below, from and after the Closing Date until the Adjustment Date (as defined below), to the extent that the Debtors after the Closing Date (the "Debtors' Estates") have inadequate funds to pay the Allowed Administrative Expenses and the Current Liabilities (as defined below), if any, that are not set forth on the Pre-Closing Balance Sheet (as defined below), On Command Corporation and/or its subsidiaries shall provide the Debtors' Estates with sufficient funds to pay such expenses, and Spectradyne shall assume such liabilities, up to an aggregate amount not to exceed the sum of the Estimated Net Working Capital (as defined below) and the Reserved Stock Value, if any. After the Adjustment Date, to the extent that the Debtors' Estates have inadequate funds to pay the Allowed Administrative Expenses and the Current Liabilities, if any, that are not set forth on the Pre- Closing Balance Sheet, On Command Corporation and/or its subsidiaries shall provide the Debtors' Estates with sufficient funds to pay such expenses, and Spectradyne shall assume such liabilities, up to an aggregate amount not to exceed the Maximum Remaining Payment Amount (as defined below). Notwithstanding the foregoing, the Plan will discharge all liabilities of, and claims against, the Debtors as of the Closing Date other than (i) Assumed Liabilities, and (ii) any indebtedness of Spectradyne that is owed by Spectradyne or any of its subsidiaries to SPI Newco, Inc. (a wholly-owned subsidiary of SpectraVision that, prior to the Transactions, will own all of the capital stock of Spectradyne) or SpectraVision, which indebtedness will be contributed to the capital of Spectradyne pursuant to the Acquisition Agreement; provided, however, that unless otherwise agreed to by Ascent in writing, none of such indebtedness will be discharged pursuant to the Plan or otherwise; provided further, however, that neither Ascent nor On Command Corporation shall be entitled to receive any distribution under the Plan on account of such indebtedness. Except for the Assumed Liabilities and the other liabilities for which On Command Corporation and/or its subsidiaries are expressly responsible for paying pursuant to the Acquisition Agreement, none of On Command Corporation, Spectradyne or any of their post-closing affiliates shall have any responsibility or liability for any expenses or liabilities of, or any claims (whether matured, contingent or otherwise) against, the Debtors, all of which shall be the responsibility and liability of the Debtors' Estates. In the event that there is any Excess Payment (as defined below) as of the Adjustment Date, the Debtors' Estates shall promptly pay On Command Corporation an amount equal to such Excess Payment, which at the option of the Creditors' Committee may be paid with either cash or a number of shares of OCC Common Stock equal to the Excess Stock Payment. Notwithstanding the foregoing, none of On Command Corporation, Spectradyne or any of their post-closing affiliates shall 34 37 have any liability or responsibility for any amounts due under or with respect to the DIP Loan Agreement in excess of $40,000,0000. Acquisition Consideration As consideration for the capital stock of Spectradyne, on the Closing Date, On Command Corporation shall: (i) issue to the Creditors, or to an agent on their behalf, an aggregate number of shares of OCC Common Stock that represents the Initial Percentage (as defined below) of the Total On Command Corporation Initial Shares (as defined below) and (ii) shall reserve the Reserved Stock for issuance to the Creditors and/or OCV's stockholders at the time and in the manner prescribed below. The number of shares of Reserved Stock to be issued to the stockholders of OCV shall equal the product of (i) the amount, if any, by which the aggregate amount of Current Liabilities that were assumed, and the aggregate amount of the Allowed Administrative Expenses that were paid, by On Command Corporation pursuant to the Acquisition Agreement exceeds the Adjusted Current Assets (as defined below) and (ii) a fraction, the numerator of which shall be equal to the Total On Command Corporation Initial Shares (as defined below) and the denominator of which shall be equal to the Warrant Exercise Price (as defined below); provided, however, that notwithstanding the foregoing, the stockholders of OCV shall not be entitled to receive any shares of the Reserved Stock unless the Adjusted Current Liabilities exceed the Adjusted Current Assets by more than $250,000. Any Reserved Stock that is not issuable to the OCV stockholders pursuant to the Merger Consideration will be issued to the Debtors. The Reserved Stock will be distributed as promptly as practical after the Final Distribution Date. Certain Definitions For the definitions of capitalized terms used herein and not otherwise defined herein, reference is made to the Acquisition Agreement, a copy of which is attached hereto as Annex II. The following terms used in the Acquisition Agreement have the following meanings: "Additional OCV Debt" means the following: (i) $22,000,000 of intercompany debt owed by OCV to Ascent as of March 1, 1996, plus any additional debt incurred by OCV in connection with its buildout of hotel rooms and transition costs associated with the Transactions from March 1, 1996 to the Closing Date; provided, however, that (a) prior to May 18, 1996, the rate of additional debt incurred by OCV in connection with buildouts and transition costs shall not exceed $3,000,000 per month and shall be consistent with, and on the same terms as, the intercompany debt outstanding on March 1, 1996, and (b) on and after May 18, 1996, the amount of additional debt incurred by OCV may exceed $3,000,000 per month (but shall be consistent with, and on the same terms, as the intercompany debt outstanding on March 1, 1996) in order to accelerate the buildout of room backlog after consultation with SpectraVision and the Creditors' Committee; (ii) all of the debt incurred by OCV in connection with leasing OCV equipment to Spectradyne and all of the rental charges to be assumed or paid by On Command Corporation; and (iii) all of the debt incurred by OCV, directly or on behalf of On Command Corporation, in arranging for alternative service to replace the network, transponder and similar services currently provided to the Debtors by EDS. "Adjusted Current Assets" means the aggregate dollar amount of the Current Assets less the sum of the following assets if, and only to the extent that, such assets constitute Current Assets: (i) the aggregate outstanding balance of the Accounts Receivable that are more than 90 days past due, and (ii) the aggregate amount of cash and other assets, if any, transferred by Spectradyne to the Debtors' Estates pursuant to the Acquisition Agreement. 35 38 "Adjusted Current Liabilities" means the aggregate dollar amount of the Current Liabilities less the sum of the following liabilities if, and only to the extent that, such liabilities constitute Current Liabilities: (i) the Rental Charges, (ii) the aggregate amount of liabilities to be paid by On Command Corporation pursuant to the Acquisition Agreement, and (iii) the deferred obligations set forth on Schedule A to the Plan Sponsor Agreement; provided, however, that the amount of each such deferred obligation that is excluded from Current Liabilities shall not exceed the amount of such obligation as set forth on such Schedule A. "Adjustment Date" means (i) the date on which the disagreements, if any, that On Command Corporation has with the Closing Balance Sheet as set forth in On Command Corporation's Statement have been resolved in accordance with the Acquisition Agreement, or (ii) if On Command Corporation does not have any disagreements with the Closing Balance Sheet or if all such disagreements have been resolved by On Command Corporation, SpectraVision and the Creditors' Committee prior to the expiration of the Resolution Period, the last day of the Resolution Period or such earlier date as is agreed to by On Command Corporation, SpectraVision and the Creditors' Committee. "Aggregate Warrant Exercise Price" means the product of the Warrant Exercise Price times 7,500,000 shares issuable under the Warrants. "Confirmation Order" means a Bankruptcy Court Order that confirms the Plan and satisfies the conditions set forth in the Acquisition Agreement. "Current Assets" means the aggregate dollar amount of the consolidated assets of Spectradyne and its foreign subsidiaries as of the Closing Date that are properly classified as "current assets" under GAAP, after giving effect to all of the transactions contemplated by the Acquisition Agreement (in calculating such dollar amount, if the current assets of any foreign subsidiary are not denominated in U.S. dollars, such current assets shall be converted into their U.S. dollar equivalent as of the Closing Date in accordance with GAAP). "Current Liabilities" means the aggregate dollar amount of the consolidated liabilities of Spectradyne and the Foreign Subsidiaries as of the Closing Date that are properly classified as "current liabilities" under GAAP (in calculating such dollar amount, if the current liabilities of any Foreign Subsidiary are not denominated in U.S. Dollars, such current liabilities shall be converted into their U.S. dollar equivalent as of the Closing Date in accordance with GAAP). "DIP Loan" means all amounts (including, without limitation, principal, interest and fees) due and owing to the Foothill Capital Corporation as of the Closing Date under the loan and security agreement, dated as of June 9, 1995, by and between Spectradyne and the Foothill Capital Corporation. "Estimated Net Working Capital" means the positive or negative amount obtained by subtracting (i) the Adjusted Current Liabilities as reflected in the Spectradyne's Pre-Closing Balance Sheet, from (ii) 95% of the Adjusted Current Assets as reflected in the Pre-Closing Balance Sheet. "Excess Payment" means the dollar amount, if any, by which the Non-Specified Payment Obligations as of the Adjustment Date exceeds the sum of the Adjusted Current Assets as reflected in the Adjusted Balance Sheet and the Reserved Stock Value, if any; provided, however, that the Excess Payment shall be equal to zero unless the Non-Specified Payment Obligations as of the Adjustment Date exceed the Adjusted Current Assets as reflected in the Adjusted Balance Sheet by at least $250,000. "Final Distribution Date" means the first business day practicable after the Adjustment Date; provided, however, that if the Estimated Net Working Capital exceeds $1,000,000, then such date shall be the Closing Date, 36 39 "Final Order" means an order or judgment rendered by the Bankruptcy Court or other court of competent jurisdiction that has been entered on the docket and (unless otherwise ordered by such court) as to which (i) both (a) the time to seek reconsideration, rehearing, or new trial by the rendering court (hereinafter, a "Post-Trial Motion"), and (b) the time (including time resulting from a timely filed motion under Rule 8002(c) under the Federal Rules of Bankruptcy Procedure) to appeal or to seek a petition for review or certiorari (hereinafter, an "Appellate Court Review"), has expired (without regard to whether time to seek relief of a judgment under Rule 60(b) of the Federal Rules of Civil Procedure or Rule 9024 of the Federal Rules of Bankruptcy Procedure has expired); and (ii) either (a) no Post-Trial Motion or request for Appellate Court Review is pending, or (b) a Post-Trial Motion or a request for Appellate Court Review is pending but the subject order of judgment has not been stayed, amended, modified or reversed by a court of competent jurisdiction or, if stayed, such stay has been vacated or is no longer in effect. Without limiting the foregoing, the pendency of, or request for, a Post-Trial Motion or an Appellate Court Review shall not prevent an order from becoming final and being implemented, absent the entry of a stay by a court of competent jurisdiction and the continuation thereof. "Initial Percentage" means the percentage equal to the difference between 27.5% and the Potential Additional Percentage. "Maximum Assumable Amount" means the sum of 95% of the Adjusted Current Assets as reflected in the Pre-Closing Balance Sheet and the Reserved Stock Value, if any. "Maximum Remaining Payment Amount" means the difference between (i) the Adjusted Current Assets as reflected in the Adjusted Balance Sheet, and (ii) the Non-Specified Payment Obligations as of the Adjustment Date; provided, however, that if Non-Specified Payment Obligations as of the Adjustment Date equal or exceed the Adjusted Current Assets as reflected in the Adjusted Balance Sheet, the Maximum Remaining Payment Amount shall be equal to zero. "Non-Specified Payment Obligations" means (A) as of the Final Distribution Date, an amount equal to the sum of (i) the aggregate amount of the Adjusted Current Liabilities that have been assumed by Spectradyne pursuant to the Acquisition Agreement, (ii) the aggregate amount of the Allowed Administrative Expenses that have been paid by On Command Corporation and/or it subsidiaries pursuant to the Acquisition Agreement as of the Final Distribution Date, and (iii) the aggregate amount of the Current Liabilities, if any, that have been assumed by Spectradyne pursuant to the Acquisition Agreement as of the Final Distribution Date, and (B) as of the Adjustment Date, an amount equal to the sum of (i) the aggregate amount of the Adjusted Current Liabilities that have been assumed by Spectradyne pursuant to the Acquisition Agreement, (ii) the aggregate amount of the Allowed Administrative Expenses that have been paid by On Command Corporation and/or its subsidiaries pursuant to the Acquisition Agreement as of the Adjustment Date, and (iii) the aggregate amount of the Current Liabilities, if any, that have been assumed by Spectradyne pursuant to the Acquisition Agreement as of the Adjustment Date. "OCV Debt" means the current liabilities of OCV and the Additional OCV Debt. "Pre-Closing Balance Sheet" means the pro forma balance sheet of Spectradyne that SpectraVision will deliver to Ascent at least five business days prior to the Closing Date, which shall set forth SpectraVision's best estimate of the Current Assets, Current Liabilities, Adjusted Current Assets and Adjusted Current Liabilities as of the Closing Date after giving effect to the Acquisition Agreement. 37 40 "Potential Additional Percentage" means the percentage (rounded to the nearest one-thousandth) calculated by dividing the number of shares of Reserved Stock by the number of Total On Command Corporation Initial Shares. "Reserved Amount" means (i) if the Estimated Net Working Capital is positive but less than $1,000,000, the difference between $1,000,000 and the Estimated Net Working Capital, (ii) if the Estimated Net Working Capital is negative, the sum of $1,000,000 and the absolute value of the Estimated Net Working Capital; provided, however, that Reserved Amount shall not exceed $10,000,000 under any circumstances, and (iii) if the Estimated Net Working Capital is equal to or greater than $1,000,000, then the Reserved Amount shall be zero. "Reserved Stock" means a number of authorized but unissued shares of OCC Common Stock (rounded to the nearest whole number) that is determined as follows: (i) if the Estimated Net Working Capital is less than $1,000,000, a number of shares of OCC Common Stock equal to the product of the Total On Command Corporation Initial Shares and a fraction, the numerator of which shall be equal to the Reserved Amount and the denominator of which shall be equal to the numerator used in the calculation of the Warrant Exercise Price, and (ii) if the Estimated Net Working Capital is greater than or equal to $1,000,000, there shall be no shares of Reserved Stock. "Reserved Stock Value" means an amount equal to the product of the number of shares of Reserved Stock and the Warrant Exercise Price. "Resolution Period" means the 20-day period following delivery of the Closing Balance Sheet to On Command Corporation pursuant to the Acquisition Agreement. "Termination Event" means (i) with respect to On Command Corporation (a) a trustee is appointed in the Bankruptcy Case; (b) the Bankruptcy Case is converted to a case under Chapter 7 of the Bankruptcy Code; or (c) the Closing Date has not occurred on or before October 30, 1996 or such later date as is acceptable to On Command Corporation and Ascent, and (ii) with respect to Debtors (a) the Closing Date has not occurred on or before October 30, 1996 or such later date as is acceptable to SpectraVision and the Creditors' Committee; or (b) the Debtors receive a higher and better offer for their assets that complies with the terms and conditions of the Procedures Order and the Disclosure Statement and Ascent or On Command Corporation has not matched such offer in accordance with the terms and conditions of the Procedures Order and the Disclosure Statement. "Total On Command Corporation Initial Shares" means 30,000,000 shares of OCC Common Stock. "Warrant Exercise Price" means the amount by which $550,000,000 exceeds the aggregate amount of debt of On Command Corporation and its subsidiaries that is outstanding as of the Closing Date after giving effect to the Transactions (including, but not limited to, the aggregate amount of debt incurred by On Command Corporation to perform all of its obligations under the Acquisition Agreement and the OCV Debt) divided by the Total On Command Corporation Initial Shares. Closing Conditions and Other Pre-Closing Matters The obligation of each party to the Acquisition Agreement to consummate the Acquisition is subject to the satisfaction of certain conditions, including the following conditions: (i) all authorizations required to consummate the Transactions shall have been obtained; (ii) as of the Closing Date, no court 38 41 shall have entered an order that enjoins, restrains, or prohibits the consummation of the Transactions; (iii) the Plan shall (a) incorporate the terms of the Acquisition Agreement, (b) have been confirmed pursuant to an order of the Bankruptcy Court, and (c) have become effective in accordance with the provisions of Chapter 11 of the Bankruptcy Code; and (iv) if the Common Stock is listed on a national securities exchange or the Nasdaq National Market, On Command Corporation's board of directors shall satisfy the applicable requirements, if any, for independent directors. The obligations of On Command Corporation under the Acquisition Agreement are conditioned upon: (i) the representations and warranties of the Debtors being true and correct as of the Closing Date; (ii) compliance by the Debtors and the Creditors Committee with all conditions under the Acquisition Agreement; (iii) the Bankruptcy Court's confirmation order shall have become a Final Order; (iv) On Command Corporation shall have received the Confirmation Letter from counsel to the Debtors; (v) no material adverse change shall have occurred since December 31, 1995; (vi) the Disclosure Statement, the Plan and the Confirmation Order shall (a) incorporate, and otherwise be consistent with, the terms of the Acquisition Agreement and the Merger Agreement, and (b) be in form and substance reasonably satisfactory to On Command Corporation; (vii) the Debtors shall deliver to On Command Corporation all the required closing documents; (viii) no Termination Event shall have occurred (other than any that have been waived by On Command Corporation in writing); (ix) On Command Corporation has not sent (a) any uncured default notice to SpectraVision (other than any that have been rescinded or waived by On Command Corporation in writing), or (b) a termination notice to SpectraVision; (x) the Bankruptcy Court shall have approved Ascent's director nominees; (xi) Ascent shall have approved the Creditors Committee's director nominees; (xii) a registration statement covering both the OCC Common Stock and the Series A Warrants to be issued to OCV's stockholders shall have been filed with, and declared effective by the Commission; and (xiii) On Command Corporation shall have received the Pre-Closing Balance Sheet at least five (5) business days prior to the Closing Date, which shall be in form and substance reasonably satisfactory to On Command Corporation. The obligations of Debtors are conditioned upon: (i) the representations and warranties of OCV in the Merger Agreement being true and correct as of the Closing Date; (ii) compliance by On Command Corporation or Ascent with all applicable conditions under the Acquisition Agreement; (iii) the Merger shall have been consummated; (iv) On Command Corporation shall deliver to SpectraVision all the required closing documents; (v) On Command Corporation has not sent (a) any default notice to SpectraVision (other than any that have been rescinded or waived by On Command Corporation in writing), or (b) a termination notice to SpectraVision; (vi) the Bankruptcy Court and Ascent shall have approved the Creditors' Committee director nominees; (vii) the Warrant Agreement and Registration Rights Agreement shall be in full force and effect; (viii) On Command Corporation shall have made arrangements to repay the DIP Loan up to a maximum amount of $40 million; (ix) OCV shall not have incurred indebtedness not permitted under the Acquisition Agreement; (x) the Transactions shall be in compliance with any applicable United States securities laws; (xi) the Disclosure Statement, the Plan and the Confirmation Order shall (a) incorporate, and otherwise be consistent with, the terms of the Acquisition Agreement and the Merger Agreement, and (b) be in form and substance reasonably satisfactory to Debtors and the Creditors' Committee; (xii) no Termination Event shall have occurred (other than any that have been waived by SpectraVision and the Creditors' Committee in writing); and (xiii) the capital structure of On Command Corporation shall be as contemplated by the Acquisition Agreement and the Merger Agreement. Pursuant to the Acquisition Agreement, immediately preceding the Closing Date, Spectradyne will terminate the employment of all of its officers and other employees. Neither On Command Corporation nor any of its affiliates shall have any liability on account of the Debtors' employees (including without limitation any liability arising in connection with or with respect to any of the following: unemployment 39 42 insurance contributions, termination payments, severance payments, retirement, pension, profit-sharing, bonus, severance pay, disability, health, accrued vacation, accrued sick leave or other employee benefit plans, agreements or understandings). If On Command Corporation or any of its subsidiaries elect to hire any employee of Debtors, the terms and conditions (including the scope and amount of all benefits) under which any such employment will be offered will be determined by On Command Corporation in its sole discretion. The Acquisition Agreement does not provide that any employees of any Debtor must be employed after the Closing Date by On Command Corporation, Spectradyne or any of their subsidiaries or post-closing affiliates, and any offers of employment may be made by On Command Corporation in its sole discretion. However, the Acquisition Agreement does not prevent the Debtors from taking actions that seek to minimize the expenses incurred by the Debtors' Estates in connection with the termination of the Debtors' employees. Representations and Warranties The Acquisition Agreement contains representations and warranties of the Debtors relating to: (i) their title to certain real property, free and clear of liens or encumbrances; (ii) the absence of certain changes or events since the date of the most recent audited financial statements filed with the Commission, including material adverse changes with respect to the Debtors; (iii) the absence of grounds for termination of the Debtors' five largest hotel customers or any of the Debtors' major studio movie suppliers or free-to-guest programming suppliers; (iv) the absence of any material environmental liability (other than as disclosed in the Environmental Assessment Report, dated July 1995, which was prepared by ENTRIX, Inc., as to which the Debtors do not concede any material liability); and (v) the absence of any material federal, state or foreign tax liability that may be assessed against or collected from On Command Corporation as a successor of the Debtors or otherwise. THE WARRANTS On Command Corporation will enter into the Warrant Agreement with The Bank of New York, as warrant agent. The Warrants will be governed by the Warrant Agreement, which is included as Annex III to this Information Statement/Prospectus and is incorporated by reference herein, and the following description of the Warrants and the Warrant Agreement and their respective terms is qualified in its entirety by reference thereto. Exercisability; Expiration Each holder of Series A Warrants will have the right, which may be exercised at any time prior to and until 5:00 P.M., New York City Time, on the seventh anniversary of the Effective Time, to receive from On Command Corporation, on a net basis and without the exchange of any funds, that number of fully paid and nonassessable Warrant Shares which is equal to the number of Warrant Shares specified in such holder's Series A Warrants less a number of Warrant Shares having an aggregate fair market value at the time of exercise (determined in accordance with the provisions of the Warrant Agreement) equal to the then Warrant Price multiplied by the number of Warrant Shares specified in such holder's Series A Warrants. Each holder of Series B Warrants will have the right, which may be exercised at any time prior to 5:00 P.M., New York City Time, on the seventh anniversary of the Effective Time, to purchase from On Command Corporation for cash the number of fully paid and nonassessable Warrant Shares which such holder may at the time be entitled to purchase on exercise of such Warrants. The holder of the Series C Warrant will have the right, which may be exercised at any time prior to and until 5:00 P.M., New York City Time, on the seventh anniversary of the Effective Time, to purchase from On Command Corporation for cash the number of fully paid and nonassessable 40 43 Warrant Shares which each such holder may at the time be entitled to purchase on exercise of such Warrants. Each Warrant not exercised prior to 5:00 P.M., New York City Time, on the seventh anniversary of the Effective Time will become void and all rights thereunder and all rights in respect thereof under the Warrant Agreement will cease as of such time. Warrants may be exercised upon (i) surrender to On Command Corporation at the principal office of the Warrant Agent in New York, New York of the certificate or certificates evidencing the Warrants to be exercised, together with the form of election to purchase, duly completed and signed, with the signature thereon guaranteed by a bank or trust company having an office or correspondent in the United States or a broker or dealer which is a member of a registered securities exchange or the National Association of Securities Dealers, Inc. (the "NASD"), and (ii) payment to the Warrant Agent for the account of On Command Corporation of the Warrant Price for the number of Warrant Shares in respect of which such Warrant is then exercised, such payment to be made by surrendering additional Warrants, in the case of the Series A Warrants, and in cash, in the case of the Series B Warrants and the Series C Warrant. No adjustment will be made in respect of any accrued and unpaid dividends on any Warrant Shares issued upon exercise of Warrants. Adjustments The number of Warrant Shares purchasable upon the exercise of each Warrant and the Warrant Price will be subject to adjustment in the event On Command Corporation (a) pays a dividend on the OCC Common Stock in shares of OCC Common Stock, (b) subdivides its outstanding shares of OCC Common Stock into a greater number of shares, (c) combines its outstanding shares of OCC Common Stock into a smaller number of shares, (d) distributes to all holders of OCC Common Stock shares of its capital stock other than OCC Common Stock, (e) issues by reclassification of its OCC Common Stock any shares of its capital stock, (f) distributes any rights, options or warrants to all holders of its Common Stock or to any affiliate (as such term is defined in the Securities Act of 1933) of On Command Corporation entitling such holders or such affiliate to purchase shares of Common Stock at a price per share less than the current market price per share on that record date, (g) sells to any affiliate (as defined above) of On Command Corporation any shares of OCC Common Stock at a price per share less than the current market price per share on the date of distribution, or (h) distributes, by dividend or otherwise, to all holders of its Common Stock cash or assets in an aggregate amount that, together with any other distributions to all holders of its Common Stock within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this clause (h) has been made, exceeds 5% of the product of the current market price per share of the Common Stock on the record date for stockholders to receive such distribution times the number of shares of Common Stock outstanding on such date. No adjustment in the Warrant Price will be made unless the adjustment would require an increase or decrease of at least 1% in the Warrant Price. Any adjustments which are not made will be carried forward and taken into account in any subsequent adjustment. Except as described above, no adjustment in the Warrant Price will be made because On Command Corporation issues, in exchange for cash, property or services, shares of OCC Common Stock, or any securities convertible into or exchangeable for shares of OCC Common Stock, or securities carrying the right to purchase shares of OCC Common Stock or such convertible or exchangeable securities. Furthermore, no adjustment in the Warrant Price 41 44 need be made under the Warrant Agreement for sales of shares of OCC Common Stock pursuant to a plan providing for reinvestment of dividends or interest or in the event the par value of the OCC Common Stock is changed or in the event the par value of the OCC Common Stock is eliminated. On Command Corporation has reserved, or will have reserved as of the Effective Time, and will keep reserved at all times, a sufficient number of shares out of the authorized OCC Common Stock to provide for the exercise of the rights to purchase Warrant Shares represented by all outstanding Warrants. On Command Corporation will pay cash in lieu of fractional shares of OCC Common Stock that would otherwise be issuable upon exercise of a Warrant. Registration; Exemption The Series A Warrants are being registered under the Securities Act pursuant to the registration statement of which this Information Statement/Prospectus is a part. The Warrant Shares issuable upon exercise of the Series A Warrants will be exempt from registration under the Securities Act pursuant to Section 3(a)(9) thereof and not subject to any transfer restrictions under the Securities Act, except for Warrant Shares issued to any holder of Series A Warrants who may be deemed to be an "affiliate" of On Command Corporation or OCV for purposes of Rule 145 under the Securities Act. See "--Resale of OCC Common Stock and Warrants." REGISTRATION RIGHTS Following the Transactions, any stockholder of OCV, including Ascent, that is deemed to be an "affiliate" of On Command Corporation, as defined pursuant to Rule 144 under the Securities Act, may resell its stock only pursuant to an effective registration statement under the Securities Act or in accordance with Rule 144 or another exemption under the Securities Act. See "The Transactions -- The Merger -- Resale of OCC Common Stock and Warrants." Following the Transactions, holders of approximately 17,500,000 shares of OCC Common Stock will be subject to such restrictions (before giving effect to the issuance of any Reserve Stock). Any person owning 10% or more of the OCV Common Stock prior to the Effective Time, Gary Wilson Partners and any other person that receives 10% or more of the OCC Common Stock issuable upon consummation of the Transactions, including Warrant Shares issuable upon exercise of the Warrants (each a "Holder" and, collectively, the "Holders"), will be entitled to certain registration rights with respect to the shares of OCC Common Stock and/or Warrants received by such Holders pursuant to the Merger Agreement or the Acquisition Agreement and the Warrant Shares issuable to such Holders upon the exercise of the applicable Warrants, all as set forth in the Registration Rights Agreement, a copy of which is included as Annex IV to this Information Statement/Prospectus. The Registration Rights Agreement provides that any Holder (a "Demanding Party") shall have the right once during any twelve-month period to make a written request of On Command Corporation for a registration with the Commission under the Act of all or part of its Registrable Securities (a "Demand Registration"); provided, that (a) On Command Corporation need not effect a Demand Registration if (1) such Demand Registration fails to include at least $10,000,000 in aggregate fair market value of the Registrable Securities (as defined in the Registration Rights Agreement) or (2) such Demand Registration would require an audit of On Command Corporation's financial statements for a period as of a date other than its fiscal year end and the Demanding Party fails to agree to bear responsibility for the expenses of such an audit, (b) On Command Corporation may, if a majority of the On Command Corporation Board of Directors determines in the exercise of their good faith judgment that compliance with the disclosure obligations necessary to effect such Demand Registration at such time would have an adverse effect on On Command Corporation, defer such Demand Registration for a single period not to exceed 180 days, and (c) if On Command Corporation has undertaken a Registration within the six months preceding the receipt by On Command Corporation of the request for the Demand Registration, commencement of such Demand Registration shall be delayed until at least six months have elapsed from the date of effectiveness of such Registration. The Registration Rights Agreement also provides piggyback registration rights, which may be exercised in connection with a Demand Registration or any other registration by On Command Corporation. 42 45 Pursuant to a letter agreement, dated April 19, 1996, between Gary Wilson Partners and Ascent, and as consideration for the registration rights granted to Gary Wilson pursuant to the Registration Rights Agreement, Gary Wilson Partners has agreed that, so long as it owns any Warrant Shares, it will vote such shares in accordance with the instructions of Ascent for so long as Ascent continues to own 20% of the outstanding shares of OCC Common Stock. Additionally, Gary Wilson Partners has agreed that without prior written consent of Ascent, Gary Wilson Partners will not sell, assign, or otherwise transfer any interest in the Warrants, or any Warrant Shares, prior to the second anniversary of the Effective Date for so long as Ascent holds at least 20% of the outstanding shares of OCC Common Stock. ANTICIPATED ACCOUNTING TREATMENT The Transactions will be accounted for using the historical book value of the assets, liabilities and stockholders equity acquired from OCV by On Command Corporation and On Command Corporation's management's estimate of the fair value of Spectradyne's assets to be acquired and liabilities to be assumed by On Command Corporation. The final purchase price allocation for the Debtors' assets will be determined at a future date (no later than one year after the Closing Date), which may result in adjustments to the preliminary allocation. However, in the opinion of management, the preliminary allocation of the purchase price reflects On Command Corporation's best estimate and all adjustments necessary to fairly state the pro forma financial information presented in this Information Statement/Prospectus. REASONS FOR THE TRANSACTIONS; DETERMINATION OF THE BOARD OF DIRECTORS OF OCV The OCV Board of Directors has determined that the Transactions are in the best interests of OCV and its stockholders. In reaching its determination to approve the Merger Agreement, the OCV Board of Directors considered a number of factors, including, without limitation, those listed below. In view of the wide variety of factors considered in connection with its evaluation of the Merger, the OCV Board of Directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination, nor did it specifically characterize any factor as positive or negative except as noted below. In addition, individual members of the OCV Board of Directors may have given different weights to different factors. 1. The potential appreciation in value of the OCC Common Stock to be held by the OCV stockholders as compared to the value of OCV Common Stock expected to result from the synergies between OCV's and Spectradyne's distribution systems of in-room entertainment in the lodging industry and OCV's and Spectradyne's contracts with hotel chains and hotel management companies. Upon consummation of the Transactions, On Command Corporation will be the leading multimedia distribution in-room entertainment provider in the U.S. lodging industry. 2. The fact that, upon the consummation of the Transactions, the OCC Common Stock will be registered under the Securities Act and eligible for listing on the Nasdaq National Market. The OCV Board of Directors viewed these factors as favorable to the OCV stockholders for the long term, as well as in the short term in the case of those OCV stockholders seeking to liquidate their OCC Common Stock received in the Merger. 3. The opportunity for OCV stockholders to participate in the growth of the business to be conducted by On Command Corporation after the Transactions. OCV's Board of Directors believes that SpectraVision's bankruptcy proceedings present a unique strategic opportunity for expansion. 4. The OCV Board of Directors considered the dilutive effect of the Acquisition on the holders of OCV Common Stock. In this regard, the OCV Board of Directors reviewed the opinion of Allen & 43 46 Company dated April 18, 1996 delivered to the OCV Board of Directors to the effect that, as of such date, the consideration to be received by the holders of OCV Common Stock pursuant to the Plan Sponsor Agreement was fair from a financial point of view to the holders of OCV common stock. A copy of Allen & Company's written opinion to the OCV Board of Directors is attached hereto as Annex V and is incorporated herein by reference. The Allen & Company opinion was delivered to the OCV Board of Directors on April 18, 1996 and neither Ascent nor OCV has requested an update of such opinion. The information underlying the analysis performed by Allen & Company in connection with its opinion to the OCV Board of Directors has changed since April 1996. Notwithstanding the changes to the information underlying the analysis performed by Allen & Company, the OCV Board of Directors determined on August 13, 1996 that the Transactions are in the best interests of OCV stockholders. See "--Opinion of Allen & Company." The OCV Board of Directors also considered a number of potential disadvantages of the Transactions. In particular, the OCV Board of Directors took into account the following potential risks: (i) due to restrictions on Ascent and its principal stockholder, COMSAT, On Command Corporation will be subject to certain restrictions on its ability to raise capital through debt financing; (ii) On Command Corporation may be dependent on additional capital to implement its strategy; (iii) there can be no assurance that On Command Corporation can successfully integrate the businesses of OCV and Spectradyne; (iv) there is no prior public market for the OCC Common Stock and the price of the OCC Common Stock is subject to possible volatility; (v) On Command Corporation may be dependent on certain key personnel of OCV and Ascent with respect to the operations at On Command Corporation after the closing of the Transactions; and (vi) certain anti-takeover provisions in On Command Corporation's Certificate of Incorporation and Bylaws, as well as certain provisions of the DGCL, could increase the difficulty of effecting a change of control of On Command Corporation, thereby potentially depriving stockholders from realizing a premium over the prevailing market price of the Common Stock. For the reasons stated above, management of OCV and of On Command Corporation believe that the Transactions provide On Command Corporation with an opportunity to significantly expand the business of OCV and Spectradyne by capitalizing on the synergies between OCV and Spectradyne. On Command Corporation believes that the increased number of rooms under contract and serviced by its subsidiaries' distribution systems will enhance On Command Corporation's ability to compete and expand in the highly competitive market for in-room entertainment viewing distribution systems servicing the worldwide lodging industry. OPINION OF ALLEN & COMPANY By engagement letter, dated April 18, 1996, Ascent, on behalf of itself and OCV, retained Allen & Company to act as financial advisor in connection with any acquisition by On Command Corporation of the assets of SpectraVision and its subsidiaries and of OCV (the "Combination Transaction"), and to render its opinion as to the fairness of such a transaction, from a financial point of view, to the stockholders of each of OCV and Ascent. Allen & Company was selected by Ascent because of Allen & Company's experience and expertise in mergers and acquisitions and its knowledge of the entertainment and multimedia distribution industries, and because of Allen & Company's familiarity with OCV's business arising out of its prior role as investment banker to OCV, Ascent and COMSAT. No limitations were imposed by either the Ascent Board of Directors, the OCV Board of Directors, Ascent or OCV upon Allen & Company with respect to the investigations made or the procedures followed by it in rendering its opinion. Ascent, OCV and their respective management cooperated fully with Allen & Company in connection with its investigation. Allen & Company delivered its written opinions, dated April 18, 1996, to the Ascent Board of Directors and the OCV Board of Directors (the "Opinion"), to the effect that, as of such date, the consideration to be received by the holders of Ascent common stock (indirectly as a result of Ascent's ownership of OCV Common Stock) and OCV Common Stock (directly as a result of the Transactions) pursuant to the terms of the Combination Transaction set forth in the Plan Sponsor Agreement was fair from a financial point of view to the holders of Ascent common stock and OCV Common Stock. A copy of the Opinion of Allen & Company to the OCV Board of Directors is attached hereto as Annex V. THE OCV STOCKHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY FOR ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN BY ALLEN & COMPANY. The Allen & Company Opinion addresses only the fairness of the consideration to be received by the holders of Ascent common stock and OCV Common Stock from a financial point of view and does not constitute a recommendation that the stockholders of OCV should approve the Merger Agreement. The summary of Allen & Company's Opinion set forth herein is qualified in its entirety by reference to the full text of the Opinion. Although Allen & Company evaluated the financial terms of the Combination Transaction, Allen & Company did not recommend the specific consideration to be paid to the OCV stockholders. The consideration to be received by the OCV stockholders was determined by negotiations between Ascent, OCV, the Debtors, the Creditors' Committee and their respective representatives. In connection with its rendering of the Opinion, Allen & Company, among other things, performed the following procedures: (i) reviewed the terms and conditions of the Plan Sponsor Agreement and related documentation (excluding exhibits and schedules, which were not provided to it as of the date of its Opinion); (ii) reviewed certain reports prepared by management and Gary Wilson Partners ("GWP"), financial advisor to Ascent and OCV, regarding the projected financial performance and budgetary information for OCV and the 44 47 combined entity; (iii) analyzed certain historical business and financial information relating to Ascent and OCV including non-public financial and operating results of OCV and Ascent made available by management; (iv) considered trends in the in-room entertainment, pay-per-view, programming and satellite communications industries, and the business prospects of OCV and SpectraVision; (v) conducted discussions with members of the senior management of Ascent and OCV with respect to the financial condition, business, operations, strategic objectives and prospects of Ascent and OCV, as well as discussions with Gary Wilson Partners with respect to the newly created entity to result from the Combination Transaction; (vi) conducted discussions with, and reviewed information obtained from, management of Ascent, OCV and Gary Wilson Partners; (vii) reviewed information regarding SpectraVision's relationship with EDS, including certain financial and operating assumptions supplied to it by management and Gary Wilson Partners, and as to which it was informed by management and Gary Wilson Partners that they believed such arrangements were achievable; (viii) reviewed financial information relating to SpectraVision, including forecasts prepared by Salomon Brothers Inc on behalf of SpectraVision; (ix) reviewed and analyzed publicly available financial and transaction information of selected comparable companies in the in-room entertainment, pay-per-view, programming, and satellite communications industries; (x) reviewed the pro forma impact of the Combination Transaction from financial and equity ownership perspectives; (xi) analyzed discounted cash flows of OCV and SpectraVision based on management's forecasts; and (xii) conducted such other financial analyses and investigations as it deemed necessary or appropriate for the purposes of the Opinion. In connection with its review, Allen & Company assumed and relied upon, without independent verification, (i) the accuracy and completeness of all the financial and other information provided to it by Ascent, OCV, Gary Wilson Partners and SpectraVision for purposes of its Opinion and the representations contained in the Plan Sponsor Agreement, as well as certain information relating to the strategic objectives of Ascent, OCV and SpectraVision, as well as their existing business relationships, prospects and opportunities, including without limitation SpectraVision's relationship with EDS and (ii) the reasonableness of the assumptions made by the management of Ascent, OCV, Gary Wilson Partners, and SpectraVision with respect to their financial forecasts and budgetary information. In addition, Allen & Company did not make or seek to obtain appraisals of OCV's or SpectraVision's assets and liabilities, nor of creditors' claims in the reorganization of SpectraVision, in rendering its Opinion. Allen & Company further relied upon the assurances of the managements of OCV, Ascent and SpectraVision that they were unaware of any facts that would make the information or any projections provided by them, respectively, to Allen & Company incomplete or misleading. The Opinion is also necessarily based upon the economic, market and other conditions as in effect on, and the information made available to Allen & Company as of, the date of its Opinion. The following is a summary of the presentation to the Ascent Board of Directors and the OCV Board of Directors by Allen & Company in connection with the rendering of Allen & Company's fairness opinion. Transaction Summary. Prior to delivering its Opinion to the Ascent Board of Directors and the OCV Board of Directors, Allen & Company reviewed certain information relating to OCV and SpectraVision, including the financial terms of the Transaction, the consideration to be received by holders of OCV Common Stock and the financial analyses summarized below. Overview of OCV. Allen & Company presented an overview of OCV, focusing particularly on OCV's established PPV on-demand in-room entertainment business as well as industry trends. Allen & Company reviewed OCV's historical financial performance for the four fiscal years ended December 31, 1995, and its estimated operating results for the five fiscal years ending December 31, 2000. Allen & Company also reviewed OCV's preliminary balance sheet at December 31, 1995. Allen & Company valued OCV based on (i) market multiples of comparable public companies, in particular LodgeNet Entertainment Corporation ("LodgeNet"), derived from the market capitalization of such companies in April 1996; (ii) a discounted cash flow analysis of OCV's estimate, as of April 1996, of its operating results for the five-year period ending December 31, 2000, which estimate, OCV has informed Allen & Company, has changed materially based on trends in the industry and changes in the strategic and operating plans for OCV; and (iii) an enterprise value per room valuation based primarily on the public market valuation of LodgeNet as of April 1996. Because of the changes in the information underlying the above analysis since April 1996, the range of values is not presented herein and Allen & Company has not been requested to update such analysis. Overview of SpectraVision. Allen & Company presented an overview of SpectraVision, noting particularly SpectraVision's market position and business history, including its reorganization in bankruptcy. Allen & Company reviewed SpectraVision's historical financial results for the four fiscal years ended December 31, 1995, and its preliminary balance sheet at December 31, 1995. Allen & Company valued SpectraVision based on (i) market multiples of comparable public companies, in particular LodgeNet, derived from the market capitalization of such companies in April 1996; (ii) a discounted cash flow analysis of an estimate prepared by SpectraVision's financial advisor in November 1995 of SpectraVision's operating results for the five year period ending June 30, 2001, which estimate has not been reviewed by OCV, SpectraVision or their respective financial advisors in light of recent trends in the industry or potential changes in the strategic or operating plans for SpectraVision; and (iii) an enterprise value per room valuation based primarily on the public market valuation of LodgeNet as of April 1996. Because of the changes in the information underlying the above analysis since April 1996, the range of values is not presented herein and Allen & Company has not been requested to update such analysis. Description and Valuation of Combined Entity. Allen & Company reviewed the description and valuation of the combined entity proposed to result from the Transactions, including pro forma financial statements, anticipated business opportunities and benefits of the Transactions. Allen & Company valued the combined entity based on (i) market multiples of comparable public companies, in particular LodgeNet, derived from the market capitalization of such companies in April 1996; (ii) a discounted cash flow analysis of an estimate prepared by Ascent and OCV, as of April 1996, of the combined entity's operating results for the five-year period ending December 31, 2000, which estimate, Ascent and OCV have informed Allen & Company, has changed materially based on trends in the industry and changes in the strategic and operating plans for On Command Corporation; and (iii) an enterprise value per room valuation based primarily on the public market valuation of LodgeNet as of April 1996. Because of the changes in the information underlying the above analysis since April 1996, the range of values is not presented herein and Allen & Company has not been requested to update such analysis. Allen & Company also analyzed the proposed split of the equity of the combined entity between stockholders of OCV (72.5%) and creditors of SpectraVision (27.5%) to result from the Transactions. Conclusion. Allen & Company concluded, among other things, that the combined entity would be a market leader with approximately one million rooms served, would possess the ability to develop and utilize proprietary technology, and would have a greater debt capacity to finance capital expenditures and potential acquisitions. Allen & Company's financial analyses also indicated among other things, an accretion in value to the stockholders of OCV, on discounted cash flow and Black Scholes option valuation methods, and that the value of OCV stockholders' interest in the combined entity exceeds the value of OCV on an enterprise value per room valuation method. Allen & Company also concluded that, based on its valuation of OCV and the combined entity, the Transaction is fair to OCV stockholders. Allen & Company concluded that, as of the date of the Opinion, the Transaction is fair to OCV stockholders from a financial point of view. No company used in the comparable company analyses summarized above is identical to OCV or SpectraVision, and no transaction used in the comparable transaction analysis summarized above is identical to the Transactions. Accordingly, any such analysis of the consideration to be received by the holders of OCV Common Stock pursuant to the Transactions involves complex considerations and judgments concerning differences in the potential financial and operating characteristics of the comparable companies and transactions and other factors in relation to the trading and acquisition values of the comparable companies. Allen & Company's Opinion was based solely upon the information available to it and economic, monetary, market and other conditions as they existed as of the date of such Opinion; events occurring thereafter could materially affect the assumptions used in preparing the Opinion. As of the date of this Information Statement/Prospectus, Allen & Company has not been asked to update its Opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. The evaluation of the fairness of a transaction, from a financial point of view, is a subjective one based on the experience and judgment of Allen & Company, and not merely the result of mathematical analysis of financial data. In its analyses, Allen & Company made numerous assumptions with respect to business, market, monetary and economic conditions, industry performance, business and economic conditions and other matters, many of which are beyond Allen & Company's, Ascent's, OCV's, On Command Corporation's and SpectraVision's control. 45 48 Pursuant to the engagement letter, Allen & Company will be paid for its services as financial advisor to Ascent and OCV in connection with the Combination Transaction, and in connection with Allen & Company's rendering of its Opinion, a cash fee of $600,000. Pursuant to the engagement letter, Allen & Company was entitled to an initial fee of $50,000 and the balance of $550,000 is payable immediately upon consummation of the Combination Transaction. Ascent also agreed to reimburse Allen & Company for its reasonable out-of-pocket expenses incurred in connection with the services rendered to Ascent pursuant to the engagement letter (including the reasonable fees and disbursements of its legal counsel, and of other consultants and advisors retained with Ascent's consent). Ascent also agreed, pursuant to the engagement letter, to indemnify Allen & Company's officers, agents, employees, affiliates, and controlling persons against certain expenses and liabilities, including liabilities under the federal securities laws. 46 49 SELECTED PRO FORMA FINANCIAL INFORMATION The following selected pro forma financial information of On Command Corporation is derived from the financial statements of OCV and the consolidated financial statements of SpectraVision included elsewhere herein and give pro forma effect to the Transactions as if they had occurred on January 1, 1995 with respect to the statement of operations data, and on June 30, 1996 with respect to the balance sheet data. The selected pro forma financial information is not necessarily indicative of what the results of operations or the financial position of On Command Corporation would have been had the Transactions occurred on such dates, nor is such data necessarily indicative of the results of operations or financial position of On Command Corporation that can be expected for any future periods or at any future date. The following selected pro forma financial information should be read together with the Financial Statements of OCV, the Consolidated Financial Statements of SpectraVision and the Pro Forma Financial Statements of On Command Corporation included elsewhere in this Information Statement/Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ---------------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues ........................................ $226,045 $120,502 Total costs and expenses ........................ 243,011 126,706 Loss from operations ............................ (16,966) (6,204) Net loss ........................................ (23,638) 8,839 Net loss per common and equivalent share......... (0.79) (0.29) Shares used in per share calculations (in thousands) .............................. 30,000 30,000 OTHER DATA: EBITDA (1) ...................................... $ 44,599 $ 31,503 Cash dividends per share ........................ -- -- Rooms served at end of period ................... 911,406 915,218 Hotels served at end of period .................. 3,109 3,141
AT JUNE 30, 1996 ---------------- (Dollars in thousands, except per share data) BALANCE SHEET DATA: Total assets.................................................................... $391,339 Total debt...................................................................... 70,568 Total stockholders' equity...................................................... 271,877 Book value per share ........................................................... 9.06
- ---------------- (1) EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 47 50 HISTORICAL SELECTED FINANCIAL INFORMATION The historical selected financial information of OCV and the historical selected consolidated financial information of SpectraVision have been derived from their respective historical financial statements and should be read in conjunction with such financial statements and notes thereto, included elsewhere in this Information Statement/Prospectus, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Interim financial information at and for the six months ended June 30, 1996 and June 30, 1995 reflect, in the opinion of the managements of OCV and SpectraVision, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information. Results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the fiscal year as a whole. OCV
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------------- ----------------------- 1995 1994 1993 1992 1991 1996 1995 -------- -------- -------- ------- -------- -------- ---------- (Dollars in thousands, except per share data) INCOME STATEMENT DATA: Total net revenues ............. $102,059 $ 81,609 $ 30,204 $ 8,595 $ 2,431 $ 62,490 $ 51,331 Total direct costs of revenues ..................... 48,817 47,786 12,912 5,461 1,304 27,940 27,531 Total operating expenses ....... 45,091 27,976 14,955 2,780 2,427 30,674 19,524 Income (loss) from operations .. 8,551 5,847 2,337 354 (1,300) 3,876 4,276 Net income (loss) .............. 4,902 3,456 1,358 168 (1,875) 1,624 2,508 Net income (loss) applicable to common stock ................. 4,261 2,856 1,179 168 (1,875) 1,301 2,174 Net income (loss) per common and equivalent share ......... 0.62 0.51 0.30 0.07 (1.65) 0.16 0.36 Shares used in per share calculations (in thousands) .. 6,833 5,571 3,896 2,353 1,135 7,903 6,015 OTHER DATA: EBITDA(1) ...................... $ 37,288 $ 23,381 $ 10,157 $ 2,257 $ (581) $ 25,169 $ 15,772 Cash dividends per share ....... -- -- -- -- -- -- -- Rooms served at end of period .. 361,000 248,000 124,000 37,000 11,000 419,000 307,000 Hotels served at end of period ....................... 1,221 751 272 89 38 1,500 996 BALANCE SHEET DATA (AT END OF PERIOD): Total assets ................... $211,005 $138,884 $ 92,363 $48,646 $ 12,570 $232,915 Total debt ..................... 15,942 1,025 1,842 2,634 3,385 29,270 Redeemable common stock ........ 11,684 11,043 10,443 -- -- 12,007 Total stockholders' equity ..... 169,804 108,949 67,817 40,675 7,605 173,214 Book value per share ........... 23.33 23.80
(1) EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 48 51 SPECTRAVISION
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------------------- --------------------- 1995 1994 1993 1992 1991 1996 1995 --------- --------- --------- --------- --------- --------- -------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Total revenues .................... $ 123,986 $ 142,384 $ 162,993 $ 168,621 $ 173,093 $ 58,012 $ 65,208 Total direct costs ................ 52,813 58,015 58,834 56,528 58,597 27,088 25,884 Write-off of goodwill ............. -- -- -- 218,453 -- -- -- Write-down of hotel contracts ..... -- 196,256 -- -- -- -- -- Loss before extraordinary items and cumulative effect of change in accounting principle ......... (73,645) (254,284) (43,057) (270,242) (60,003) (22,786) (38,729) Extraordinary gain (loss) ......... (915) -- (2,699) 23,378 -- -- (915) Cumulative effect of change in accounting principle ............ -- -- -- (28,498) -- -- -- Net loss .......................... (74,560) (254,284) (45,756) (275,362) (60,003) (22,786) (39,644) Preferred stock dividend........... -- -- -- (21,878) (38,157) -- -- Net loss applicable to common stockholders..................... (74,560) (254,284) (45,756) (297,240) (98,160) (22,786) (39,644) Net loss per common and equivalent share before extraordinary items and cumulative effect of change in accounting principle.......... (3.07) (10.60) (2.37) (166.31) (655.88) (0.95) (1.65) Shares used in per share calculation (in thousands)....... 23,984 23,984 18,178 1,757 150 23,984 23,984 OTHER DATA: EBITDA(1) ......................... $ 866 $ 19,148 $ 55,790 $ 65,303 $ 69,877 $ 2,734 $ 8,756 Cash dividends per share .......... -- -- -- 12.45 254.38 -- -- Rooms served at end of period ..... 550,406 635,378 684,599 722,571 758,710 496,218 608,146 Hotels served at end of period .... 1,888 2,308 2,442 2,543 2,554 1,641 2,184 BALANCE SHEET DATA (AT END OF PERIOD): Total assets ...................... $ 205,622 $ 242,822 $ 409,478 $ 401,493 $ 619,518 $ 194,637 Total debt ........................ 28,667 510,563 436,557 458,900 514,782 41,298 Liabilities subject to settlement under reorganization ............ 579,587 -- -- -- -- 576,040 Stockholders' equity (deficit) .... (447,608) (373,025) (118,614) (150,923) 59,899 (472,165) Book value per share .............. (18.66) (19.69)
(1) EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 49 52 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Financial Statements of OCV and of SpectraVision included elsewhere in this Information Statement/Prospectus. OVERVIEW On Command Corporation was formed in July 1996 as a holding company for the acquisition of OCV and Spectradyne. Prior to the consummation of the Transactions, On Command Corporation has had no operations and has conducted no business other than those activities related to the Transactions. Set forth below is a discussion of the results of operations of OCV and of SpectraVision. Following the Transactions, OCV and Spectradyne, which comprises substantially all of the operations of SpectraVision, will comprise the principal operations of On Command Corporation. RESULTS OF OPERATIONS ON COMMAND CORPORATION -- PRO FORMA The pro forma results of operations for the year ended December 31, 1995 and the six months ended June 30, 1996 reflect the Transactions as if they had taken place as of January 1, 1995. Such pro forma results reflect the historical operations of OCV andSpectraVision, adjusted for the following: (i) the anticipated cost savings relating to a new EDS contract: (ii) the additional cost of a management services fee to be paid to Ascent; (iii) adjustments to depreciation and amortization relating to the goodwill recorded in the Acquisition and the change in depreciable basis in connection with the allocation of the purchase price for fixed assets and revisions to the estimated useful lives of the purchased assets; (iv) adjustments to interest expense to reflect the terms of the OCC Credit Facility and pro forma borrowings thereunder; (v) an adjustment to reduce restructuring costs for non-recurring bankruptcy costs incurred by SpectraVision; and (vi) an elimination of OCV's tax provision as it is anticipated that OCV would not record tax expense on a combined basis. While On Command Corporation expects that its subsidiaries will achieve substantial operating cost savings through the consolidation of certain operations and elimination of redundant costs, no adjustments have been made for these possible operating cost savings, as there are no assurances that these cost savings will be realized. The extent to which the operating cost savings will be achieved depends on, among other things, the regulatory environment and economic conditions and may be affected by unanticipated changes in business activities, inflation and operating costs. The impact of the adjustments noted above reduces the combined net loss of On Command Corporation by $46.0 million and $12.3 million for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. OCV -- HISTORICAL Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Total net revenues increased by $11.2 million or 21.7% to $62.5 million for the six months ended June 30, 1996 as compared to total net revenues of $51.3 million for the six months ended June 30, 1995, primarily as a result of net movie revenues from 419,000 installed on-demand rooms as of June 30, 1996 compared to 307,000 such rooms as of June 30, 1995, and, to a lesser extent, as a result of selected price increases. OCV's movie prices are now generally $8.95 for the first buy, and when applicable, $4.95 for the second and subsequent buys. The decrease in video system sales and the absence of video management services revenue for the six months ended June 30, 1996 is primarily attributable to the contribution by Ascent of certain assets included in its Satellite Cinema division to OCV in exchange for OCV Common Stock pursuant to a contribution agreement effective August 1, 1995. During the six month period ending June 30, 1995, video system sales and management services to Ascent totaled approximately $16.2 million. Total direct cost of revenues was $27.9 million or 44.7% of total net revenues, for the six months ended June 30, 1996, compared to $27.5 million, or 53.6% of total net revenues, for the six months ended June 30, 1995. This percentage decrease resulted from the elimination of low margin video system sales and video management services to Ascent, offset by increased free-to-guest direct costs due to price reductions granted in connection with certain hotel contracts without a corresponding decrease in programming fees paid to suppliers. Field service costs, which consist primarily of labor and material expense required to maintain the existing on-demand equipment, were $5.2 million for the six months ended June 30, 1996, or 9.4% of net movie revenue compared to $4.3 million or 13.8% of net movie revenue for the same period in 1995. This percentage decrease is the result of operating efficiencies due to the increase in installed on-demand rooms and increased management focus. Depreciation and amortization was $21.3 million or 38% of net movie revenues, for the six months ended June 30, 1996, compared to depreciation and amortization of $11.5 million, or 36.6% of net movie revenues, for the comparable period in 1995. This increase in depreciation and amortization 50 53 is attributable to the capital investment associated with installing on-demand service in hotel rooms, coupled with the depreciation and amortization resulting from the acquisition of the assets from Ascent. Marketing, general and administrative expense increased $1.2 million for the six months ended June 30, 1996 compared to the same period in 1995 due to higher levels of business activities, and costs associated with the SpectraVision acquisition. Research and development expense increased to $1.9 million for the six months ended June 30, 1996, compared to $1.1 million for the six months ended June 30, 1995. The increase of $.8 million is primarily attributable to continued investment in the development of new products by OCV, including the prototype work being done in 1996 on a new remote control. In 1995, OCV recorded a charge of $1.5 million related to the settlement of a lawsuit with a former employee of OCV. Income from operations decreased to $3.9 million for the six months ended June 30, 1996 from $4.3 million in 1995, a decrease of 9.4%. This decrease is primarily attributable to the decreased level of video system sales, higher free to guest programming costs and an increase in depreciation and amortization expenses. Net interest expense was $1.0 million for the six month period ended June 30, 1996 as compared to $.1 million for the comparable 1995 period. This is the result of OCV utilizing debt financing from Ascent during 1996 to finance OCV's continuing expansion of its installed customer base, in contrast to the comparable period in 1995 when equity financing was used in lieu of debt. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Total net revenues increased by $20.5 million or 25.1% to $102.1 million for the year ended December 31, 1995 as compared to total net revenues of $81.6 million for the year ended December 31, 1994 primarily as a result of net movie revenues from 361,000 installed on-demand rooms as of December 31, 1995 compared to 248,000 such rooms as of December 31, 1994. This increase in net movie revenues was partially offset by the elimination of video systems sales and video management services to Ascent in the August through December, 1995 period. Video system sales and video management services to Ascent totaled approximately $18.9 million and $28.1 million in 1995 and 1994, respectively. Total direct cost of revenues was $48.4 million or 47.4% of total net revenues, for the year ended December 31, 1995, compared to $47.8 million, or 58.6% of total net revenues, for the year ended December 31, 1994. This percentage decrease resulted from a reduction in film share expense from 13.7% of net movie revenues in 1994 to 11.7% in 1995 and from the elimination of low margin video system sales and video management services to Ascent in the August through December, 1995 period. Field service costs, which consist primarily of labor and material expense required to maintain the existing on-demand equipment, were $9.1 million for the year ended December 31, 1995, or 12.1% of net movie revenue compared to $5.3 million or 11.5% of net movie revenue for the same period in 1994. This increase in field service expense was broad based and included increase in personnel, travel, facility and spare equipment purchase and repair costs. Depreciation and amortization was $28.7 million or 38.3% of net movie revenues, for the year ended December 31, 1995, compared to depreciation and amortization of $17.5 million, or 38.2% of net movie revenues, for the comparable period in 1994. This increase in depreciation and amortization is 51 54 attributable to the capital investment associated with installing on-demand service in additional hotel rooms combined with the depreciation and amortization resulting from the contribution by Ascent as described above. Research and development expense for the year ended December 31, 1995 was $2.6 million as compared to $1.8 million for the 1994 period, as OCV continued its efforts to be competitive through continued investment in the development of new products, as well as new features for existing products. The increase across the periods was attributable to an increase in the costs associated with executing these efforts, primarily an increase in personnel costs of $.7 million. Marketing, general and administrative expense decreased to $3.1 million in the year ended December 31, 1995 as compared to $3.4 million in 1994, primarily due to reduced legal expenses in 1995. In 1995 OCV recorded a charge of $1.5 million related to the settlement of a lawsuit with a former employee of OCV. Income from operations increased to $8.6 million for the year ended December 31, 1995 from $5.9 million in 1994, an increase of 46.3%. This increase is attributable to increased movie revenues and a lower film share cost, offset by increased field service costs and settlement of litigation expenses. Net interest expense increased to $.4 million during the year ended December 31, 1995 as compared to $.1 million for the comparable 1994 period. This is the result of OCV obtaining debt financing from Ascent in the latter half of 1995 to finance OCV's continuing expansion of its installed customer base, in contrast to the comparable period in 1994 when equity financing was used in lieu of debt. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Total net revenues increased by $51.4 million or 170.1% to $81.6 million for the year ended December 31, 1994 as compared to net revenues of $30.2 million for the year ended December 31, 1993 primarily as the result of a 100% increase in installed on-demand rooms and from video system sales and video management services to Ascent. Video system sales and video management services to Ascent totaled approximately $28.1 million and $4.2 million in 1994 and 1993, respectively. Total direct cost of revenues was $47.8 million or 58.6% of total net revenues, for the year ended December 31, 1994, compared to $12.9 million, or 42.7% of total net revenues, for the year ended December 31, 1993. This percentage increase resulted from an increase in lower margin video system sales and video management services to Ascent and an increase in free-to-guest direct costs due to price reductions granted in connection with certain hotel contracts without a corresponding decrease in programming fees paid to suppliers. Field services costs, which consist primarily of labor and material expense required to maintain the existing on-demand equipment, were $5.3 million for the year ended December 31, 1994, or 11.5% of net movie revenue compared to $3.3 million or 14.1% of net movie revenue for the same period in 1993. This percentage decrease was primarily attributable to the increase in OCV's installed base with a lower increase in fixed costs associated with providing customer support. Depreciation and amortization was $17.5 million or 38.2% of net movie revenues, for the year ended December 31, 1994, compared to depreciation and amortization of $7.8 million, or 33.4% of net movie revenues, for the comparable period in 1993. This percentage increase is attributable to the increased capital investment required to obtain and install new hotel contracts. 52 55 Research and development expense for the year ended December 31, 1994 was $1.8 million as compared to $1.2 million for the 1993 period. Increased costs in 1994 included personnel, occupancy and consultants. Marketing, general and administrative expense increased to $3.4 million in the year ended December 31, 1994 as compared to $2.6 million in 1993. Income from operations increased to $5.8 million and 7.2% of total net revenues for the year ended December 31, 1994 from $2.3 million and 7.7% of total net revenues in 1993. This increase is attributable to increased revenues with a lower fixed cost in operating expenses. Net interest expense increased to $78,000 during the year ended December 31, 1994 as compared to $17,000 for the comparable 1993 period. This was a combination of having lower interest earning, and lower investor loan balances in 1994 as compared to 1993. 53 56 SpectraVision -- Historical Information contained in this Information Statement/Prospectus relating to SpectraVision and its subsidiaries has been obtained from publicly available documents, including the most recent Form 10-Q and Form 10-K of SpectraVision filed with the Commission. See "Available Information." The following discussion of SpectraVision's results of operations has been obtained from publicly available documents filed by SpectraVision with the Commission. See "Available Information." SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 Total revenues decreased to $58.0 million in the six months ended June 30, 1996 from $65.2 million in the six months ended June 30, 1995, a decrease of $7.2 million or 11.0%. Of the total revenues reported in the six months ended June 30, 1996, 86.9% were revenues from pay-per-view, 9.5% were from free-to-guest, and 3.6% were from other sources. Pay-per-view revenues decreased to $50.4 million in the six months ended June 30, 1996 from $55.1 million in the six months ended June 30, 1995, a decrease of $4.7 million or 8.5%. This decrease in pay-per-view revenues primarily reflects the decline in the number of rooms served, which resulted in a decrease in revenues of approximately $8.7 million. The decline in the number of revenue producing rooms during the quarter is due to the loss of rooms from non-renewal of certain hotel PPV contracts as a result of the intense competition in the hotel pay-per-view industry and SpectraVision's voluntary termination of certain unprofitable hotel contracts. These decreases were somewhat offset by an increase in average price per view from $7.75 during the six months ended June 30, 1995 to $8.32 for the six months ended June 30, 1996 contributing approximately $4.0 million to pay-per-view revenue. This increase in average price per view revenue is primarily due to the $1.00 price increase SpectraVision implemented on March 1, 1996 for substantially all of the hotels it services located in the United States. Free-to-guest revenues decreased to $5.5 million in the six months ended June 30, 1996 from $6.9 million in the six months ended June 30, 1995, a decrease of $1.4 million or 20.3%. This decrease primarily reflects the decline in the number of hotels served as well as negotiated price reductions in connection with certain PPV contract renewals. Pay-per-view direct costs increased to $20.2 million in the six months ended June 30, 1996 from $19.2 million in the six months ended June 30, 1995, an increase of $1.0 million or 5.2%. As a percentage of pay-per-view revenues, pay-per-view direct costs increased to 40.0% in the six months ended June 30, 1996 from 34.8% in the six months ended June 30, 1995. This percentage increase is primarily due to increased film licensing fees and in room collateral costs. Film licensing costs were 16.0% of pay-per-view revenues in the six months ended June 30, 1995 as compared to 19.0% in the six months ended June 30, 1996. The film license costs increased due to higher costs from vendors. The in room collateral costs, which increased $.6 million or 59.2% increased due to the introduction of the Entertainment Guide. Free-to-guest direct costs increased to $5.9 million in the six months ended June 30, 1996 from $5.7 million in the six months ended June 30, 1995, an increase of $.2 million or 3.5%. As a percentage of free-to-guest revenues, free-to-guest direct costs increased to 107.2% in the six months ended June 30, 1996 from 82.5% in the six months ended June 30, 1995. The increase in free-to-guest direct costs as a percentage of free-to-guest revenues reflects the price reductions in free-to-guest revenues in connection with certain PPV contract renewals and increases in certain free-to-guest programming costs. 54 57 Operating expenses decreased to $20.0 million in the six months ended June 30, 1996 from $21.0 million in the six months ended June 30, 1995, a decrease of approximately $1.0 million or 4.8%. Operating expenses consist primarily of maintenance of hotel systems including contractual services performed by EDS, pay-per-view equipment rental expense (primarily integrated receiver decoders and file servers for the digital guest choice system) and pay-per-view equipment repairs performed by a third party. Operating expenses declined due to the reduction in the number of hotel rooms served and due to the term of the EDS contract. Selling, general and administrative expenses decreased to $7.2 million in the six months ended June 30, 1996 from $10.2 million in the six months ended June 30, 1995, a decrease of $3.0 million or 29.4%. Decreases in salaries and benefits as a result of the reduction in workforce, along with decreases in marketing and public relations expenditures, account for the decrease. Interest expense (net) decreased to $3.1 million in the six months ended June 30, 1996 from $26.9 million in the six months ended June 30, 1995, a decrease of $23.8 million or 88.5%. The decrease is primarily due to the non-accrual of interest on debt instruments subject to settlement under reorganization. SpectraVision also capitalized interest in the amount of $.2 million for the six months ended June 30, 1996 as compared to $1.8 million in the six months ended June 30, 1995. SpectraVision's cash interest for the six months ended June 30, 1996 was $3.2 million compared to $.6 million for the six months ended June 30, 1995. Reorganization items were $1.8 million in the six months ended June 30, 1996 and consisted of normal bankruptcy, professional and other miscellaneous charges. Net loss was $22.8 million for six months ended June 30, 1996 and $39.6 million for the six months ended June 30, 1995. The decrease in the net loss for the six months ended June 30, 1996 compared to June 30, 1995 was primarily due to the decreased interest and expenses offset by declining revenues and increases in direct costs, depreciation and amortization and reorganization costs. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Total revenues decreased to $124.0 million in 1995 from $142.4 million in 1994, a decrease of $18.4 million or 12.9% primarily due to the decline in pay-per-view revenues as a result of the reduction of installed hotel rooms. Of the total revenues reported in 1995, 84.6% were revenues from pay-per-view, 11.0% were from free-to-guest, 4.4% were from interactive services and other revenue sources. Pay-per-view revenues decreased to $104.9 million in 1995 from $119.5 million in 1994, a decrease of $14.6 million or 12.2%. This decrease in pay-per-view revenues reflects the decline in the number of rooms served, which resulted in an approximate $11.1 million decrease in revenues. The remainder of the decrease in pay-per-view revenues is attributed to a decline in revenues per equipped room ("RER") reflecting lower viewing levels. SpectraVision believes the lower RER in 1995 can also be attributed to an increased number of non-operating hotel systems due to poor service and poorly performing movie product. Free-to-guest revenues decreased to $13.6 million in 1995 from $14.8 million in 1994, a decrease of $1.2 million or 8.1%. This decrease primarily reflects negotiated price reductions in connection with certain PPV hotel contract renewals and the decline in the number of hotels with free-to-guest services. 55 58 Other revenues decreased to $5.5 million in 1995 from $8.1 million in 1994, a decrease of $2.6 million or 32.1%. This decrease is primarily due to the fact that equipment sales in 1994 did not recur in 1995. Pay-per-view direct costs decreased to $39.9 million in 1995 from $41.8 million in 1994, a decrease of $1.9 million or 4.5%. As a percentage of PPV revenues, pay-per-view direct costs increased to 38.1% in 1995 from 35.0% in 1994 for a number of reasons. Film share expense increased from 16.2% of PPV revenues in 1994 to 17.1% of PPV revenues in 1995 because of higher film share percentages being charged to SpectraVision from the various film studios for the major studio film product shown by SpectraVision. Although transmission costs remained the same, they increased to 3.1% of PPV revenues in 1995 from 2.3% in 1994 because PPV revenues declined. The video tape costs increased to 3.4% of PPV revenues in 1995 compared to 2.6% in 1994 due to increased tape encoding and duplicating costs established by SpectraVision's vendors during bankruptcy. Movie card costs rose from 2.9% of PPV revenues in 1994 to 3.8% of PPV revenues in 1995 due primarily to the introduction of an Entertainment Guide magazine. Free-to-guest direct costs decreased to $11.4 million in 1995 from $11.8 million in 1994, a decrease of $.4 million or 3.4%. As a percentage of free-to-guest revenues, free-to-guest direct costs increased to 84.4% in 1995 from 79.6% in 1994 as a result of the lower revenues due to price reductions granted in connection with certain PPV contract renewals without a corresponding decrease in programming fees paid to suppliers. Other direct costs decreased to $1.4 million in 1995 from $4.4 million in 1994, a decrease of $3.0 million or 68.2%. As a percentage of other revenues, other direct costs decreased to 26.0% in 1995 from 54.8% in 1994 principally due to a one time $1.5 million charge for prior period licensing fees in 1994. Depreciation and amortization expense decreased to $39.4 million in 1995 from $50.5 million in 1994, a decline of $11.1 million or 22.0%. The decline is due to the write-down of hotel contracts at the end of 1994 and assets becoming fully depreciated. Operating expenses increased to $17.6 million in 1995 from $13.2 million in 1994, a net increase of $4.4 million or 33.3%. Operating expenses for periods prior to April 1994 included costs of SpectraVision's U.S. field service organization as well as field service operations in its foreign subsidiaries, and labor costs of repairs and maintenance of hotel system components (including TV's). Subsequent to March 1994, operating expenses are comprised of field service operations of the foreign subsidiaries and repairs and maintenance costs. In 1995, these costs also included technicians who were hired to improve customer service in the field. Approximately $2.0 million represented duplicated costs during 1995 when SpectraVision employed its own field service organization and also paid contract fees under the EDS Service and Technology Agreement. In addition, the cost of repairs to system components increased $1.6 million due to both the cost of shipping and the increased quantity of room units and videotape players repaired. The increased number of repairs, primarily to room unit channel selectors, is partially due to the omission of on-site repairs previously performed by SpectraVision field service personnel in prior years. Contracted service costs increased to $29.3 million in 1995 from $21.0 million in 1994, an increase of $8.3 million or 39.5%. The remaining increases include the costs from the EDS Service and Technology Agreement, which was in effect for the last three quarters of 1994 and the entire year of 1995. The increase is due primarily to the recording of $6.0 million of operating leases for equipment previously owned by SpectraVision and sold in a sale leaseback arrangement. 56 59 Selling and marketing expenses decreased to $4.9 million in 1995 from $8.7 million in 1994, a decrease of $3.8 million or 43.7% due to the elimination of the marketing department during the year and reductions in activities associated with public relations and promotion of new products. General and administrative expenses decreased to $17.3 million in 1995 from $19.6 million in 1994, a net decrease of $2.3 million or 11.7%. Expenses in 1994 included severance costs of $2.1 million due to changes in executive management. Additionally, 1994 included increases in legal fees, outside management fees for warehouse management and shipping services provided by Certech. Research and development expenses decreased to $1.8 million in 1995 from $3.8 million in 1994, a decrease of $2.0 million due to various cost reductions implemented. Non-operating income for 1995 was $.5 million. This amount includes adjustments to certain prior obligations which were settled for less than anticipated. Non-operating income for 1994 was $1.2 million and is comprised of business interruption insurance proceeds from hurricanes in 1993 and certain non-operating payments received in-lieu of performance under purchase orders for equipment by a customer. Interest expense (net) decreased to $28.2 million in 1995 from $55.0 million in 1994, a decrease of $26.8 million or 48.7%. Cash interest expense decreased from $4.0 million in 1994 to $3.2 million in 1995, a decrease of $.8 million. Non-cash interest expense decreased from $51.2 million in 1994 to $25.0 million in 1995, a decrease of $26.2 million. These decreases in interest expense were the result of the non-accrual of interest on debt instruments subject to settlement under reorganization for the period from June 8, 1995, the date of the Chapter 11 filing, to December 31, 1995. This decrease was partially offset by an increase in interest expense due to the increased outstanding balance of the 11.65% Senior Subordinated Reset Notes during 1995 (prior to June 8, 1995) as compared to 1994. Reorganization items of $7.6 million ($0 in 1994) for the twelve months ended December 31, 1995 include normal bankruptcy, professional and miscellaneous charges of $1.6 million and restructure charges of $6.0 million, which includes discontinuing service to a number of unprofitable hotels and the elimination of certain positions within SpectraVision. Of the total $6.0 million restructuring charge, $.9 million relates to the cost of deinstalling certain hotels and $1.7 million was recorded for estimated losses on the disposal of deinstalled equipment. SpectraVision also recorded $.1 million in employee severance costs which will be incurred in the restructure process. SpectraVision recorded an additional charge of $2.3 million which represented the write-off or abandonment of other fixed assets and $1.0 million for other costs associated with the restructure process. Deferred income tax benefits decreased to $1.0 million in 1995 from $28.5 million in 1994, a decrease of $27.5 million or 96.5%. The 1994 deferred tax benefit includes the tax effects related to the write-down of hotel contracts. SpectraVision has recognized deferred tax assets only to the extent such assets can be realized through future reversals of existing taxable timing differences. As of December 31, 1995, the net operating loss carryforwards for federal income tax purposes were $328 million. Extraordinary item of $.9 million in 1995 represents the write-off of unamortized debt issuance costs in connection with the extinguishment of SpectraVision's Revolving and Canadian Bank Credit Facilities. Net loss decreased to $74.6 million in 1995 from $254.3 million in 1994, a decrease of $179.7 million. The net loss for 1994 included a one-time charge of $196.3 million for the revaluation of hotel 57 60 contracts and patent costs. Ignoring this one time charge in 1994, 1995 net loss increased by $16.6 over the 1994 net loss. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Total revenues decreased to $142.4 million in 1994 from $163.0 million in 1993, a decrease of $20.6 million or 12.6% primarily due to the decline in pay-per-view revenues as a result of the reduction of installed hotel rooms. Of the total revenues reported in 1994, 83.9% were revenues from pay-per-view, 10.4% were from free-to-guest, 5.7% were from interactive services and other revenue sources. Pay-per-view revenues decreased to $119.5 million in 1994 from $134.8 million in 1993, a decrease of $15.3 million or 11.4%. This decrease in pay-per-view revenues reflects the decrease in the number of rooms served, which resulted in an approximate $11.3 million decrease in revenue. The remainder of the decrease in pay-per-view revenues is attributed to a decline in RER reflecting lower viewing levels. SpectraVision believes the lower RER in 1994 can also be attributed to an increased number of non-operating hotel systems during the transition. The transition of SpectraVision's field service to EDS involved numerous difficulties for field service personnel in maintaining the normal level of repairs and maintenance of existing PPV rooms (particularly those with tape-based PPV systems) concurrent with the installation of the compressed digital video sites. Free-to-guest revenues decreased to $14.8 million in 1994 from $17.9 million in 1993, a decrease of $3.1 million or 17.3%. This decrease primarily reflects negotiated price reductions in connection with certain PPV hotel contract renewals and the decline in the number of hotels with free-to-guest services. Other revenues decreased to $8.1 million in 1994 from $10.3 million in 1993, a decrease of $2.2 million or 21.4%. This decrease is primarily due to reduced equipment sales and a $1.0 million decrease in interactive revenues due to price reductions granted in connection with certain PPV contract renewals. Pay-per-view direct costs decreased to $41.8 million in 1994 from $42.2 million in 1993, a decrease of $429,000 or 1.0%. As a percentage of pay-per-view revenues, pay-per-view direct costs increased to 35.0% in 1994 from 31.3% in 1993. The increase resulted primarily from costs of the transponder lease required for the implementation of the compressed digital video Satellite Network beginning in the last quarter of 1993. The costs of videotapes and in-room schedule cards increased to 5.4% of PPV revenues in 1994 from 4% in 1993. Due to the delay of deployment of the satellite-delivered compressed digital video technology including SPEXIS and the electronic on-screen movie card, reduction of videotapes and in-room cards were not realized as anticipated. Free-to-guest direct costs decreased to $11.8 million in 1994 from $12.8 million in 1993, a decrease of $1.0 million or 7.8%. As a percentage of free-to-guest revenues, free-to-guest direct costs increased to 79.0% in 1994 from 71.6% in 1993. The increase in free-to-guest direct costs as a percentage of free-to-guest revenues is a result of the lower revenues due to price reductions granted in connection with certain PPV contract renewals without a corresponding decrease in programming fees paid to suppliers. Other direct costs increased to $4.4 million in 1994 from $3.8 million in 1993, an increase of $.6 million or 15.8%. As a percentage of other revenues, other direct costs increased to 54.8% in 1994 from 50.2% in 1993 principally due to a $1.5 million charge for prior period licensing fees. Depreciation and amortization expense increased to $50.5 million in 1994 from $44.1 million in 1993, an increase of $6.4 million or 14.5%. The increase in depreciation is due to the increase in video 58 61 systems capitalized during 1994 due to the installation of the new satellite-delivered compressed digital video technology. Technology and field service charge for 1993 reflects the one-time costs due to changes in technology and field service operations in connection with the EDS Service and Technology Agreement. SpectraVision recorded costs in the amount of $7.0 million for the write-off of obsolete equipment (primarily videotape players and obsolete microprocessing equipment) and personnel related costs associated with the reorganization of SpectraVision's field service operations. Approximately $3.9 million was attributable to the write-off of obsolete equipment and $3.1 million was due to costs of severance and incentives to field operation personnel and costs related to the closing of field service offices. The EDS Service and Technology Agreement was executed in July 1993 and SpectraVision's management determined the impact on operations including obsolete equipment and personnel reductions at that time and accordingly recorded the estimation of these costs in the results of operations for 1993. Loss on sale of manufacturing assets and inventory is a result of the sale of SpectraVision's manufacturing operations to The Cerplex Group in December 1993. Certech Technology, Inc., a wholly-owned subsidiary of The Cerplex Group, manufactures and sells to SpectraVision a portion of the hotel PPV system components. Certech has leased the manufacturing space at SpectraVision's corporate headquarters. The cash proceeds to SpectraVision resulting from the sale of assets and inventory were $5.2 million. The net loss on the transaction of $0.7 million is comprised of a gain on the sale of assets net of inventory write-downs and accrued severance costs. Operating expenses combined with contracted service costs increased to $34.2 million in 1994 from $26.3 million in 1993, a net increase of $7.9 million or 30.0%. Operating expenses for periods prior to April 1994 include costs of SpectraVision's U.S. field service organization as well as field service operations in its foreign subsidiaries, and labor costs of repairs and maintenance of hotel system components (including TV's). Subsequent to March 1994, operating expenses are comprised of field service operations of the foreign subsidiaries and repairs and maintenance costs. The combined expenses for 1994 includes a decrease of approximately $2.2 million due to personnel transferred from operations to SpectraVision's sales organization which costs are included in selling and marketing expenses for 1994. Approximately $5.3 million represents duplicated costs during the first quarter of 1994 when SpectraVision employed its own field service organization and also paid contract fees under the EDS Service and Technology Agreement. The cost of repairs to system components also increased. This increase is attributable to both the cost of shipping and the increased quantity of room units and videotape players repaired. The increased number of repairs, primarily to room unit channel selectors, is partially due to the omission of on-site repairs previously performed by SpectraVision field service personnel. Selling and marketing expenses increased to $8.7 million in 1994 from $5.1 million in 1993, an increase of $3.6 million or 70.6%. Sales costs increased approximately $2.2 million due to transfers of personnel previously utilized in the field operations group as described above. Marketing costs increased approximately $1.2 million due to activities associated with public relations and promotion of new products. General and administrative expenses increased to $19.6 million in 1994 from $15.4 million in 1993, a net increase of $4.2 million or 27.3%. Expenses in 1994 included severance costs of $2.1 million due to changes in executive management. Additionally there were increases in legal fees and increases in outside management fees for warehouse management and shipping services provided by Certech. Directors' and officers' liability insurance costs and bad debt expense decreased in 1994 as compared to 1993. 59 62 Non-operating income for 1994 was $1.2 million and is comprised of business interruption insurance proceeds from hurricanes in 1993 and certain non-operating payments received in-lieu of performance under purchase orders for equipment by a customer. Non-operating income was zero in 1993. Research and development expenses increased to $3.8 million in 1994 from $1.6 million in 1993, an increase of $2.2 million due to increased development and support of the satellite-delivered compressed digital video technology. Interest expense (net) increased to $55.0 million in 1994 from $49.0 million in 1993, an increase of $6.0 million or 12.2%. Cash interest expense decreased from $43.2 million in 1993 to $4.0 million in 1994, a decrease of $39.2 million. Non-cash interest expense increased from $6.1 million in 1993 to $51.2 million in 1994, an increase of $45.1 million. The decrease in cash interest expense and the increase in non-cash interest expense is due to SpectraVision's issuance of additional Reset Notes in payment of the interest obligation on June 1 and December 1, 1994 on the Reset Notes resulting in $34.0 million of non-cash interest expense. Additionally, 1994 includes a full year of discount accretion on the Senior Notes (issued in October 1993) compared to only 3 months of discount accretion during 1993. State and foreign income tax benefit was $448,888 in 1994 as compared to $1.7 million of state and foreign income tax expense in 1993, a decrease of $2.2 million. The benefit in 1994 is primarily attributed to operating losses on the state level resulting in loss carrybacks. Deferred tax benefits increased to $28.5 million in 1994 from $4.5 million in 1993, as a result of a reduction in SpectraVision's net deferred tax liabilities. The increase in the tax benefit for 1994 as compared to 1993 primarily relates to the write-down of hotel contracts. SpectraVision has recognized deferred tax assets only to the extent such assets can be realized through future reversals of existing taxable temporary differences. As of December 31, 1994 the net operating loss carryforwards for federal income tax purposes were $285 million. Loss before extraordinary items increased to $254.3 million in 1994 from $43.1 million in 1993, an increase of $211.2 million. The net loss for 1994 includes a one-time charge of $196.3 million for the revaluation of hotel contracts and patent costs. LIQUIDITY AND CAPITAL RESOURCES On Command Video Corporation Through 1994, the liquidity and capital needs of OCV were financed primarily through cash flow from operations and equity placements with Ascent and other minority stockholders. In 1995, OCV entered into a promissory note agreement with Ascent to supplement OCV's ongoing financing needs. As of December 31, 1995 and June 30, 1996, borrowings outstanding under the note payable were $15.7 million and $29.3 million, respectively. Pursuant to the promissory note agreement, these borrowings are due on demand and bear interest at the prime rate. In connection with the Transactions, the promissory note will be repaid. During the year ended December 31, 1995, OCV's working capital deficit increased by $19.3 million. This increase was primarily attributable to the $15.1 million increase in the short-term note payable to Ascent used primarily to fund the installation of on-demand systems, combined with a decrease in accounts receivable of approximately $2.5 million. During the six months ended June 30, 1996, OCV's working capital deficit increased by approximately $14.1 million, which is primarily attributable to OCV's borrowings under the short-term note payable to Ascent used to fund continuing installation of on-demand systems. On Command Corporation In connection with the consummation of the Transactions, On Command Corporation will require approximately $90 million to refinance the SpectraVision DIP Loan, to repay the OCV Debt, to pay closing and exit costs related to consummating the Plan and to provide initial working capital. In September 1996, On Command Corporation received a commitment from NationsBank of Texas, N.A. ("NationsBank") for an aggregate $125 million credit facility consisting of either of the following types of facilities: (i) a 364-day revolving credit and competitive advance facility, which, subject to certain conditions, will be renewable for four 364-day periods, and (ii) a five-year revolving credit and competitive advance facility; provided, however, that any amounts borrowed under the five-year facility will reduce the amount available under the 364-day facility. The OCC Credit Facility will contain customary covenants and agreements, including, among other things, compliance by On Command Corporation with certain financial covenants, including a consolidated ratio of EBITDA to cash interest expense (calculated in accordance with the OCC Credit Facility) of at least 4.00 to 1.00 for any four consecutive fiscal quarters and a consolidated ratio of total debt to EBITDA (calculated in accordance with the OCC Credit Facility) of not more than 2.50 to 1.00 for any fiscal quarter from the Closing through fiscal year end 1997 and 2.00 to 1.00 for any fiscal quarter thereafter. The OCC Credit Facility will also limit On Command Corporation's ability to incur additional indebtedness and pay dividends but will not preclude On Command Corporation from paying cash dividends on its Common Stock. Revolving loans extended under the OCC Credit Facility generally will bear interest at either the London Interbank Offering Rate ("LIBOR") plus a spread that may range from 0.375% to 0.625% depending upon On Command Corporation's consolidated ratio of total debt to EBITDA (calculated in accordance with the OCC Credit Facility) or the greater of prime rate or federal funds rate plus a half percentage point. In addition, at On Command Corporation's option, it may request bids from the lenders under the OCC Credit Facility for competitive advance loans with specified maturities, in which case On Command Corporation may choose to accept bids in ascending order based on the interest rates bid by such lenders. Borrowings under the OCC Credit Facility will be subject to certain customary conditions, including the absence of any events of default and of any material adverse change in the financial condition of On Command Corporation. In consideration for the lenders' commitment under the OCC Credit Facility, On Command Corporation will pay the lenders an annual fee ranging from 0.1875% to 0.25% of the unused amount of the OCC Credit Facility, depending upon On Command Corporation's consolidated ratio of total debt to EBITDA (calculated in accordance with the OCC Credit Facility) and certain other fees. On Command Corporation's principal cash requirements are expected to include continued installation of on-demand systems, including installations for new customers and the conversion of hotels currently under contract and receiving only scheduled service. On Command Corporation will have material commitments for capital expenditures for the installation of on-demand systems by both OCV and Spectradyne, which installations will be completed when cash flows are available and the overall liquidity of On Command Corporation is sufficient for such expenditures. However, On Command Corporation anticipates that capital expenditures in connection with the continued installation by OCV of on-demand service will total approximately $35 million during the six-months ended December 31, 1996. For 1997, On Command Corporation has not determined estimated capital expenditures for the installation of on-demand service and/or the conversion of select SpectraVision hotels to the OCV on-demand system due to management's desire to further analyze the capabilities of the two systems and manage the cash flows and liquidity needs of On Command Corporation. On Command Corporation expects to have access to short-term and long-term financing at favorable rates under the OCC Credit Facility. Management of On Command Corporation believes that funds generated by operations and funds available under the OCC Credit Facility will be sufficient for On Command Corporation to satisfy its growth and finance working capital requirements through 1997, subject to the limitations described in the following paragraph. 60 63 On Command Corporation and Ascent will enter into the Corporate Agreement, pursuant to which On Command Corporation will agree with Ascent not to incur any indebtedness without Ascent's prior consent, other than indebtedness under the OCC Credit Facility, and indebtedness incurred in the ordinary course of operations which together shall not exceed $100 million in the aggregate; provided that not more than $50 million of such indebtedness may constitute long-term debt. In addition, pursuant to the COMSAT Agreement, Ascent has agreed not to incur any indebtedness, other than under Ascent's existing credit facility (and refinancings thereof) and indebtedness incurred in the ordinary course of business, which together shall not exceed $175 million in the aggregate, without COMSAT's consent. In contemplation of the closing of the Transactions, COMSAT has consented to permit Ascent to incur consolidated indebtedness (including indebtedness of On Command Corporation) of up to $216 million in the aggregate; provided that: (i) not more than $50 million of such indebtedness may constitute long-term debt; and (ii) indebtedness in excess of $175 million may only be incurred to provide funding requirements through the balance of 1996. A primary purpose of the COMSAT Agreement is and a primary purpose of the Corporate Agreement will be to require Ascent and On Command Corporation to coordinate their capital requirements with COMSAT so that COMSAT can monitor its compliance with the regulations of the FCC applicable to the capital structure and debt financing activities of COMSAT and its consolidated subsidiaries. COMSAT is required to submit a financial plan to the FCC for review annually. Under existing FCC guidelines, COMSAT is subject to a maximum long-term debt to total capital ratio of 45%, a limit of $200 million in short-term debt and interest coverage ratio of 2.3 to 1. COMSAT has requested a temporary decrease in the interest coverage ratio, which is renewed at year end, to a minimum of 1.9 to 1 for the 1996 plan year and an increase in the short-term debt limit to $325 million as long as the financial statements of Ascent are consolidated with those of COMSAT. COMSAT has informed Ascent that COMSAT was in compliance with both the long-term debt to total capital ratio and the short-term debt limit at June 30, 1996 and expects to be in compliance with those guidelines and the interest coverage ratio guideline at December 31, 1996 if the short-term debt limit and interest coverage ratio are modified as requested. If the FCC approves COMSAT's request, COMSAT has further informed Ascent that it expects that the cash flows from operations and COMSAT's consolidated short-term borrowing capacity, including indebtedness authorized under Ascent's credit facility and the refinancing thereof in connection with the Transactions and the OCC Credit Facility, will be sufficient to fund COMSAT's aggregate cash requirements for the balance of 1996. Management of On Command Corporation and Ascent believes that, the $100 million limit on On Command Corporation's indebtedness and the $216 million aggregate limit on Ascent's indebtedness are adequate to fund their respective operations through the end of 1996. A number of factors could cause the funding requirements of COMSAT, Ascent and On Command Corporation to differ materially from those projected, including, but not limited to, the performance of their respective operating subsidiaries, unanticipated costs associated with the consummation fo the Transactions or integration of SpectraVision's and OCV's businesses, the level of ticket sales and other revenues by Ascent's professional sports franchises, and market conditions. For 1997, management of On Command Corporation and Ascent believes that it will be necessary for On Command Corporation to seek approval from Ascent to increase its debt limit, and for Ascent to seek approval from COMSAT to increase its debt limit. As part of Ascent's 1997 operating and capital planning process, Ascent's management will request that COMSAT increase Ascent's debt limit beginning in January 1997. There can be no assurance, however, that COMSAT will approve any increase in Ascent's debt limit. If Ascent were not to obtain approval to increase its debt limit, it is highly unlikely that Ascent would approve an increase in On Command Corporation's debt limit. If On Command Corporation's debt limit were not increased, On Command Corporation may be required to reduce or reschedule planned capital investments, reduce cash outlays, reduce debt, sell assets or sell equity. Finally, COMSAT has informed Ascent that if COMSAT were to fail to satisfy one or more of the FCC guidelines as of an applicable measurement date, COMSAT would be required to seek advance FCC approval of future financing activities on a case by case basis. If such approval were not granted for any financing activities sought by On Command Corporation, it could be required to reduce or reschedule planned capital investments, reduce cash outlays, reduce debt or sell assets. On Command Corporation believes that the risks of foreign currency exchange rate fluctuations on its operations presently are not material to its overall financial condition. However, should its foreign operations grow, management of On Command Corporation will consider entering into foreign currency contracts, swap arrangements or other financial instruments designed to minimize exposure to both interest rate and exchange rate fluctuations on its foreign operations. ANTICIPATED ACCOUNTING TREATMENT The Transactions will be accounted for using the historical book value of the assets, liabilities and stockholders equity acquired from OCV by On Command Corporation and On Command Corporation's management's estimate of the fair value of Spectradyne's assets to be acquired and liabilities to be assumed by On Command Corporation. The final purchase price allocation for the Debtors' net assets will be determined at a future date (no later than one year from the Closing Date), which may result in adjustments to the preliminary allocation. However, in the opinion of On Command Corporation's management, the preliminary allocation of the purchase price reflects On Command Corporation's best estimate and all adjustments necessary to fairly state the pro forma financial information presented in this Information Statement/Prospectus. SEASONALITY The business of each of OCV and Spectradyne is, and the business of On Command Corporation is expected to be, seasonal, with higher revenues realized during the summer months and lower revenues realized during the winter months due to business and vacation travel patterns. 61 64 BUSINESS GENERAL On Command Corporation is a newly formed Delaware corporation. From and after the Closing Date, and after giving effect to the Transactions, On Command Corporation will be a holding company the principal assets of which will be OCV, Spectradyne and On Command Development, each of which will operate as a separate, wholly owned subsidiary of On Command Corporation. OCV is the leading provider (by number of hotel rooms served) of on-demand in-room entertainment for the United States lodging industry. The OCV system is a patented video selection and distribution system that allows guests to select on a PPV basis from up to 50 motion pictures on computer controlled television sets located in their rooms at any time. OCV also provides in-room viewing of free-to-guest programming of select cable channels (such as HBO, the Disney Channel, Showtime, ESPN and CNN) and other interactive services. OCV provides its services under long-term contracts primarily to business and luxury hotel chains such as Marriott, Hilton, Wyndham, Doubletree, Fairmont, Embassy Suites and Holiday Inn, and to other select hotels. OCV has experienced rapid growth in the past three years, increasing its base of installed on- demand rooms from approximately 37,000 rooms at the end of 1992 to approximately 419,000 rooms at June 30, 1996. See "--On Command Video Corporation." Spectradyne, a subsidiary of SpectraVision, is a leading provider of interactive in-room video entertainment services to the lodging industry. Founded in 1971, SpectraVision originally developed and patented a system which provides in-room television viewing of recently released major and other motion pictures on a PPV basis. SpectraVision, through Spectradyne, subsequently expanded its services to include providing PPV movies in an on-demand format, delivering free-to-guest programming and providing interactive services that capitalize on Spectradyne's proprietary two-way communications equipment. Spectradyne has been a major provider of these services to the lodging industry since 1971 and, at June 30, 1996, provided PPV services to approximately 495,000 rooms in approximately 1,600 hotels. Spectradyne provides its services under contracts to hotel chains, hotel management companies and individually owned and franchised hotel properties. In June 1993, SpectraVision entered into a ten-year exclusive contract with EDS to install and maintain a digital satellite delivered hotel PPV system. By late 1994, the costs associated with the EDS contract combined with SpectraVision's high debt levels created financial difficulties for SpectraVision. In early 1995, SpectraVision determined that a financial restructuring would be required to ensure SpectraVision's long-term survival. SpectraVision conducted restructuring negotiations with representatives of its secured and unsecured creditors during April and May 1995, working toward the development of an overall restructuring plan. In June 1995, SpectraVision concluded that a filing for reorganization under Chapter 11 of the Bankruptcy Code should be made in order to preserve the value of its assets and to ensure that the business had sufficient cash resources to continue operations while it completed the financial restructuring process. On June 8, 1995, the Debtors, filed a petition for relief under the Bankruptcy Code in the Bankruptcy Court. On Command Development, a newly formed subsidiary of On Command Corporation, has been formed to develop new technologies to be used by OCV and Spectradyne in order to support and improve OCV's and Spectradyne's operations and to develop new applications to be marketed by OCV and Spectradyne. See "--On Command Development." 62 65 INDUSTRY OVERVIEW Providing in-room video entertainment and information services to the lodging industry includes offering pay-per-view major motion pictures, free-to-guest programming of select pay cable channels and an increasing array of interactive services. Pay-per-view services were introduced in the early 1970's and have since become a standard amenity offered by many hotels to their guests. Historically, providers of programming to hotels delivered their content on a fixed time schedule that did not provide the end- consumer flexibility in choosing when to watch a movie. Typically, a hotel guest would be offered four to eight movies, each of which would be shown once every two to four hours. The development of video switches (including OCV's patented video switch) has enabled providers of pay-per-view services to offer scheduling flexibility to the end-consumer. It has been OCV's experience that rooms having the on- demand format generate significantly greater movie revenues than comparable rooms having only the scheduled movie format. Changes in technology have also led to the ability to provide a number of on- demand interactive services such as folio review, automatic checkout, survey completion, guest messaging and video games. OPERATING AND GROWTH STRATEGIES OCV's operating and growth strategy has been to (i) increase its installed hotel customer base by obtaining contracts with business and luxury hotels, and select mid-priced hotels, not presently under contract with existing vendors or presently served by other vendors as the contracts covering such hotels expire or may be acquired, (ii) create new revenue sources through an expanding range of interactive and information services offered to the lodging industry and (iii) expand into foreign markets and alternative markets, including the corporate, educational, health care and residential markets. Following the Transactions, it is anticipated that On Command Corporation will follow a similar operating and growth strategy. On Command Corporation has directed the Debtors to assume substantially all of the Spectradyne hotel contracts in connection with the Plan. In particular, On Command Corporation has directed Spectradyne to assume the contract with Hyatt Corporation ("Hyatt"), which is currently served by Spectradyne's Digital Guest Choice system and to continue to provide equivalent services to Hyatt under such contract. On Command Corporation intends to operate OCV and Spectradyne as separate operating entities, at least in the short term, until On Command Corporation finalizes plans for integrating operations. As a result, in the short term, On Command Corporation intends to service the Spectradyne hotel contracts on a substantially similar basis as they were serviced by Spectradyne prior to the Acquisition. However, On Command Corporation intends to pursue quickly and diligently renewing or extending many of the contracts with existing Spectradyne hotel customers by offering these customers the opportunity to enter into contracts with OCV for the installation of OCV on-demand PPV movie service and related services in place of the existing Spectradyne service. On Command Corporation management believes that offering Spectradyne's customers the opportunity to receive OCV products and services will result in the retention of a majority of the Spectradyne hotel customers. Certain of Spectradyne's customers will not be offered the opportunity to receive OCV equipment. These customers are located in Hong Kong, Australia, Singapore and Thailand. OCV is currently a party to an agreement with MagiNet Corporation ("MagiNet") to provide OCV systems and technology to MagiNet in the Asia Pacific region. See "--On Command Video Corporation." Because of the existence 63 66 of this agreement, OCV does not currently intend to allow any other parties to use the OCV system to service customers in those countries. In order to continue to provide the Guest Theater and Digital Guest Choice services to Spectradyne customers, On Command Corporation has entered into an agreement with EDS pursuant to which Spectradyne will continue to lease certain equipment from EDS, and EDS will provide network services and transponder support for these services for up to 45 months after closing. The cost to On Command Corporation and Spectradyne of this new agreement will be substantially less than SpectraVision had been committed to pay. With respect to all of the other suppliers necessary or appropriate to provide PPV and free-to-guest services to Spectradyne's hotel customers, On Command Corporation is currently in negotiations with all of these parties and expects to have agreements in place to provide uninterrupted service. In some cases this will require the assumption of pre-petition Spectradyne agreements, certain of which are expected to be amended in connection with such assumption. In other cases, On Command Corporation anticipates that suppliers will agree to a master agreement with On Command Corporation under which both OCV and Spectradyne would receive products or services from the relevant suppliers. Historically, substantially all of OCV's growth has derived from obtaining contracts with hotels in the United States not presently under contract with existing vendors or presently served by other vendors as the contracts covering such hotels expired. On Command Corporation believes that, following the consummation of the Transactions, opportunities for additional growth in the United States will be more limited than in the past. As a result, On Command Corporation intends to focus its strategy for obtaining new hotel customers on international markets. On Command Corporation believes that, relative to the United States, many international markets are underserved by the hotel in-room entertainment industry. ON COMMAND VIDEO CORPORATION OCV is the leading provider (by number of hotel rooms served) of on-demand in-room video entertainment for the United States lodging industry, according to a report published by Paul Kagan Associates, Inc., an industry analyst. The OCV system is a patented video selection and distribution system that allows guests to select on a PPV basis from up to 50 motion pictures on computer controlled television sets located in their rooms at any time. OCV has experienced rapid growth in the past three years, increasing its base of installed on-demand rooms from approximately 37,000 rooms at the end of 1992 to approximately 419,000 rooms at June 30, 1996. OCV also provides in-room viewing of free-to-guest programming of select cable channels (such as HBO, the Disney Channel, Showtime, ESPN and CNN) and other interactive services. OCV provides its services under long-term contracts primarily to business and luxury hotel chains such as Marriott, Hilton, Wyndham, Doubletree, Fairmont, Embassy Suites and Holiday Inn, and to other select hotels. In addition to the on-demand in-room entertainment services offered by OCV, since August 1, 1995, OCV also provided lower margin, satellite-delivered PPV movies on a scheduled basis to the lodging industry through its Satellite Cinema division. By June 1996, OCV had converted select Satellite Cinema hotel properties to higher margin OCV services and had sold or discontinued Satellite Cinema services at the remaining hotel properties. At June 30, 1996, approximately 97% of OCV's installed on-demand rooms were located in the United States, with the balance located in Canada, the Caribbean and Europe. In addition to installing OCV systems in hotels served by OCV, OCV sells its systems to certain other providers of in-room entertainment, including MagiNet (formerly Pacific Pay Video Limited), which is licensed to use OCV's 64 67 system to provide on-demand in-room entertainment in the Asia Pacific region. Services and Products OCV provides on-demand in-room television viewing of major motion pictures (including new releases) and independent non-rated motion pictures for mature audiences for which a hotel guest pays on a per-view basis. Guests can choose among 20 to 50 different video programs on demand, depending upon the size of the hotel, with larger hotels offering a wider selection. The hardware installed in OCV's systems consists of a microprocessor controlling the television in each room, a handheld remote control and a central "head-end" video rack and system computer located elsewhere in the hotel. The in-room terminal unit may be integrated within, or located behind, the television. OCV emphasizes sales and installations of full-scale OCV video on-demand systems to business and luxury hotels. OCV is also marketing lower cost Video NOW(TM) systems to select mid-priced hotels. The Video NOW(TM) system works with the hotel's existing televisions and telephones, allowing guests to use their touch-tone telephones to access on-demand movies and other programming. OCV provides service under contracts with hotels that generally run for a term of seven years. Under these contracts, OCV installs its system into the hotel at OCV's cost and OCV retains ownership of all equipment utilized in providing the service. Traditionally, the hotel provides and owns the televisions; however, on occasion, OCV provides televisions to hotels that meet certain economic criteria. OCV undertakes a significant investment when it installs its system in a property, sometimes rewiring the entire hotel. Depending on the size of the hotel property and the configuration of the system installed, the installed cost of a new on-demand system with interactive and video game services capabilities, including the head-end equipment, ranges from $400 to $700 per room, or approximately $300 per room if the Video NOW(TM) system is used. OCV's contracts with hotels provide that OCV will be the exclusive provider of in-room, PPV television entertainment services to the hotel and generally permit OCV to set the movie price. The hotels collect movie viewing charges from their guests and retain a commission equal to a percentage of the total PPV revenue that varies depending upon the size and profitability of the system. Some contracts also require OCV to upgrade its system to the extent that new technologies and features are introduced during the term of the contract. At the scheduled expiration of a contract, OCV generally seeks to extend the contract on terms substantially similar to the current terms. Because of the capital investment that OCV has made in installing its system in a particular hotel, OCV believes it will have a significant competitive advantage over any other provider attempting to displace OCV as provider to that hotel. There can be no assurance, however, that OCV will be successful in renewing its contracts. See "--Competition." Programming signals originate from video cassette players located within the head-end rack and are transmitted to individual rooms by way of OCV's proprietary video switching technology. Movie starts are controlled automatically by the system computer. The system computer also records the purchase by a guest of any title and reports billing data to the hotel's accounting system, which posts the charge to the guest's bill. Manual functions of the OCV equipment and system are limited to changing video cassettes once a month, which is handled by OCV's field operations personnel. OCV's information system is capable of generating regular reports of guests' entertainment selections, permitting OCV to adjust its programming to respond to viewing patterns. The number of guests that can view a particular movie at the same time varies from hotel to hotel depending upon the popularity of the movie. OCV provides more copies of the most popular programming to hotels. In a typical hotel with 300 rooms, for example, the central "head-end" video rack would consist of approximately 120 video cassette recorders containing up to ten copies of the most popular movies and a total of up to 50 different titles. The OCV system includes a computerized in-room on-screen menu that offers to guests a list of only those movie selections available to the guest at that time. As a result, even though the on-screen menu may not 65 68 include a list of all titles available in the particular hotel, the list includes all movies available to the guest at that particular time, eliminating the possibility of a guest being disappointed when the guest's selection is not available. The revenue generated from OCV's PPV service is dependent upon the occupancy rate at the property, the "buy rate" or percentage of occupied rooms that buy movies or other services at the property and the price of the movie or service. Occupancy rates vary by property based on the property's location and competitive position within its marketplace and over time based on seasonal factors and general economic conditions. Buy rates generally reflect the hotel's guest mix profile, the popularity of the motion pictures or services available at the hotel and the guests' other entertainment alternatives. Buy rates also vary over time with general economic conditions. Movie price levels are established by OCV and are set based on the guest mix profile at each property and overall economic conditions. Currently, OCV's movie prices typically are $8.95 for the first purchase by an end-consumer and $4.95 for each subsequent buy by the same end-consumer on the same day. OCV obtains non-exclusive rights to show motion pictures from motion picture studios pursuant to a master agreement with each studio. The license period and percentage fee for each motion picture are negotiated separately, with the studio receiving a percentage generally ranging from 30% to 50% of OCV's gross revenue from a major motion picture. For recently released motion pictures, OCV typically obtains rights to exhibit the picture after the motion picture has been released in theaters, but prior to its release to the home video market or exhibition on cable television. OCV also obtains independent motion pictures, most of which are non-rated and are intended for mature audiences, for a one-time flat fee that is nominal in relation to the licensing fees paid for major motion pictures. In addition to PPV services, OCV provides television programming for which the hotel, rather than its guests, typically pays the charges. Free-to-guest services allow a hotel to receive one or more satellite-distributed programming channels, which are delivered to the rooms via a satellite earth station over the hotel's existing master antenna system. This service requires much less significant capital expenditures by OCV because the earth station equipment generally either is provided independently by the hotel or is purchased or leased from OCV. OCV also provides certain interactive services such as video check-out, room service ordering and guest satisfaction surveys. The OCV system also enables hotel owners to broadcast informational and promotional messages and to monitor room availability. For free-to-guest services, the hotel typically pays OCV a monthly charge per room for each programming channel selected and provides these channels to its guests free-of-charge. Premium channels, such as HBO, Showtime and The Disney Channel, broadcast major motion pictures and specialty programming, while non-premium channels, such as CNN and ESPN, broadcast news, sports and informational programs. OCV believes premium programming suppliers typically contract only with cable companies and other large volume subscribers, such as OCV, and generally will not provide programming directly to individual hotel properties. OCV successfully competes with local cable television operators by customizing packages of programming to provide only those channels desired by the hotel subscriber, which typically reduces the overall cost of the services provided. See "--Competition." OCV obtains its free-to-guest programming pursuant to multi-year license agreements and pays its programming suppliers a monthly fee for each room offering the service. Sales and Marketing On Command Corporation believes that, along with its technological leadership, OCV sales and marketing strategy is key to OCV maintaining its high revenues per room relative to its major competitors. OCV's marketing efforts are focused on business and luxury hotels with at least 150 rooms, as OCV 66 69 believes that such hotels consistently generate the highest revenues per room in the lodging industry. OCV also targets smaller business and luxury hotels and select mid-priced hotels that meet OCV's profitability criteria. On Command Corporation intends to continue targeting established hotel chains and certain luxury and business hotel management companies and independent hotels. OCV markets its services to hotel guests by means of on-screen advertising that highlights the services and motion picture selections of the month. Installation and Service Operations At June 30, 1996, OCV's installation and service organization consisted of approximately 212 installation and service personnel in the United States and Canada. Unlike a number of its competitors, OCV-employed installation and service personnel are responsible for all of the on-demand hotel rooms served by OCV. Installation and service personnel are responsible for system maintenance and distribution of video cassettes. OCV's installation personnel prepare site surveys to determine the type of equipment to be installed at each particular hotel, install OCV's systems, train the hotel staff to operate the systems and perform quality control tests. OCV also utilizes local installation subcontractors supervised by full-time OCV personnel to install its backlog. OCV maintains a toll-free technical support hot line that is monitored 24 hours a day by trained support technicians. The on-line diagnostic capability of OCV's system enables OCV to identify and resolve a majority of the reported system malfunctions from OCV's service control center without visiting the hotel property. When a service visit is required, the modular design of OCV's systems generally permits installation and service personnel to replace defective components at the hotel site. Technology OCV's system incorporates OCV's proprietary communications system design with commercially manufactured components and hardware such as video cassette players, amplifiers and computers. Because OCV's systems utilize industry standard interfaces, OCV can integrate new technologies as they become economically viable. Such technologies might include digital compression and store-and-forward, which would permit multiple users to access the same stored movie at varying start times. OCV has chosen not to use a satellite-based movie transmission system at the present time, primarily because of the inability of such a system to provide on-demand services on a cost-effective basis. However, OCV believes that it can integrate satellite transmission technology and other technology into its systems when the economic viability of such technology is established. Manufacturing and Suppliers OCV contracts directly with various electronics firms for the manufacture and assembly of its systems hardware, the design of which is controlled by OCV. Historically, OCV has found these suppliers to be dependable and able to meet delivery schedules on time. OCV believes that, in the event of a termination of any of its sources, alternate suppliers could be located without incurring significant costs or delays. However, certain electronic component parts used with OCV's products are available from a limited number of suppliers and can be subject to temporary shortages because of general economic conditions and the demand and supply for such component parts. If OCV were to experience a shortage of any given electronic part, OCV believes that alternative parts could be obtained or system design changes implemented. In such event, OCV could experience a temporary reduction in the rate of new room installations and/or an increase in the cost of such installation. The head-end electronics are assembled at OCV's facilities for testing prior to shipping. Following assembly and testing of equipment designed specifically for a particular hotel, the system is 67 70 shipped to each location, where it is installed by OCV-employed and trained technicians, typically assisted by independent contractors. OCV also maintains direct contractual relations with various suppliers of PPV and free-to-guest programming, including the motion picture studios and programming networks. OCV believes its relationships with all suppliers are good, except for Showtime Networks Inc., ("Showtime") which is disputing OCV's performance of the contract with Showtime in connection with OCV's termination of scheduled satellite pay-per-view service. In addition, OCV is negotiating the renewal of a contract with HBO which expired in June 1996, although OCV continues to provide HBO programming under the expired contract. SPECTRADYNE, INC. Spectradyne is the principal operating subsidiary of SpectraVision, which is a leading provider of interactive in-room video entertainment services to the lodging industry. Founded in 1971, SpectraVision originally developed and patented a system, known as "SpectraVision(TM)," which provides in-room television viewing of recently released major and other motion pictures on a PPV basis. Spectradyne subsequently expanded its services to include providing PPV movies in an on-demand format, delivering free-to-guest programming and providing interactive services that capitalize on SpectraVision's proprietary two-way communications equipment. Spectradyne has been a major provider of these services to the lodging industry since 1971 and at June 30, 1996, provided PPV services to approximately 495,000 rooms in approximately 1,600 hotels. Spectradyne provides its services under contracts to hotel chains, hotel management companies and individually owned and franchised hotel properties. Pay-Per-View Services Spectradyne's primary source of revenue is providing in-room television viewing of recently released major movies and independently produced motion pictures for mature audiences to hotel guests on a pay-per-view basis. This service is attractive to hotel operators because it provides a service desired by the guests at no or minimal cost to the hotel. The movie price is automatically charged to the guest room in which the movie was viewed. At June 30, 1996, Spectradyne provided PPV service to approximately 495,000 rooms in approximately 1,600 hotels. Spectradyne provides its PPV service through several products including: (i) SpectraVision(TM), a scheduled tape-based play system; (ii) SpectraVision Guest Theater(TM), a scheduled play system utilizing satellite delivery; (iii) Guest Choice(TM), an analog tape system which provides on-demand viewing of up to 200 videotapes; and (iv) Digital Guest Choice, the industry's only digital video on-demand service. SpectraVision(TM). Spectradyne's tape-based SpectraVision(TM) system typically offers a hotel guest eight movies per day at predetermined times. The movie schedule typically consists of a mix of major motion pictures available after commencing first-run theatrical exhibition and before release on cable or home video, and independently produced movies for mature audiences. On the first day of each month, Spectradyne typically replaces a majority of the movies on each schedule with new features. At June 30, 1996 Spectradyne had SpectraVision(TM) installed in 581 hotels with a total of 152,123 rooms. Guest Theater(TM). Spectradyne's Guest Theater(TM) system utilizing digital satellite delivery technology was introduced in the fourth quarter of 1993. Guest Theater(TM) increases the number of movies available in a SpectraVision(TM) system from eight to 20 by varying movie selections on a nightly basis. At June 30, 1996, Spectradyne had Guest Theater installed in 1,099 hotels with a total of 352,612 rooms. Guest Choice(TM). In 1991, Spectradyne introduced Guest Choice(TM) to provide hotel guests with on-demand viewing from a library of up to 200 videotapes per hotel. At June 30, 1996, Guest Choice(TM) was installed in 229,618 rooms in 508 hotels, substantially all of which also offer either SpectraVision(TM) 68 71 or Guest Theater(TM) services. The on-demand capability significantly increases usage of the PPV service by the hotel guests, and Spectradyne experienced increases in viewership on average of approximately 40% in the hotels in which Guest Choice(TM) systems have been installed. Through Guest Choice(TM), Spectradyne provides on-demand viewing of major motion pictures, independently produced movies for mature audiences, and a variety of other topics, such as exercise programs, business information, children's programming and other special interest tapes. The Guest Choice(TM) system includes SpectraVision's proprietary equipment and software, and utilizes a patented video rack designed and manufactured by a third party. Digital Guest Choice(TM). During 1994, Spectradyne introduced its new digital video on-demand service, Digital Guest Choice, that provides on-demand viewing of digitally stored movies. Digital Guest Choice(TM) utilizes satellite technology to deliver digitized movies to high capacity disk arrays. The digitized movies are stored at the hotel site and then decoded and forwarded to the guest instantaneously and on-demand. Digital Guest Choice allows multiple users to access the same digitally stored movie image at the same time. This on-demand system virtually eliminates lost views due to another guest already viewing a particular videotape or if all tape players are in use. At June 30, 1996, Spectradyne had installed Digital Guest Choice(TM) in 105 hotels with a total of approximately 57,615 rooms. In addition to its operations in the United States, SpectraVision offers its services in Canada, Mexico, Puerto Rico, the U.S. Virgin Islands, Hong Kong, Singapore, Thailand, Australia and the Bahamas. The legal entities located in Canada, Puerto Rico, the U.S. Virgin Islands, Hong Kong, Singapore, Thailand, and Australia are not part of the Bankruptcy Case. These entities will be acquired by On Command Corporation as part of the Acquisition, and On Command Corporation intends to continue to expand Spectradyne's international operations. Spectradyne is a leading provider of in-room video entertainment in the Asia-Pacific region and in Australia. Spectradyne serves its international hotel customers primarily with its tape-based systems, but generally experiences higher revenues and operating cash flow per room than in the United States because of higher prices, higher usage and the lack of programming alternatives. Free-To-Guest Services Spectradyne also markets a free-to-guest service pursuant to which a hotel may elect to receive one or more satellite programming channels, such as HBO, CNN, ESPN, WTBS and other cable networks. The hotel typically pays Spectradyne a fixed monthly fee per room for each programming channel selected. At June 30, 1996, Spectradyne provided free-to-guest services to 739 hotels serving 262,371 guest rooms. Approximately 94% of these rooms also offer Spectradyne's PPV services. Spectradyne provides its free-to-guest programming pursuant to affiliation license agreements. The free-to-guest programming agreements typically are multi-year contracts under which SpectraVision pays the supplier a fee for each room offering this programming. Spectra Vision's license agreements for HBO, ESPN and CNN were rejected under the Plan, and On Command Corporation expects to offer these programming services under OCV agreements or new agreements. Interactive And Other Services In addition to entertainment services, Spectradyne provides interactive services to the lodging industry. These services generate revenues and cash flows for Spectradyne which are independent of viewing levels. These services utilize the two-way interactive communications capability of the PPV equipment and include Video Checkout(TM), Video Messaging(TM), Video Breakfast Menu(TM), Video Bellman(TM), Smart Survey(TM) and room availability monitoring. The hotel typically pays a fixed monthly fee for each service selected. Interactive services are also currently available in Spanish, French, and certain other 69 72 foreign languages. Spectradyne offers its interactive services only to hotels that have PPV systems. In most cases, the interactive services are made a part of the contract for pay-per-view services and the service term is concurrent with the term of the pay-per-view contract, which is typically five years. At June 30, 1996, Spectradyne provided one or more interactive services to 234,481 rooms in 508 hotels, all of which also offer Spectradyne's PPV service. Other revenue sources include the sale and license of Spectradyne's proprietary equipment, the installation, design and maintenance of hotel Master Antenna Television ("MATV") systems, sales of satellite dishes, sales of miscellaneous parts and supplies (including television remote controls) and advertising revenues. Programming Spectradyne obtains the nonexclusive rights to show recently released motion pictures from major motion picture studios generally pursuant to a master agreement with each studio. The license period and fee for each motion picture are negotiated individually with each studio, which typically receives a percentage of that picture's gross revenues generated in Spectradyne's PPV system. Negotiated fees are related to the popularity of a given movie and the volume of pictures licensed by SpectraVision from a given studio. Those license fees typically decline over the time the movie is played in Spectradyne's PPV systems. Typically, Spectradyne obtains rights to exhibit major motion pictures during the "Hotel/Motel PPV Window," which is the time period after initial theatrical release and before release for home video distribution or cable television exhibition. Spectradyne attempts to license pictures as close as possible to a motion picture's theatrical release date to benefit from the studios' advertising and promotional efforts. With respect to most independently produced features, Spectradyne obtains non-exclusive rights from the producers for a flat fee for an extended period of time. The EDS Service And Technology Agreement In 1993, SpectraVision entered into a ten-year agreement with EDS to install a satellite-based digital movie delivery system to replace its existing tape-based delivery systems. In conjunction with the installation of this system, SpectraVision introduced its new SPEXIS computer system which allows SpectraVision to provide new and improved interactive services. SpectraVision and EDS first installed equipment to enable SpectraVision to provide its scheduled play movies in a compressed digital video format on a real time basis via satellite (Guest Theater). In late 1994, SpectraVision and EDS began the second phase of the technology conversion and initiated the installation of a digital video on-demand system (Digital Guest Choice) in selected hotels. This system consists of high capacity disk arrays, which are used to store digitized movies, delivered to a hotel via satellite, for instantaneous on-demand viewing by hotel guests. SpectraVision also entered into a contract with EDS whereby EDS assumed SpectraVision's field service and Management Information Services ("MIS") functions. The transition of SpectraVision's field service to EDS involved numerous difficulties for field service personnel in maintaining the normal level of repairs and maintenance required. On February 1, 1996, the Bankruptcy Court approved a modification to the EDS Service and Technology Agreement whereby the field service and the MIS services operations would transition back to SpectraVision. SpectraVision is currently in the process of implementing this agreement. 70 73 SpectraVision's ten-year exclusive contract was rejected under the Plan, and On Command Corporation entered into a new agreement with EDS for the continued delivery of the satellite delivered service for up to 45 months after the Closing at a substantially lower cost than SpectraVision was paying. Hotel Contracts Spectradyne typically enters into a separate contract with each hotel for the services provided. Contracts with the corporate-managed hotels in any one chain generally are negotiated by that chain's corporate management, and the hotels subscribe at the direction of corporate management. In the case of franchised or independently owned hotels, the contracts are generally negotiated separately with each hotel. Existing contracts generally have a term of five or seven years from the date the system becomes operational. At the scheduled expiration of a contract, Spectradyne typically seeks to extend the term of a hotel's contract with market competitive terms. At June 30, 1996, approximately 19.4% of the pay-per-view hotels have contracts that have expired and are on a month-to-month basis. Approximately 27.1% of the pay-per-view hotels served by SpectraVision have contracts that expired and are on a month-to-month basis or have contract expiration dates during 1996. Spectradyne currently provides PPV services to hotels that are part of chains including Hyatt, Loew's, Four Seasons, Stouffer and Harvey Hotels. Spectradyne offers its free-to-guest services to the same type of hotels to which it markets its pay-per-view services. The service is provided to hotels pursuant to contracts similar to the pay-per-view contracts, although in certain cases, the contracts are terminable after three years, at the option of the hotel, upon payment of a fee to Spectradyne. Manufacturing Prior to 1994, SpectraVision manufactured substantially all of the equipment used in its tape-based PPV and interactive hotel systems. In December 1993, Spectradyne manufacturing capability was sold to The Cerplex Group. In connection with this sale, Spectradyne entered into a five year contract with Certech Technology, Inc. ("Certech"), a wholly owned subsidiary of The Cerplex Group, to provide manufacturing and repair services of certain equipment for use in hotel PPV and interactive systems. The agreement with Certech has been rejectd under the Plan. COMPETITION There are several providers of in-room on-demand video entertainment to the lodging industry, at least three of which (including OCV and Spectradyne) provide pay-per-view and free-to-guest programming and other interactive services over the hotel television. Pay-per-view, the most profitable component of the services offered, competes for a guest's entertainment resources with broadcast television, free-to-guest programming and cable television services. In addition, there are a number of potential competitors that could utilize their existing infrastructure to provide in-room entertainment to the lodging industry, including cable companies (including wireless cable), telecommunications companies and direct-to-home and direct broadcast satellite companies. Some of these potential competitors are already providing free-to-guest services to hotels and testing video-on-demand. On Command Corporation, through OCV and Spectradyne, will be the leading provider (by number of hotel rooms served) of in-room television entertainment services and the leading provider (by number of hotel rooms served) of in-room on-demand television entertainment services to the United 71 74 States lodging industry. On Command Corporation, through OCV and Spectradyne, will compete on a national scale primarily with LodgeNet Entertainment Corporation ("LodgeNet"), and on a regional basis with certain other smaller entities. Based on publicly filed information, On Command Corporation estimates that, at June 30, 1996, LodgeNet served approximately 335,623 pay-per-view rooms (of which approximately 284,102 are equipped with on-demand services), compared to OCV's approximately 419,000 on-demand rooms and SpectraVision's approximately 495,000 pay-per-view rooms (of which approximately 287,233 are on-demand rooms). Competition with respect to new guest pay contracts centers on a variety of factors, depending upon the circumstances important to a particular hotel. Among the more important factors are (i) the features and benefits of the entertainment systems, (ii) the quality of the vendor's technical support and maintenance services and (iii) the financial terms and conditions of the proposed contract. With respect to hotel properties already receiving in-room entertainment services, the current provider may have certain informational and installation cost advantages as compared to outside competitors. On Command Corporation anticipates substantial competition in obtaining new contracts with major hotel chains. On Command Corporation believes that hotels view the provision of in-room on- demand entertainment both as a revenue source and as a source of competitive advantage in that sophisticated hotel guests are increasingly demanding a greater range of quality entertainment and informational alternatives. At the same time, On Command Corporation believes that certain major hotel chains have awarded contracts based primarily on the level and nature of financial and other incentives offered by the pay-per-view service provider. While On Command Corporation believes OCV's high revenue per room will enable On Command Corporation to continue to offer hotels attractive economics, its competitors may attempt to gain or maintain market share at the expense of profitability. Even if it were able to do so, On Command Corporation may not always be willing to match the incentives provided by its competitors. On Command Corporation believes that its other competitive advantages, together with its long-term contracts, will substantially offset the potentially negative effect of any incentive-based pricing by its competitors. REGULATION The Federal Communications Commission (the "FCC") has broad jurisdiction over electronic communications. The FCC does not directly regulate OCV's or Spectradyne's pay-per-view or free-to- guest services. The FCC's jurisdiction does, however, encompass certain aspects of OCV's and Spectradyne's operations as they relate to the offering of satellite-delivered pay-per-view movies. The FCC's jurisdiction also encompasses certain aspects of Spectradyne's operations as they relate to Spectradyne's use of the radio frequency spectrum in certain hotels served by Spectradyne. Spectradyne has, as a matter of practice, obtained optional licenses from the FCC for a number of its downlink, television receive-only earth stations, which are used to receive transmissions from communications satellites in connection with Spectradyne's free-to-guest services and obtained the required licenses for the microwave point-to-point relay facilities. On February 1, 1996, Congress passed The Telecommunications Act of 1996 (the "Telecommunications Act"), which was signed into law on February 8, 1996. The Telecommunications Act will alter federal, state and local laws and regulations for telecommunications providers and services, and may affect OCV and Spectradyne. There are numerous rulemakings to be undertaken by the FCC that will interpret and implement the Telecommunications Act. It is not possible at this time to predict the outcome of such rulemakings. 72 75 PATENTS, TRADEMARKS AND COPYRIGHTS OCV and Spectradyne own a number of patents and patent licenses. Although OCV and Spectradyne maintain patents for some of their products, On Command Corporation believes that the design, innovation and quality of OCV's and Spectradyne's products and their relations with their customers are substantially more important to the maintenance and growth of On Command Corporation's business. Accordingly, On Command Corporation does not believe that it is dependent to any material extent upon any single patent or group of patents. OCV and Spectradyne also own various tradenames, trademarks and logos used in their businesses, which On Command Corporation intends to actively protect. EMPLOYEES Pursuant to the Acquisition Agreement, On Command Corporation may extend offers of employment to those employees of the Debtors that On Command Corporation desires to hire. The Debtors have agreed to waive any claims against On Command Corporation or the Debtors' employees arising from such employment. As of June 30, 1996, OCV had 391 employees worldwide and Spectradyne had 374 employees worldwide. OCV and SpectraVision believe that their relationship with their employees is good. PROPERTIES OCV currently leases its headquarters located in Santa Clara, California. The headquarters contain approximately 67,000 square feet of office, light manufacturing and storage space. OCV has entered into a new lease and will relocate its headquarters, office, light manufacturing and storage space to a 131,000 square foot facility in San Jose, California in the fourth quarter of 1996. In connection with the Acquisition, On Command Corporation will acquire, through Spectradyne, the SpectraVision headquarters building, which contains approximately 84,000 square feet of manufacturing and office space, of which 45,000 square feet are currently leased to Certech, which lease will not be assumed. SpectraVision also leases office space throughout the United States, Canada, Mexico, Puerto Rico, Hong Kong and Australia for its customer support operations. On Command Corporation will also direct the Debtors to assume certain other SpectraVision leases to ensure that after the Acquisition, SpectraVision's properties are suitable and adequate for SpectraVision's business operations. LEGAL PROCEEDINGS OCV is a defendant, and may be potential defendant, in lawsuits and claims arising in the ordinary course of its business. While the outcomes of such claims, lawsuits, or other proceedings cannot be predicted with certainty, management expects that such liability, to the extent not provided for by insurance or otherwise, will not have a material adverse effect on the financial condition of OCV. Proceedings in connection with any lawsuit against Spectradyne have been stayed as a result of the Bankruptcy Case. None of Spectradyne's liabilities, actual or contingent, under any lawsuit to which it is a party will be assumed by On Command Corporation in the Acquisition. 73 76 MANAGEMENT On Command Corporation will initially have a Board of Directors consisting of seven directors, five of whom initially have been selected by Ascent and two of whom initially will be selected by the Creditors' Committee (subject to the approval of Ascent, such approval not to be unreasonably withheld). All such directors will be subject to approval by the Bankruptcy Court and to requirements as to independent directors if the OCC Common Stock is listed on the Nasdaq National Market or on another securities exchange. The initial officers of On Command Corporation will be selected by Ascent. DIRECTORS AND THE EXECUTIVE OFFICERS The following table sets forth the information concerning the individuals who are or will be the directors and officers of On Command Corporation as of the Closing Date.
Name Age Position ---- --- -------- Robert M. Kavner............................... 52 President and Chief Executive Officer and Director Brian A.C. Steel............................... 36 Executive Vice President, Chief Financial Officer, Chief Operating Officer and Director James A. Cronin, III........................... 41 Director Charles Lyons.................................. 42 Chairman of the Board Gary L. Wilson................................. 56 Director Warren Y. Zeger................................ 49 Director Robert Snyder.................................. 60 Vice Chairman (not a director) Arthur M. Aaron................................ 38 Vice President, Acting General Counsel and Secretary Jean Devera.................................... 46 Vice President, National Accounts Richard Fenwick, Jr............................ 38 Vice President, Engineering Ronald Lessack................................. 49 Vice President, Operations Edward B. Neumann.............................. 60 Vice President, Finance Richard Swift.................................. 44 Vice President, Sales
Robert M. Kavner has been President, Chief Executive Officer and a Director of On Command Corporation September 1996. Prior thereto, Mr. Kavner was a principal in Kavner & Associates, a consulting firm for media and communication companies. From June 1994 through September 1995, Mr. Kavner was an Executive Vice President of Creative Artists Agency, Inc. Prior to joining Creative Artists Agency, Mr. Kavner was Executive Vice President of AT&T Corp. ("AT&T") and Chief Executive Office of AT&T's Multimedia Products and Services Group. He was also a member of AT&T's Management Executive Committee. 74 77 From 1992 to 1994, Mr. Kavner was Group Executive for Communications Products Group of AT&T. From 1988 to 1991, Mr. Kavner was President of AT&T's Data Systems Group. Mr. Kavner is also a director of the Fleet Financial Corp. and Tandem Computers, Incorporated. Brian A.C. Steel has been Executive Vice President, Chief Financial Officer and Chief Operating Officer of On Command Corporation since September 1996 and will become a Director of On Command Corporation on the Closing Date. Prior thereto, Mr. Steel was Executive Vice President, Strategic Development and Chief Financial Officer for TELE-TV since August 1995. Prior to joining TELE-TV, Mr. Steel was Vice President, Strategic Development of Pacific Telesis Enhanced Services, General Manager of Pacific Telesis Electronic Publishing Services and Executive Director, Corporate Development from January 1994 to July 1995. Prior to joining Pacific Telesis, Mr. Steel was a principal in Conversion Management Associates from January 1993 to December 1993. From June 1986 to December 1992, Mr. Steel was employed by Shearson Lehman Brothers Inc. as Senior Vice President, Real Estate Merchant Banking Group and First Vice President, E.F. Hutton Properties. James A. Cronin, III has been a Director of On Command Corporation since its formation in July 1996 and was Vice President and Acting Chief Financial Officer from July 1986 until September 1996. Mr. Cronin has been Chief Operating Officer and Executive Vice President -- Finance for Ascent since June 1996. Prior to joining Ascent, Mr. Cronin served as a financial and management consultant from 1992 through June 1996 and as a partner in Alfred Checchi Associates, a merchant bank, from 1990 through 1991. Mr. Cronin is also a director of Landair Services, Inc. and Eastbay, Inc. Charles Lyons has been Chairman of the Board of On Command Corporation since its formation in July 1996. Mr. Lyons has been President, Chief Executive Officer and a director of Ascent Entertainment Group, Inc. since October 1995, and prior to that he was President and a director of Ascent's predecessors since February 1992. He was Vice President and General Manager, COMSAT Video Enterprises, now Ascent Network Services, Inc., from October 1990 to January 1992. Prior to joining COMSAT, Mr. Lyons was with Marriott Corporation from 1982 to October 1990 in various executive positions. Mr. Lyons has been Chairman of the Board of Directors of OCV since December 1994 and a director since 1992. Gary L. Wilson will become a Director of On Command Corporation on the Closing Date. Mr. Wilson has been co-chairman of the board and a principal investor in NWA, Inc., a parent of Northwest Airlines and several other transportation-related subsidiaries since January 1991. He served as Executive Vice President and Chief Financial Officer of the Walt Disney Company from 1985 to 1990. Mr. Wilson is also a director of The Walt Disney Company and CB Commercial. Warren Y. Zeger will become a Director of On Command Corporation on the Closing Date. He has been Vice President, General Counsel and Secretary of COMSAT since August 1994. He was Vice President and General Counsel of COMSAT from March 1992 to July 1994, Acting General Counsel from September 1991 to March 1992 and Associate General Counsel of COMSAT and Vice President, Law of its World Systems Division from February 1988 to September 1991. Mr. Zeger was a director of OCV from December 1994 through April 1996. Robert Snyder has been Vice Chairman, but not a Director, of On Command Corporation since September 1996, prior to which he was President and Chief Executive Officer of On Command Corporation since August 1996. Mr. Snyder has been President and a director of OCV since 1987 and Chief Executive Officer of OCV since July 1995. Arthur M. Aaron has been Vice President, Acting General Counsel and Secretary of On Command Corporation since its formation in July 1996. Mr. Aaron has been Vice President, Business and Legal Affairs for Ascent since April 1995. Prior thereto, he was a General Attorney in the Office of the General Counsel of COMSAT since July 1993. From October 1987 to July 1993, Mr. Aaron was an attorney at the law firm of Skadden, Arps, Slate, Meagher & Flom in Boston, Massachusetts. Jean Devera has been Vice President, National Accounts of On Command Corporation since September 1996. Prior to joining On Command Corporation, Ms. Devera was Vice President, National Accounts of OCV since January 1994 and prior to that she was Director of Sales Administration of COMSAT Video Enterprises. Richard Fenwick, Jr. has been Vice President, Engineering of On Command Corporation since September 1996. Mr. Fenwick has been Vice President, Engineering of OCV since September 1992, prior to which Mr. Fenwick served in various engineering and program management positions at Electrospace Systems, Inc. Ronald Lessack has been Vice President, Operations of On Command Corporation since September 1996. Prior to joining On Command Corporation, Mr. Lessack was Vice President, Operations of OCV since January 1994. Prior to that he was self employed as a consultant from July 1992 to February 1994 and prior to that he was a Vice President of Watkins Johnson Co. Group. Edward B. Neumann has been Vice President, Finance of On Command Corporation since September 1996. Prior to joining On Command Corporation, Mr. Neumann was Vice President, Finance and Chief Financial Officer of OCV for more than five years. Richard Swift has been Vice President, Sales of On Command Corporation since September 1996. Prior to joining On Command Corporation, Mr. Swift was Vice President, Sales of OCV since August 1995 and prior to that he was Vice President, Sales of COMSAT Video Enterprises since 1991. COMMITTEES OF THE BOARD OF DIRECTORS On Command Corporation intends to create an Audit and Finance Committee, which will include independent directors and will review the results and scope of the audit and other services provided by On Command Corporation's independent auditors. The On Command Corporation Board of Directors also intends to create a Nominating and Compensation Committee. The On Command Corporation Board of Directors will appoint members to these committees within three to six months after the completion of the Transactions. DIRECTORS' COMPENSATION On Command Corporation intends to pay directors who are not employees of On Command Corporation, its subsidiaries or, for so long as Ascent owns 50% of the outstanding OCC Common Stock, Ascent or Ascent's subsidiaries or affiliates, compensation, which may be annual, quarterly, and/or for each attended meeting of the On Command Corporation Board of Directors or committee thereof and each meeting held pursuant to a special assignment in amounts to be determined shortly after the Closing. On Command Corporation also intends to reimburse directors for ordinary and necessary out-of-pocket expenses incurred in connection with attending meetings of the Board of Directors or its committees. EXECUTIVE COMPENSATION The following table shows the compensation received for the three fiscal years ended December 31, 1995 by (i) the Vice Chairman of On Command Corporation in his capacity as President and Chief Executive of OCV, (ii) Richard Fenwick, Vice President, Engineering of On Command Corporation in his capacity as Vice President, Engineering of OCV since September 1992, (iii) Ronald Lessack, Vice President, Operations, of On Command Corporation in his capacity as Vice President, Operations of OCV and (iv) Arthur M. Aaron, Vice President and Acting General Counsel of On Command Corporation in his capacity as Vice President, Business and Legal Affairs of Ascent (the officers identified in clauses (i), (ii), (iii) and (iv) above being hereinafter referred to as the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING ALL OTHER SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION NAME AND POSITION YEAR ($) ($) ($)(1) ($)(2) (#)(2) ($)(3) - ------------------------- ---- -------- -------- ------------- ---------- ----------- ----------- Robert Snyder 1995 $285,779 $150,000 -- $ -- 100,000* $4,620 Vice Chairman 5,000** 1994 199,273 100,000 -- 137,500 10,000** 4,620 1993 168,840 50,000 -- 508,126 -- -- Richard Fenwick, Jr. 1995 151,250 15,000 -- -- 10,000* 1,540 Vice President, 2,500** Engineering 1994 112,664 -- -- -- -- 14,275 1993 102,186 -- -- -- -- -- Ronald Lessack 1995 161,663 20,000 -- -- 10,000* 4,620 Vice President, 2,500** Operations 1994 108,461 50,000 -- -- -- 3,425 Arthur M. Aaron 1995 122,400 30,000 2,690 19,688 100,000* 20,084 Vice President and 1994 83,882 15,000 -- 27,500 1,500** 11,699 Acting General Counsel 1993 38,308 7,500 -- 13,125 700** 5,639
(1) Other Annual Compensation shown for 1993, 1994 and 1995 does not include perquisites and other personal benefits because the aggregate amount of such compensation does not exceed the lesser of (i) $50,000 or (ii) 10% of individual combined salary and bonus for the Named Executive Officer in each year. (2) Restricted stock awards include COMSAT restricted stock awards ("RSAs"), COMSAT restricted stock units ("RSUs") and COMSAT phantom stock units ("PSUs"). Dividends are paid on RSAs granted in 1993 and 1995. For performance-based RSAs granted in 1994, dividend equivalents are paid with respect to the performance period, and dividends will be paid during the subsequent vesting period on shares earned under the applicable performance measures. Half of the RSAs granted to the Named Executive Officers in 1994 will be forfeited in 1996 based on the non-satisfaction of certain required performance measures during 1994 and 1995. Dividend equivalents are paid on RSUs and PSUs. The number and value of the aggregate restricted stock holdings of Messrs. Snyder and Aaron as of December 31, 1995, are as follows: (footnotes continued on next page) 75 78
NUMBER OF RSAs/RSUs/PSUs VALUE AS OF 12/31/95 ------------------------ --------------------- Mr. Snyder............................. 25,000 476,563 Mr. Aaron.............................. 2,400 45,750
All options marked with a single asterisk (*) are options to purchase Ascent Common Stock, and options marked with a double asterisk (**) are options to purchase COMSAT Common Stock. (3) For 1995, all other compensation for Mr. Snyder, Mr. Fenwick and Mr. Lessack consisted of contributions by OCV to OCV's 401(k) Savings Plan on behalf of each such Named Executive Oficer. All other compensation for Mr. Aaron in 1995 includes the following elements: (i) unused credits under Ascent's cafeteria plan that were paid in cash; (ii) time off buy-back under Ascent's cafeteria plan that was paid in cash; (iii) supplemental bonuses; (iv) contributions by Ascent to COMSAT's 401(k) Plan and (v) dividend matching payments and moving expenses. 4. Mr. Lessack's employment with OCV commenced in February 1994. OPTION GRANTS The following table sets forth information on options granted to the Named Executive Officers in 1995. OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO GRANT DATE OPTIONS EMPLOYEES EXERCISE PRICE PRESENT VALUE GRANTED (#)(1) IN FY (2) ($/SH) EXPIRATION DATE (3) NAME ASCENT COMMON STOCK Robert Snyder 100,000 10.83 $15.000 12/18/05 $711,000 Arthur M. Aaron 100,000 10.83 15.00 12/18/05 711,000 Richard Fenwick, Jr. 10,000 1.08 15.00 12/18/05 71,100 Ronald Lessack 10,000 1.08 15.00 12/18/05 71,100 COMSAT COMMON STOCK Robert Snyder 5,000 0.57 19.3125 01/20/05 $26,700 Arthur M. Aaron 1,500 0.17 19.3125 01/20/05 8,010 Richard Fenwick, Jr. 2,500 0.28 19.3125 01/20/05 13,350 Ronald Lessack 2,500 0.28 19.3125 01/20/05 13,350
(1) The Ascent option grants were made effective December 18, 1995 and vest as follows: 10% on December 18, 1996; 15% on December 18, 1997; 25% on December 18, 1998; another 25% on December 18,1999; and the remaining 25% on December 18, 2000; provided that these options will not vest to any extent prior to December 18, 1998, if COMSAT continues to own at least 80% of Ascent. The COMSAT options shown were granted on January 20, 1995, to acquire COMSAT's Common Stock and vest as follows: 25% on January 20, 1996; another 25% on January 20, 1997; and the remaining 50% on January 20, 1998. (2) The total number of Ascent options granted to Ascent employees in 1995 was 923,000; the total number of COMSAT options granted to key employees of COMSAT and its subsidiaries in 1995 was 877,650. (3) Ascent and COMSAT used the Black-Scholes option pricing model to determine grant date present values using the following assumptions; a dividend yield of 0.0% for Ascent and 3.38% for COMSAT; stock price volatility of 0.28%; a 10-year option term; a risk-free rate of return of 5.71% for Ascent and 5.84% for COMSAT; a retention discount of 3.0%; and the vesting schedule described in footnote 1 above for Ascent and COMSAT. The use of this model is in accordance with SEC rules; however, the actual value of an option realized will be measured by the difference between the stock price and the exercise price on the date the option is exercised. 76 79 OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth information on (1) options exercised by the Named Executive Officers in 1995, and (2) the number and value of their unexercised options as of December 31, 1995 AGGREGATED OPTION EXERCISES IN 1995, AND 12/31/95 OPTION VALUES
NUMBER OF SECURITIES VALUE OF THE UN- UNDERLYING UNEXERCISED EXERCISED IN-THE-MONEY OPTIONS AT 12/31/95 OPTIONS AT 12/31/95 ---------------------- ---------------------- SHARES UNDERLYING UN- UN- OPTIONS VALUE EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE EXERCISED REALIZED (#) (#) ($) ($) ----------------- ------------- --------------- --------------- ---------------- ------------ NAME ASCENT OPTIONS Robert Snyder* -0- -0- -0- 100,000 -0- $25,000 Arthur M. Aaron -0- -0- -0- 100,000 -0- 25,000 Richard Fenwick, Jr.* -0- -0- -0- 10,000 -0- 2,500 Ronald Lessack -0- -0- -0- 10,000 -0- 2,500 COMSAT OPTIONS Robert Snyder* -0- -0- 2,500 12,500 -0- -0- Arthur M. Aaron -0- -0- 175 2,025 -0- -0- Richard Fenwick, Jr. -0- -0- -0- 2,500 -0- -0- Ronald Lessack -0- -0- -0- 2,500 -0- -0-
* Messrs. Snyder, Fenwick and Lessack also hold options to purchase 40,000, 17,500 and 20,000 shares of the Common Stock of OCV, respectively of which 14,000, 9,500 and 4,000, respectively were exercisable at December 31, 1995. The value of these options is not reported because OCV Common Stock is not publicly traded and the fair market value at December 31,1995 is not readily determinable. Employment Agreements On Command Corporation and each of Messrs. Kavner and Steel entered into employment agreements that expire on September 11, 2000. Pursuant to the agreements, Mr. Kavner's and Mr. Steel's base salary will be $500,000 and $290,000 per year, respectively, subject to increases at the discretion of the board of directors of On Command Corporation. Messrs. Kavner and Steel will also be eligible for annual bonuses based on performance measures determined by the Compensation Committee of the Board of Directors (the "Compensation Committee") with a target bonus equal to 70% each such executive's respective base salary for achieving 100% of the target level for the performance measures. In addition, Messrs. Kavner and Steel have been granted options to purchase 1,041,562 and 385,312 shares of OCC Common Stock, respectively, exercisable at the following per-share prices: (i) 80% of each such executive's options shall be exercisable at a per-share price equal to $15.33 and (ii) 20% of each such executive's options shall be exercisable at a per-share price equal to $17.63; provided, however, that if the average of the daily high and low bid prices of the OCC Common Stock on the Nasdaq National Market for the 20 trading days following the third trading day after On Command Corporation's public release of financial results for the third quarter of 1996 is less than $17.63 per share, then the exercise price will be such average. The options will vest 25% on September 11, 1997, an additional 25% on September 11, 1998 and the remaining 50% on September 11, 1999. The options will expire at the earlier of (i) three months after the date upon which such executive is terminated for "cause" (as defined in each such executive's employment agreement); (ii) one year after each such executive's employment agreement is terminated as a result of such executive's death or (iii) on September 11, 2006. Messrs. Kavner and Steel will also be entitled to participate in group health, dental and disability insurance programs and any group profit sharing, deferred compensation, life insurance or other benefit plans as are generally made available by On Command Corporation to its senior executive officers on a favored nations basis. In addition, the employment agreements for each of Messrs. Kavner and Steel provide that upon a "Change of Control Event" (as defined in such agreement), each of Messrs. Kavner and Steel will be entitled to elect to terminate his employment with On Command Corporation and, for the longer of (a) the remainder of the term of such executive's employment agreement as if such agreement had not been terminated and (b) one year following the date of such termination (such period being the "Duration Period"), will receive: (i) his then current base salary; (ii) an annual bonus equal to 70% of his then current base salary for each year during the Duration Period; and (iii) all other benefits provided pursuant to such executive's employment agreement. A "Change of Control Event" is defined in the employment agreements as an affirmative determination, either jointly by either Mr. Kavner or Mr. Steel, respectively, and the Board of Directors or pursuant to an arbitration which either Mr. Kavner or Mr. Steel, respectively, has the right to invoke, that any "change of control" of On Command Corporation (defined as an event as result of which (i) a single person or entity other than Ascent owns 50% or more of the voting stock of On Command Corporation or (ii) a single person or entity other than COMSAT owns 50% or more of the voting stock of Ascent) or prospective change of control would be reasonably likely to have a materially detrimental effect on either the day-to-day circumstances of Mr. Kavner's or Mr. Steel's employment, respectively, or the compensation payable to Mr. Kavner or Mr. Steel, respectively, under his employment agreement. The employment agreement with Mr. Steel provides that, in order to facilitate such executive's transition to On Command Corporation, Ascent will cause a $240,000 unsecured, no interest loan (the "Transition Loan") to be made to Mr. Steel at the Effective Time. The Transition Loan will be due and payable by Mr. Steel on the first anniversary of the Effective Time; provided that Mr. Steel is still employed by Ascent, On Command Corporation, OCV or any of their successors or affiliates on such first anniversary date. If Mr. Steel's employment has terminated other than for cause prior to such date, the Transition Loan will be forgiven in its entirety. OCV and Mr. Snyder have entered into an employment agreement that expires in 1999. Pursuant to the agreement, Mr. Snyder's salary for 1996 was set by the board of directors of OCV at $300,000, and Mr. Snyder is eligible for incentive bonus compensation to be established by mutual consent of Mr. Snyder and the board of directors of OCV. The agreement also provides that, upon termination of his employment with OCV, Mr. Snyder will provide exclusive consulting services to OCV for a period of seven years, for which OCV will pay Mr. Snyder $20,000 per year. ON COMMAND CORPORATION STOCK OPTION PLAN OCV adopted a stock option plan (the "OCV Stock Option Plan"), expiring in June 1999, under which employees, directors and consultants of OCV may be granted incentive or nonstatutory stock options for the purchase of OCV Common Stock. Incentive stock options are granted at fair value on the date of grant as determined by the OCV Board of Directors and nonstatutory stock options are granted at a price per share fixed by the OCV Board of Directors, but not less than 85% of the fair value on the date of grant. Options granted under the OCV Stock Option Plan generally vest over a five-year period and are exercisable in installments of 20% one year from the date of grant and ratably per month thereafter. Unvested options are cancelled upon termination of employment. Certain OCV employees have also received options to purchase shares of common stock of Ascent pursuant to the 1995 Ascent Key Employee Stock Plan (the "Ascent Stock Plan"). It is currently 77 80 anticipated that such employees shall retain these options at least so long as Ascent retains a beneficial ownership of at least 50% of the outstanding shares of OCC Common Stock. All of SpectraVision's employee stock options were terminated in connection with the confirmation of the Plan. Effective upon consummation of the Transactions, On Command Corporation will adopt a stock incentive plan substantially similar to the Ascent Stock Plan (the "On Command Corporation Stock Plan"). The On Command Corporation Stock Plan is intended to assist On Command Corporation in attracting and retaining management employees of outstanding ability and to promote the identification of their interests with those of the stockholders of On Command Corporation. The On Command Corporation Stock Plan permits the grant of non-qualified stock options and incentive stock options to purchase shares of OCC Common Stock, stock appreciation rights (in connection with option grants and alone), awards of shares of restricted stock and other stock and stock-based awards covering up to 3,000,000 authorized but unissued or reacquired shares of OCC Common Stock, subject to adjustment to reflect events such as stock dividends, stock splits, recapitalizations, mergers or reorganizations of or by On Command Corporation. Unless sooner terminated by the On Command Corporation Board of Directors, the On Command Corporation Stock Plan will expire ten years after the Closing Date. Such termination will not affect the validity of any option or other award outstanding under the On Command Corporation Stock Plan on the date of termination. The On Command Corporation Stock Plan is administered by the Compensation Committee and is intended to satisfy the requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to the terms and conditions of the On Command Corporation Stock Plan, the Compensation Committee has the authority to select the persons to whom grants are to be made, to designate the number of shares of Common Stock to be covered by such grants, to determine the exercise price of options, to establish the period of exercisability of awards, and to make all other determinations and to take all other actions necessary or advisable for the administration of the On Command Corporation Stock Plan. Without limiting the Committee's authority to establish another exercise price, awards granted under the On Command Corporation Stock Plan will generally be granted at an exercise price equal to the then fair market value per share of OCC Common Stock. Grants under the On Command Corporation Stock Plan may provide, in the Compensation Committee's discretion, for their expiration or acceleration upon the occurence of certain events set forth in the On Command Corporation Stock Plan. On Command Corporation expects to make grants of non-qualified stock options to purchase Common Stock (the "Options") contemporaneously with the Closing at an exercise price to be determined by the Compensation Committee. The Compensation Committee may provide in the terms of an individual Option that exercisability of the Option will depend on On Command Corporation's achievement of certain performance goals. The Compensation Committee also may, in its discretion, provide that Options expire at specified times following, or become exercisable in full upon, the occurrence of certain events, including a change of control, death, disability or retirement. The On Command Corporation Stock Plan permits the payment of the Option exercise price to be made in cash (which may include an assignment of the right to receive the cash proceeds from the sale of Common Stock subject to the Option pursuant to a "cashless exercise" procedure) or by delivery of shares of Common Stock valued at their fair market value on the date of exercise, or by delivery of property of any kind constituting good and valuable consideration or by delivery of an interest bearing recourse promissory note payable to On Command Corporation, or by delivery of a combination of the foregoing. Options granted under the On Command Corporation Stock Plan shall not be transferable otherwise than by will, the laws of descent and distribution and may be exercised during the optionee's lifetime only by the optionee. See "The Transactions--The Merger--Treatment of OCV Employee Stock Options." 78 81 BENEFICIAL OWNERSHIP OF OCV AND OCC COMMON STOCK The following table sets forth, as of September 15, 1996, (i) the number of shares and percentage of OCV Common Stock beneficially owned by each person known to OCV who may be deemed to be the beneficial owner of more than 5% of the outstanding OCV Common Stock, each director of OCV, the Named Executive Officers and all directors and executive officers of each of OCV and On Command Corporation as a group and (ii) the number of shares and percentage of OCC Common Stock that would have been owned by each such person had the Transactions occurred on such date (assuming no holder of OCV Common Stock exercises its appraisal rights and before giving effect to any Reserved Stock and, unless otherwise indicated, the exercise of any Warrants):
OCV On Command Corporation ------------------------------ ------------------------------- Number of Number of Name and Address Shares Percentage(1) Shares Percentage(1) ---------------- --------- ------------- --------- ------------- Ascent Entertainment Group, Inc. (2)(5)........... 6,038,650 78.9% 18,273,394 58.7% Hilton Hotels Corporation(1)...................... 821,122 10.8 2,331,986 7.8 9336 Civic Center Drive Beverly Hills, California 90210 Richard C. Fenwick, Sr............................ 175,000 2.3 497,000 1.7 2 Arrowhead Way Westin, Connecticut 06883 Robert Snyder (3)(4).............................. 86,498 1.0 245,654 * Robert M. Kavner (3).............................. -- -- -- -- Brian A.C. Steal.................................. -- -- -- -- Charles Lyons (5)................................. -- -- -- -- C.J. Silas (5).................................... -- -- -- -- James A. Cronin, III (3).......................... -- -- -- -- Wesley D. Minami (5).............................. -- -- -- -- Gary L. Wilson (6)................................ -- -- 3,450,000 10.3 Warren Y. Zeger................................... -- -- -- -- Arthur M. Aaron (5)............................... -- -- -- -- Richard Fenwick, Jr. (3)(4)....................... 15,166 * 43,071 * Ronald Lessack (3)(4)............................. 12,000 * 34,080 * All executive officers and directors of OCV as a group (4 persons)............................ 292,786 3.8 831,512 2.8 All executive officers and directors of On Command Corporation as a group (11 persons) (4)........... 117,786 1.5 3,784,512 11.3
* Less than 1%. (footnotes continued on next page) (1) Assumes the exercise by Hilton of its option to purchase 410,561 shares of OCV Common Stock anticipated to occur before the Effective Time. (2) COMSAT owns 80.7% of the outstanding common stock of Ascent. COMSAT and Ascent have entered into agreements governing certain relationships between the companies. The number of shares of On Command Corporation shown to be owned by Ascent includes shares purchasable under Series A Warrants to be issued to Ascent, but excludes shares purchasable by Gary Wilson Partners upon exercise of the Series C Warrants. Gary Wilson Partners has agreed to vote such shares at the direction of Ascent. (3) The address of each such person is c/o On Command Video Corporation, 3301 Olcott Street, Santa Clara, California 95054. (4) Includes shares of OCV Common Stock purchaseable upon exercise of options as follows: Mr. Snyder, 31,498 shares; Mr. Fenwick, 14,166 shares; Mr. Lessack, 11,000 shares; and Mr. Neumann, 2,000 shares. (5) The address of such person is c/o Ascent Entertainment Group, Inc., One Tabor Center, 1200 Seventeenth Street, Denver, Colorado 80202. (6) Includes shares purchasable under the Series C Warrants to be issued to Gary Wilson Partners. The address of such person is c/o Gary Wilson Partners, 9665 Wilshire Boulevard, Suite 200, Beverly Hills, California 90212. In July 1993, OCV sold 410,561 shares of OCV Common Stock then representing a 10% ownership interest to Hilton Hotels Corporation ("Hilton") for $10.3 million pursuant to a stock purchase agreement, dated July 7, 1993 (the "Stock Purchase Agreement"). The Stock Purchase Agreement provided that, until May 1998, Hilton may sell the shares back to OCV after the earlier of (i) June 1, 1995 or (ii) the date Hilton determines that ownership of such shares may directly or indirectly jeopardize its ability to retain material licenses in connection with its business, at a price equal to the original purchase price plus interest from the date the shares were initially purchased, at an interest rate equal to the average of the one-year U.S. Treasury Bill rate compounded annually. In conjunction with the Stock Purchase Agreement, Hilton received an option (the "Hilton Option") to purchase an additional 410,561 shares of OCV Common Stock at the initial price of the OCV 79 82 Common Stock sold to Hilton under the Stock Purchase Agreement, escalating 10% per year. The Hilton Option is currently exercisable at $27.50 per share. The Stock Purchase Agreement was amended by a letter agreement dated December 8, 1995 in response to certain concerns of Hilton with respect to the valuation of the consideration received by OCV in connection with the contribution by Ascent of certain assets included in its Satellite Cinema division for OCV Common Stock (the "Contribution"). The December 8, 1995 letter agreement provided that: (a) an independent investment banking firm would be engaged to review, by February 10, 1996, the Contribution with respect to the value of the consideration received by OCV and the value of the OCV shares issued in such transaction (the "Valuation"); (b) the parties agreed to be bound by the recommendation of such investment banking firm, including, if necessary, at Ascent's option, paying cash to OCV or the minority stockholders of OCV; (c) an investment banking firm selected by Hilton will, if Hilton requests and at its expense, be engaged to attempt to locate a buyer for its equity interests in OCV at fair market value; and (d) if Ascent disposes of any or all of its interests in OCV to any person that is not an affiliate of OCV, the minority stockholder will be afforded an opportunity to dispose of a pro rata portion of its position in OCV on the same terms. In the COMSAT Agreement, COMSAT agreed to indemnify Ascent for the cost to Ascent of any adjustments to its interest in OCV as a result of the Valuation. In early 1996, Ascent, OCV and Hilton agreed that Hilton would engage a valuation consultant, and, based on the results of that consultant's work, Ascent, OCV and Hilton negotiated a resolution of the concerns raised by Hilton. As a result, the parties entered into a letter agreement in August 1996, providing for the cancellation of 470,588 shares of OCV Common Stock issued to Ascent pursuant to the Contribution. Pursuant to the COMSAT indemnity set forth in the COMSAT Agreement, this adjustment will result in a payable from COMSAT to Ascent of approximately $1.8 million. In connection with the August 1996 letter agreement, Hilton and OCV entered into an amendment of the Stock Purchase Agreement that provided for the extension of the date on which the exercise price of the Hilton Option would increase from June 1, 1996 to the later of (i) 90 days after the closing or the abandonment of the Transactions or (ii) December 1, 1996. The amendment also provides that if in connection with the Transactions, OCV Common Stock or On Command Corporation securities into which it is converted are registered under the Exchange Act and Hilton's shares of OCV Common Stock (or On Command Corporation securities into which they are converted) are freely tradeable, (a) all of OCV's obligations under Section 5 of the Stock Purchase Agreement (including Hilton's right to sell the shares back to OCV described above) will terminate and (b) the Hilton Option will terminate as of the closing of the Transactions, unless exercised before such closing. OCV has declared a contingent dividend to holders of its common stock on September 18, 1996 payable out of the proceeds of the exercise of the Hilton Option. The amendment provides that Hilton may pay a portion of the exercise price of its option in the form of a promissory note secured by the stock purchased, which note would be dividended to Ascent, would be payable in 90 days and would be subject to mandatory prepayment in 60 days if the OCC Common Stock is trading at a price in excess of 120% of Hilton's exercise price. The August 1996 letter agreement provides that if Hilton exercises the Hilton Option by reason of the closing of the Transactions, Hilton will have the right to put to Ascent all, but not less than all, of those Hilton Option shares of OCV Common Stock (or OCC Common Stock or Warrants into which they are converted) Hilton still owns on the date 90 days after the closing of the Transactions at the same exercise price in the Hilton Option. 80 83 CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES The following describes the principal federal income tax consequences of the Merger and of the ownership of OCC Common Stock and Series A Warrants, assuming that the Merger is consummated as contemplated herein. This discussion is based on current laws and interpretations thereof, and there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements contained herein. The discussion assumes that the OCV Common Stock exchanged by each holder in the Merger is held as a capital asset and does not take account of rules that may apply to holders of OCV Common Stock that are subject to special treatment under the Code (including, without limitation, insurance companies, dealers in securities, certain retirement plans, financial institutions, tax-exempt organizations, holders who are not U.S. Holders (as defined below) and OCV stockholders who acquired OCV Common Stock pursuant to the exercise of an employee stock option or otherwise as compensation). Also, the discussion does not address state, local or foreign tax consequences. Consequently, each OCV stockholder should consult its own tax advisor as to the specific tax consequences of the Merger and ownership of OCC Common Stock and Series A Warrants to that stockholder. As used in this section, a "U.S. Holder" of a share of OCC Common Stock means a holder that is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or an estate or trust the income of which is subject to federal income taxation regardless of its source. The Merger Tax Opinions. The obligations of OCC and of OCV to consummate the Merger are subject to the receipt of the opinion of tax counsel outlined below, unless waived. Neither OCC nor OCV has requested or will request an advance ruling from the Internal Revenue Service (the "IRS") as to the tax consequences of the Merger. As of the date of this Information Statement/Prospectus, Latham & Watkins, counsel to OCV, has advised OCV that, in their opinion, based on certain customary representations and assumptions referred to in such opinions, (i) the Merger will be treated for federal income tax purposes as a "reorganization" within the meaning of Section 368(a) of the Code and (ii) On Command Corporation, Merger Sub and OCV will each be a party to the reorganization within the meaning of Section 368(b) of the Code. Tax Treatment of Holders of OCV Common Stock. Exchanges of OCV Common Stock pursuant to the Merger will have the federal income tax consequences described below. In considering the following discussion, a holder should be aware that (under Section 318 of the Code) the holder may be considered to own, after the Merger, OCC Common Stock owned (and in some cases constructively owned) by certain related individuals and entities and OCC Common Stock which the holder (or such individuals and entities) has the right to acquire upon the exercise of options. Exchange of OCV Common Stock for a Combination of OCC Common Stock and Series A Warrants. A holder of OCV Common Stock who, pursuant to the Merger, exchanges all of the OCV Common Stock actually owned by him for a combination of OCC Common Stock and Series A Warrants will not recognize any loss on such exchange. Such holder will realize gain equal to the excess, if any, of (i) the sum of the fair market value of the Series A Warrants and the aggregate fair market value of the OCC Common Stock received in the Merger over (ii) such holder's tax basis in the OCV Common Stock exchanged therefor. However, any such gain will be recognized (and thus subject to tax) 81 84 only to the extent of the fair market value of the Series A Warrants received. In addition, such holder may recognize additional gain if cash is received in lieu of a fractional share of OCC Common Stock, as discussed below. The gain recognized by a holder of OCV Common Stock who receives a combination of OCC Common Stock and Series A Warrants pursuant to the Merger will be treated as long- or short-term capital gain (depending on whether such holder held the OCV Common Stock for more than one year) unless the receipt of the Series A Warrants has the effect of a distribution of a dividend as provided in Section 356(a)(2) of the Code, in which case such recognized gain would be treated as dividend income to the extent of such holder's ratable share of the accumulated earnings and profits of OCV (or possibly the total earnings and profits of OCV and On Command Corporation). The principles applicable under Section 302 of the Code are used to determine dividend equivalency under Section 356(a)(2). Section 302 determines whether a stockholder who received a distribution in redemption of stock of a corporation will be treated as having received a dividend or as recognizing a capital gain or loss. In applying the principles of Section 302, a holder of OCV Common Stock will be treated as if he first exchanged all his shares of OCV Common Stock solely for OCC Common Stock and then On Command Corporation immediately redeemed a portion of such OCC Common Stock in exchange for the Series A Warrants such stockholder actually received in the Merger. Under the principles of Section 302, gain recognized by a holder on the exchange that is attributable to the Series A Warrants will be taxed as capital gain if the deemed redemption from such holder (i) is a "substantially disproportionate redemption" of stock or (ii) is "not essentially equivalent to a dividend" with respect to such holder (taking into account, in either case, the constructive ownership rules of Section 318 of the Code and all other actual and deemed redemptions from such holder and other holders of OCC Common Stock and other transactions undertaken as part of the plan or reorganization). The deemed redemption of a holder's OCC Common Stock will be a "substantially disproportionate redemption" if, as a result of the deemed redemption, there is a greater than 20% reduction in (1) the percentage of all shares of OCC Common Stock owned by the holder measured immediately after the redemption as compared to such percentage measured immediately before the redemption and (2) the percentage of the voting power of all OCC Common Stock represented by all OCC Common Stock owned by the holder measured immediately after the redemption as compared to such percentage measured immediately before the redemption. Whether the deemed exchange and subsequent redemption transaction would be "not essentially equivalent to a dividend" with respect to a holder of OCV Common Stock will depend upon the holder's particular circumstances. If the deemed redemption is to qualify as "not essentially equivalent to a dividend," however, it must, in any event, result in a "meaningful reduction" in such holder's deemed percentage stock ownership of On Command Corporation. In determining whether a reduction in such holder's percentage ownership has occurred, (i) the percentage of the outstanding stock of On Command Corporation that such OCV stockholder is deemed actually and constructively to have owned immediately before the deemed redemption by On Command Corporation is compared to (ii) the percentage of the outstanding stock of On Command Corporation actually and constructively owned by such holder immediately after the deemed redemption by On Command Corporation. Based upon a published ruling of the IRS, the receipt of Series A Warrants in the Merger would not be characterized as a dividend if a holder's percentage stock ownership interest in On Command Corporation and OCV prior to the Merger is minimal, such holder exercises no control over the affairs of On Command Corporation or OCV and the holder's percentage equity interest in On Command Corporation is reduced in the deemed redemption to any extent. 82 85 The aggregate tax basis of OCC Common Stock received by an OCV stockholder who, pursuant to the Merger, exchanges his OCV Common Stock for a combination of OCC Common Stock and Series A Warrants will be the same as the aggregate tax basis of the OCV Common Stock surrendered therefor (except to the extent cash is received for fractional shares), decreased by the fair market value of Series A Warrants received and increased by the amount of gain recognized, if any (including any portion of such gain that is treated as a dividend). The holding period of the OCC Common Stock will include the holding period of the OCV Common Stock surrendered therefor. The aggregate tax basis of the Series A Warrants received by such holder will be the fair market value of such Series A Warrants at the Effective Time. The holding period of the Series A Warrants received will commence on the date of the Effective Time. Cash Received in Lieu of Fractional Shares of OCC Common Stock. No fractional shares of OCC Common Stock will be issued in the Merger. Cash received in lieu of a fractional share of OCC Common Stock will be treated as received in redemption of such fractional share, and gain or loss will be recognized, measured by the difference between the amount of cash received and the portion of the basis of the OCV Common Stock allocable to such fractional share. If such redemption meets the "not essentially equivalent to a dividend" test discussed above, such gain or loss would be capital gain or loss and should be long-term capital gain or loss if the holding period for such OCV Common Stock was greater than one year at the Effective Time. Tax Consequences of Ownership of OCC Common Stock Taxation of Dividends. The gross amount of dividends paid to holders of OCC Common Stock will be treated as dividend income to such holders, to the extent paid out of current or accumulated earnings and profits, as determined under federal income tax principles. Such income will be includable in the gross income of a holder as ordinary income on the day received by the holder. To the extent that the amount of any distribution is not paid out of On Command Corporation's current or accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the OCC Common Stock (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by a holder on a subsequent disposition of the OCC Common Stock), and the balance in excess of adjusted basis will be taxed as capital gain. Sale or other Taxable Disposition. A holder will recognize taxable gain or loss on any sale or other taxable disposition of a share of OCC Common Stock in an amount equal to the difference between the amount realized for the share of OCC Common Stock and the holder's basis in such share of OCC Common Stock. Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the share of OCC Common Stock has been held for more than one year on the date of the sale or exchange. Tax Consequences of Ownership of Series A Warrants Sale or other Taxable Disposition. The sale or other taxable disposition of a Series A Warrant will result in the recognition of gain or loss to the holder in an amount equal to the difference between the amount realized and the holder's tax basis therein. Such a sale or other taxable disposition (other than a redemption by OCC) will result in capital gain or loss. Such capital gain or loss will be long-term gain or loss if the Series A Warrants have been held for more than one year. 83 86 If the redemption of a Series A Warrant by On Command Corporation is treated as a sale or other taxable exchange of a capital asset, any gain or loss recognized on the transaction will be capital gain or loss. However, it is unclear whether the redemption of Series A Warrants by On Command Corporation will be treated as the sale or other taxable exchange of a capital asset, and if such redemption is not so treated, the holder of a Series A Warrant would recognize ordinary income or loss on such redemption. Adjustments. Under Section 305 of the Code, certain actual or constructive distributions of stock (including warrants to purchase stock) may be taxable to a holder of On Command Corporation. Adjustments (or a lack thereof) in the exercise price of the Series A Warrants or the number of shares of OCC Common Stock purchasable upon exercise of the Series A Warrants may result in a taxable constructive distribution which is taxable as a dividend under the Code to the holders of the Series A Warrants to the extent of current or accumulated earnings and profits of On Command Corporation. Exercise. No gain or loss will be recognized to a holder of Series A Warrants on the purchase of OCC Common Stock upon exercise of the Series A Warrants (except to the extent of cash, if any, received in lieu of fractional shares). The adjusted initial basis of the Common Stock so acquired would be equal to the adjusted basis of the exercised Series A Warrants plus the exercise price. For tax purposes, the holding period of the OCC Common Stock acquired upon the exercise of the Series A Warrants will not include the holding period of the Series A Warrants exercised. Lapse. If the Series A Warrants are not exercised and are allowed to expire, the Series A Warrants will be deemed to have been sold or exchanged on the expiration date. Any loss to the holder will be a capital loss, and the classification of the loss as long-term or short-term will depend upon the date the Series A Warrants were acquired and the length of time the Series A Warrants were held. Backup Withholding and Information Reporting. The receipt of dividends with respect to OCC Common Stock by a holder made by a paying agent, broker or other intermediary in the United States may be subject to U.S. information reporting requirements. The payment of the proceeds from the disposition of OCC Common Stock or Series A Warrants by a U.S. broker generally will be subject to information reporting. Backup withholding of 31% also will be required with respect to such payments unless such holder (i) is a corporation or other exempt recipient and, when required, demonstrates that fact, or (ii) provides a correct taxpayer identification number, certifies, when required, that such holder is not subject to backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. Backup withholding is not an additional tax; any amounts so withheld are creditable against the holder's federal income tax, provided the required information is provided to the IRS. 84 87 DESCRIPTION OF ON COMMAND CORPORATION CAPITAL STOCK The following summary does not purport to be complete and is subject in all respects to the applicable provisions of the Certificate of Incorporation and the Bylaws of On Command Corporation. The Certificate of Incorporation and the Bylaws of On Command Corporation are included as exhibits to the Registration Statement of which this Information Statement/Prospectus forms a part. THE FOLLOWING DESCRIPTIONS OF THE ON COMMAND CORPORATION CAPITAL STOCK SHOULD BE READ CAREFULLY BY OCV STOCKHOLDERS SINCE, AT THE EFFECTIVE TIME, EACH ISSUED AND OUTSTANDING SHARE OF OCV COMMON STOCK, OTHER THAN DISSENTING SHARES AND SHARES HELD BY OCV OR BY ITS DIRECT OR INDIRECT SUBSIDIARIES, WILL BE CONVERTED INTO THE RIGHT TO RECEIVE OCC COMMON STOCK. GENERAL The authorized capital of On Command Corporation consists of 50,000,000 shares of OCC Common Stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share (the "On Command Corporation Preferred Stock"). The Bank of New York will act as transfer agent and registrar for the OCC Common Stock. OCC COMMON STOCK Dividend Rights. Holders of OCC Common Stock are entitled to receive dividends declared on each share of OCC Common Stock held. Voting Rights. Holders of OCC Common Stock are entitled to one vote per share on all matters to be voted on by holders of OCC Common Stock, except that there is cumulative voting in elections of directors as described in "Comparison of Stockholder Rights--Voting Rights." Any matter to be voted on by holders of OCC Common Stock shall be decided by a majority of the votes cast on the matter, except with respect to certain amendments to the Certificate of Incorporation of On Command Corporation, which will require an affirmative vote of at least 80% of the shares eligible to vote. Action by written consent of stockholders in lieu of a meeting will not be effective until On Command Corporation or any stockholder provides all other stockholders with 20-days' prior written notice thereof. See "Comparison of Stockholder Rights--Stockholder Vote Required for Certain Actions." Board of Directors. Upon the consummation of the Transactions, the Board of Directors of On Command Corporation will be fixed by, or in the manner provided in, the On Command Corporation Bylaws; provided, however, that so long as there is cumulative voting On Command Corporation will maintain a board of not less than seven directors. Preemptive, Subscription, Redemption and Conversion Rights. Holders of OCC Common Stock have no preemptive, subscription, redemption or conversion rights. Liquidation Rights. Subject to the rights and preferences of any holder of On Command Corporation Preferred Stock, upon the liquidation, dissolution or winding up of On Command Corporation, whether voluntary or involuntary, the holders of OCC Common Stock are entitled to receive ratably the net assets of On Command Corporation. Assessment. The outstanding shares of OCC Common Stock to be issued in the Transactions will be fully paid and nonassessable. 85 88 ON COMMAND CORPORATION PREFERRED STOCK The Board of Directors of On Command Corporation is authorized, subject to limitations prescribed by law and the provisions of the Certificate of Incorporation of On Command Corporation, to provide for the issuance of shares of On Command Corporation Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. COMPARISON OF STOCKHOLDER RIGHTS OCV and On Command Corporation are both corporations organized under the laws of the State of Delaware and subject to the DGCL. However, certain differences, including but not limited to those described below, exist between the rights of OCV stockholders and the rights of holders of OCC Common Stock. The following summary does not purport to be complete and is subject in all respects to the applicable provisions of the DGCL, the Certificate of Incorporation and Bylaws of On Command Corporation and the Certificate of Incorporation and Bylaws of OCV, which are included as exhibits to the Registration Statement of which this Information Statement/Prospectus forms a part. GENERAL The authorized capital stock of OCV consists of 9,000,000 shares of OCV Common Stock, par value of $.01 per share. As of the date of this Information Statement/Prospectus, there were 7,219,768 shares of OCV Common Stock and Redeemable Common Stock outstanding, excluding any shares issuable upon exercise of outstanding warrants or options to purchase OCV Common Stock. The authorized capital stock of On Command Corporation consists of a total of 60,000,000 shares, divided into (i) 50,000,000 shares of OCC Common Stock, par value of $.01 per share, and (ii) 10,000,000 shares of On Command Corporation Preferred Stock, par value of $.01 per share. Subject to the rights and preferences of any holder of On Command Corporation Preferred Stock issuable from time to time under On Command Corporation's Certificate of Incorporation, upon the liquidation, dissolution or winding up of On Command Corporation, whether voluntary or involuntary, the holders of OCC Common Stock are entitled to receive ratably the net assets of On Command Corporation. The rights, preferences and privileges of holders of OCC Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of On Command Corporation Preferred Stock which On Command Corporation may designate and issue from time to time in the future. Following the Transactions, and assuming there are no Dissenting Shares, there will be 30,000,000 shares of OCC Common Stock outstanding and no shares of On Command Corporation Preferred Stock outstanding. In addition, Warrants to purchase 7,500,000 additional shares of OCC Common Stock will have been issued, as well as options for the purchase of approximately 3,000,000 shares of OCC Common Stock to be issued under the On Command Corporation Stock Option Plan. VOTING RIGHTS 86 89 Holders of OCV Common Stock are entitled to one vote per share on all matters to be voted on by OCV stockholders, except that there is cumulative voting in all elections of directors if the candidates' names have been placed in nomination prior to the commencement of the voting and a stockholder has given notice prior to commencement of the voting of such stockholder's intention to cumulate votes. If such conditions are met, each stockholder entitled to vote at the election of directors may cast a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that stockholder's shares are entitled. Cumulative votes may be cast for one candidate or distributed among any or all of the candidates as the stockholder chooses. OCV stockholders are not entitled to any preemptive or subscription rights. Subject to the voting rights provided by law or granted to any series of On Command Corporation Preferred Stock, all voting power is exclusively vested in the OCC Common Stock. Holders of OCC Common Stock are entitled to one vote per share on all matters to be voted on by holders of OCC Common Stock, except that there will be cumulative voting in all elections of directors under the circumstances described below. Until the Termination Date (as defined below), each holder of shares of OCC Common Stock will be entitled at all elections of directors to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of OCC Common Stock multiplied by the number of directors to be elected, and such holder may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them as he may see fit. Upon the occurrence of the Termination Date, the holders of OCC Common Stock no longer will be entitled to cumulative voting rights with respect to the election of directors and, from and after the Termination Date, all directors will be elected by straight voting. As used herein, the term "Termination Date" means the first date on which any "person" or related group (within the meaning of Rule 13d-3 or Rule 14d-2 promulgated under the Exchange Act), including any "group" acting for the purpose of acquiring or disposing of securities (within the meaning of Rule 13d-5(b)(1) promulgated under the Exchange Act), other than the Excluded Persons (as defined below), holds, directly or indirectly, more than 15% of the outstanding shares of capital stock of On Command Corporation entitled to vote generally in the election of directors (considered for this purpose as one class), and, for the purpose of this provision, all shares of OCC Common Stock issuable upon the exercise or conversion of all currently exercisable or convertible warrants, options or other securities held by such person or related group shall be deemed to be outstanding and held by such person or related group. "Excluded Person" means each person holding OCV Common Stock immediately prior to the Merger which is converted into OCC Common Stock, and any other person who, individually or collectively with its affiliates, receives upon original issuance thereof shares of OCC Common Stock and Warrants that represent more than 5% of the Applicable Securities. "Applicable Securities" means all shares of OCC Common Stock (including shares of OCC Common Stock purchasable upon exercise of the Warrants) to be issued and outstanding immediately upon consummation of the Transactions. On Command Corporation stockholders are not entitled to any preemptive or subscription rights. DIVIDENDS Holders of OCV Common Stock are entitled to receive dividends declared on each share of OCV Common Stock held. 87 90 Subject to the preferential rights of any series of On Command Corporation Preferred Stock, holders of OCC Common Stock are entitled to receive dividends declared on each share of OCC Common Stock held. BOARD OF DIRECTORS Each director of OCV is elected at the annual meeting of stockholders of OCV and serves a one-year term until the next annual meeting of stockholders. Director nominees receiving a plurality of the votes cast by the holders of outstanding shares of OCV represented at the annual meeting of stockholders, in person or by proxy, will be elected as directors of OCV. The number of directors constituting the Board of Directors of OCV is currently set at eight. Vacancies in the OCV Board of Directors may be filled by the remaining directors, except that a vacancy created by the removal of a director by the vote or written consent of the stockholders or by court order may be filled only by the vote of a majority of the shares entitled to vote for that director's position represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of stockholders and until a successor has been elected and qualified. A majority of directors shall constitute a quorum at any meeting of the Board of Directors. Following the Transactions, the On Command Corporation Board of Directors will consist of seven directors and each director of On Command Corporation will be elected at the annual meeting of stockholders of On Command Corporation and will serve a one-year term until the next annual meeting of stockholders. Director nominees receiving a plurality of the votes cast by the holders of outstanding shares of On Command Corporation represented at the annual meeting of stockholders, in person or by proxy, will be elected as directors of On Command Corporation. Any vacancies in the Board of Directors of On Command Corporation for any reason, and any directorships resulting from any increase in the number of directors, may be filled by the On Command Corporation Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen will hold office until the next election at which such directors successors have been elected and qualified. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of On Command Corporation Preferred Stock have the right, voting separately as a class, to elect one or more directors of the corporation, the terms of the director or directors elected by such holders will expire at the next succeeding annual meeting of stockholders. Notwithstanding any other provisions of the Certificate of Incorporation Bylaws of On Command Corporation, any director or the entire Board of Directors may be removed at any time, with or without cause, by the holders of a majority of the outstanding shares of On Command Corporation capital stock entitled to vote generally in the election of directors, except that, prior to the Termination Date, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of On Command Corporation Preferred Stock have the right, voting separately as a class, to elect one or more directors of On Command Corporation, the preceding sentence will not apply with respect to the director or directors elected by such holders of Preferred Stock. REPORTS TO STOCKHOLDERS; OTHER PUBLIC INFORMATION 88 91 OCV is not subject to the periodic reporting or other informational requirements of the Exchange Act. Stockholders of OCV are entitled to receive a copy of the latest annual, semi-annual and quarterly income statement which OCV has prepared and a balance sheet as of the end of that period. The reports, statements and other information sent by OCV to its stockholders can be inspected and copied at OCV's principal executive offices. On Command Corporation currently is not subject to the informational requirements of the Exchange Act. As a result of the registration of OCC Common Stock and Series A Warrants to be issued as part of the Merger Consideration in the Merger, On Command Corporation will become subject to the periodic reporting and other informational requirements of the Exchange Act and in accordance therewith will file reports and other information with the Commission. Following the Merger, On Command Corporation will furnish to the holders of OCC Common Stock annual reports containing audited consolidated financial statements prepared in accordance with GAAP, with an opinion thereon by On Command Corporation's external auditors, and quarterly reports containing unaudited consolidated financial information prepared in accordance with GAAP. See "Available Information." RIGHTS OF INSPECTION The DGCL allows any stockholder of a Delaware corporation to inspect, upon written demand, the stockholder list for such corporation and such corporation's other books and records for a purpose reasonably related to such person's interest as a stockholder. STOCKHOLDER MEETING PROCEDURES Calling of Special Meeting A special meeting of OCV stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the OCV Certificate of Incorporation, may be called at any time by (i) the Board of Directors, (ii) the Chairman of the Board, (iii) the president of OCV or (iv) one or more stockholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting. If a special meeting is called by any of the persons listed above other than the OCV Board of Directors, then such person shall provide written notice specifying the time of the meeting and the general nature of the business proposed to be transacted at the meeting to the Chairman of the Board, the president of OCV, any vice-president of OCV or the secretary of OCV, and the recipient will cause the notice to be sent to the stockholders. A special meeting of On Command Corporation stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the On Command Corporation Certificate of Incorporation, may be called by the chief executive officer, by a majority of the entire Board of Directors, or at the written request of stockholders owning at least a majority of the outstanding shares of capital stock entitled to vote in an election of directors (the "On Command Corporation Voting Stock"). Such request must state the purpose or purposes of the proposed meeting. Business transacted at the special meeting will be limited to the purposes stated in the notice. Written Action in Lieu of Meeting Any action that may be taken at any annual or special meeting of OCV stockholders may be taken without a meeting and without prior notice if a consent in writing setting forth the action so taken is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action 89 92 were present and voted. In the election of directors, such a consent is effective only if it is signed by the holders of all outstanding shares entitled to vote in the election (except that only a majority of the stockholders is required to fill a vacancy on the OCV Board of Directors not otherwise filled by the directors). Any action required or permitted to be taken at any annual or special meeting of On Command Corporation stockholders may be taken without a meeting, without prior notice and without a vote if a consent in writing setting forth the action so taken is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted, provided that such action shall not become effective until 20 days after notice to all stockholders. Quorum Requirements The holders of stock having a majority of the votes attributable to the capital stock of OCV issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the OCV stockholders for the transaction of business except as otherwise provided by statute or by the OCV Certificate of Incorporation or Bylaws. The holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the On Command Corporation stockholders for the transaction of business except as otherwise provided by statute or by the On Command Corporation Certificate of Incorporation or Bylaws. STOCKHOLDER VOTE REQUIRED FOR CERTAIN ACTIONS The OCV Certificate of Incorporation requires the affirmative vote of the holders of at least two-thirds of the voting power of the then outstanding shares of capital stock ("OCV Voting Stock") (i) to change the number of directors on the Board of Directors, (ii) to create any securities of the corporation, (iii) to increase the authorized number of shares of stock, (iv) to approve the conveyance of all or substantially all of the assets of the corporation or any of its subsidiaries, to approve the reorganization, consolidation or merger of the corporation or any of its subsidiaries, to approve any reclassification or other change in any stock, or to approve any recapitalization of the corporation or (v) to amend the OCV Certificate of Incorporation or the OCV Bylaws. The Certificate of Incorporation of On Command Corporation reserves to On Command Corporation the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in the Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner prescribed by law; provided, however, that any amendment, alteration, change or repeal of the provisions (i) limiting the effectiveness of action by written consent in lieu of meeting until 20 days after delivery of the notice to stockholders required by Section 228(d) of the DGCL, and (ii) requiring at least seven directors on the On Command Corporation Board of Directors for so long as cumulative voting is in effect and (iii) regarding amendments to the Certificate of Incorporation of On Command Corporation, shall require the affirmative vote of the holders of at least 80% of the outstanding shares of capital stock of On Command Corporation entitled to vote thereon. Under the DGCL, any other amendment, alteration or repeal of any article of the OCV Certificate of Incorporation or On Command Corporation Certificate of Incorporation requires the affirmative vote of a majority of the outstanding stock entitled to vote thereon and of a majority of the outstanding stock of each class entitled to vote thereon, voting as a class. Even if not otherwise entitled to vote upon a 90 93 proposed amendment, the holders of the outstanding shares of any class (or series of any class) are entitled under the DGCL to vote as a class upon such proposed amendment if it would alter the number of authorized shares or par value of the shares of such class (or series) or adversely affect the powers, preferences or special rights of the shares of such class (or series). The On Command Corporation Certificate of Incorporation permits the Board of Directors to amend the On Command Corporation Bylaws without stockholder action, but subject to the stockholders' power to alter or repeal any bylaw made by the Board of Directors. Furthermore, the On Command Corporation Bylaws provide that only business properly brought before an annual meeting of On Command Corporation stockholders can be acted upon at such meeting. To be properly brought before an annual meeting business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the On Command Corporation Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the On Command Corporation Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of On Command Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in the On Command Corporation Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth above. The chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the On Command Corporation Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. The On Command Corporation Bylaws also provide that only persons who are nominated in accordance with the procedures set forth in the On Command Corporation Bylaws shall be eligible for election as directors. Section 8 of the On Command Corporation Bylaws provides that nominations of persons for election to the On Command Corporation Board of Directors may be made at a meeting of stockholders by or at the direction of the On Command Corporation Board of Directors or by any stockholder entitled to vote for the election of directors at the meeting who complies with the following procedures described below. Such nominations, other than those made by or at the direction of the On Command Corporation Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of On Command Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at On Command Corporation's principal executive offices not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such 91 94 person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of On Command Corporation capital stock which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such persons' written consent to be named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder. At the request of the On Command Corporation Board of Directors any person nominated by the On Command Corporation Board of Directors for election as a director shall furnish to the Secretary of On Command Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in Section 8 of the On Command Corporation Bylaws. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. INDEMNIFICATION FOR SECURITIES ACT LIABILITIES A provision in OCV's Certificate of Incorporation limits the liability of the OCV Board of Directors for monetary damages to OCV and to OCV stockholders that may result from a breach of fiduciary duty by a director. The provision does not, however, limit the liability of a director (a) for any breach of the director's duty of loyalty to OCV or OCV stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) to the extent the director is liable under Section 174 of the DGCL for unlawful payment of dividends or (d) for any transaction from which the director derived an improper personal benefit. A provision in On Command Corporation's Certificate of Incorporation limits the liability of the On Command Corporation Board of Directors for monetary damages to On Command Corporation and to On Command Corporation stockholders that may result from a breach of fiduciary duty by a director, except to the extent such exemption from liability would not be permitted under the DGCL. STOCKHOLDER SUITS Under the DGCL, a stockholder of a Delaware corporation may institute a lawsuit in the name and on behalf of such corporation. An individual stockholder also may commence a lawsuit on behalf of himself and other similarly situated stockholders where the requirements for maintaining a class action under Delaware law have been met. Neither the Certificate of Incorporation nor the Bylaws of either OCV or On Command Corporation prescribe any procedure for the exercise of these rights. APPRAISAL RIGHTS Under the DGCL, stockholders of a Delaware corporation who follow prescribed statutory procedures are entitled, in the event of certain mergers or consolidations, to surrender their shares to the corporation in exchange for the judicially determined "fair value" of such shares. See "The Transactions--Appraisal Rights." Such a stockholder, however, is not entitled to such appraisal rights if (a) at the record date fixed to determine the stockholders entitled to receive notice and to vote at the meeting of stockholders, the shares held by the stockholder are part of a class of shares which is listed on a national securities exchange or designated as a national market system security on an interdealer 92 95 quotation system by the NASD or held of record by more than 2,000 holders at such record date and (b) the stockholder is not required by the terms of the plan of merger to accept for his shares anything except (i) shares of stock of the corporation surviving or resulting from such merger or consolidation, (ii) shares of stock of any other corporation which at the effective date of the merger or consolidation will either be listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the NASD or held of record by more than 2,000 stockholders, (iii) cash in lieu of fractional shares of the corporations described in (i) or (ii) above or (iv) any combination of the shares of stock and cash in lieu of fractional shares described in (i), (ii) and (iii) above. 93 96 EXPERTS The financial statements of On Command Video Corporation as of December 31, 1995 and 1994 and for each of the two years in the period ended December 31, 1995 included in this Information Statement/Prospectus and the related financial statement schedule as of December 31, 1995 and 1994 and for each of the two years in the period ended December 31, 1995 included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The statement of operations, stockholders' equity, and cash flows for the year ended December 31, 1993, included in this Information Statement/Prospectus, which is referred to and made part of this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements and schedule of SpectraVision and subsidiaries as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, have been included herein and in the registration statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and in the registration statement, and upon the authority of said firm as experts in accounting and auditing. The reports of KPMG Peat Marwick LLP covering the December 31, 1995 consolidated financial statements and schedule of SpectraVision contain an explanatory paragraph that states that SpectraVision's filing under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court on June 8, 1995 and its expected noncompliance with certain covenants related to its debtor-in-possession financing raises substantial doubt about SpectraVision's ability to continue as a going concern. The consolidated financial statements and schedule of SpectraVision do not include any adjustments that might result from the outcome of this uncertainty. LEGAL MATTERS Latham & Watkins, New York, New York, has rendered an opinion with respect to the validity of the OCC Common Stock and the Series A Warrants to be issued in connection with the Merger and will pass upon certain United States federal income tax matters related to the Merger. 94 97 INDEX TO PRO FORMA FINANCIAL STATEMENTS OF ON COMMAND CORPORATION Unaudited Pro Forma Combined Balance Sheet at June 30, 1996................ P-3 Unaudited Pro Forma Combined Statement of Operations for the Six Months Ended June 30, 1996......................................... P-4 Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 1995 .......................................... P-5 Notes to Unaudited Pro Forma Combined Financial Statements................. P-6 P-1 98 The following unaudited pro forma combined financial information for On Command Corporation ("OCC") consists of the Unaudited Pro Forma combined statements of operations for the six months ended June 30, 1996 and for the year ended December 31, 1995 and the Unaudited Pro Forma consolidated balance sheet as of June 30, 1996 (collectively, the "Pro Forma Statements"). The Pro Forma Statements give effect to the formation of OCC and the acquisition of the assets by OCC of OCV and Spectradyne, the principal operating subsidiary of SpectraVision. The unaudited pro forma combined statement of operations for the year ended December 31, 1995 and the six months ended June 30, 1996 reflects the transaction as if it had taken place on January 1, 1995. The unaudited pro forma combined balance sheet gives effect to the formation and acquisitions as if they had taken place on June 30, 1996. The SpectraVision financial information included in the Pro Forma Statements was previously reported in SpectraVision's Form 10-Q for the period ended June 30, 1996 and Form 10-K for the year ended December 31, 1995. Adjustments have been made to the SpectraVision financial information to eliminate the net assets of SpectraVision and SPI Newco, Inc., the principal holding companies of Spectradyne, as their assets are not being acquired. The pro forma financial information reflects the historical book value of the assets, liabilities, and stockholders equity acquired from OCV by OCC and management's estimate of the fair value of the SpectraVision assets to be acquired and liabilities to be assumed by OCC. The final purchase price allocation for the SpectraVision assets will be determined at a future date (no later than one year from the Closing Date), which may result in adjustments to the preliminary allocation. However, in the opinion of management, the preliminary allocation of the purchase price reflects OCC's best estimate and all adjustments necessary to state fairly such pro forma financial information have been made. The Pro Forma Statements should be read in conjunction with the notes included in this document. The pro forma financial information is not necessarily indicative of what the actual financial results would have been had the transaction taken place on January 1, 1995 or June 30, 1996 or what the future financial results will be. As a result of the transaction, OCC expects its subsidiaries to achieve substantial operating cost savings through the consolidation of certain operations and the elimination of redundant costs. These operating cost savings are expected primarily through reductions in personnel and related benefit costs and consolidation and elimination of support operations, including administration, marketing, data processing, and centralized support functions. There can be no assurance that the operating cost savings will be realized. The extent to which the operating cost savings will be achieved depends, among other things, on the regulatory environment and economic conditions and may be affected by unanticipated changes in business activities, inflation, and operating costs. No adjustment has been included in the unaudited Pro Forma Statements for the possible operating cost savings, except for the expected reduction in payments due to EDS (in the approximate amount of $700,000 monthly) that would result from amended agreements with EDS. P-2 99 ON COMMAND CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET AT JUNE 30, 1996 (In thousands)
OCV SPECTRAVISION PRO FORMA OCC ACTUAL ACTUAL ADJUSTMENTS NOTE COMBINED ------ ------ ----------- ---- -------- ASSETS Current assets: Cash and cash equivalents ...................... $ 145 $ 4,918 $ (1) (1) $ 5,062 Accounts receivable, net ....................... 13,819 13,763 95 (2) 27,677 Other current assets ........................... 2,165 6,323 (246) (1) 6,414 (1,250) (5) (578) (2) -------- --------- --------- -------- Total current assets ......................... 16,129 25,004 (1,980) 39,153 -------- --------- --------- -------- Video Systems, net ............................... 207,504 98,581 (11,581) (5) 294,504 Land ............................................. -- 2,559 (559) (5) 2,000 Property and equipment, net ...................... 3,263 6,301 (2,051) (5) 7,513 Hotel contracts, net ............................. -- 46,104 (39,354) (5) 6,750 Debt issuance costs .............................. -- 5,662 (5,344) (1) -- (318) (4) Other assets, net ................................ 6,019 10,426 (10,426) (5) 6,019 Other intangibles ................................ -- -- 10,000 (5) 10,000 Goodwill ......................................... -- -- 25,400 (5) 25,400 -------- --------- --------- -------- Total assets ................................... $232,915 $ 194,637 $ (36,213) $391,339 ======== ========= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................... $ 8,761 $ 12,289 $ 6,000 (5) $ 27,050 Accrued compensation and (74) (1) other liabilities ............................ 6,835 12,255 (1,749) (2) 17,267 Notes payable .................................. 29,270 37,919 -- 67,189 Capitalized lease obligations .................. -- 3,379 (3,379) (3) -- -------- --------- --------- -------- Total current liabilities .................... 44,866 65,842 798 111,506 -------- --------- --------- -------- Other liabilities ................................ 1,816 -- 5,128 (2)(3) 6,944 Liabilities subject to settlement under -- 576,040 (494,875) (1) -- reorganization (81,165) (6) Deferred income taxes ............................ 1,012 4,920 (4,920) (8) 1,012 -------- --------- --------- -------- Total liabilities .............................. 47,694 646,802 (575,034) 119,462 -------- --------- --------- -------- Contingent value rights .......................... -- 20,000 (20,000) (1) -- Redeemable common stock .......................... 12,007 -- (12,007) (7) -- Stockholders' equity: Common stock ................................... 73 24 203 (1)(7) 300 Additional paid-in capital ..................... 168,604 392,185 98,436 (5)(7) 267,040 (392,185) (1) Retained earnings (deficit) .................... 4,537 (863,075) 901,567 (1) 4,537 (38,492) (7) Foreign currency translation ................... -- (1,299) 1,299 (7) -- -------- --------- --------- -------- Total stockholders' equity ................... 173,714 (472,165) 570,828 271,877 -------- --------- --------- -------- Total liabilities & stockholders' equity ... $232,915 $ 194,637 $ (36,213) $391,339 ======== ========= ========= ========
See Notes to Pro Forma Financial Statements. P-3 100 ON COMMAND CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (In thousands)
OCV SPECTRAVISION PRO FORMA PRO FORMA ACTUAL ACTUAL ADJUSTMENTS NOTE OCC ------ ------ ----------- ---- --- Revenues ................................ $62,490 $ 58,012 $ -- $120,502 Costs and expenses: Direct Cost of revenues ............... 27,940 27,088 -- 55,028 Operating expenses .................... 5,240 20,016 (4,200) (12) 21,056 Depreciation and amortization ......... 21,293 20,519 (4,105) (9) 37,707 Marketing, general and administrative . 2,212 7,186 600 (13) 9,998 Research and development .............. 1,929 988 -- 2,917 ------- -------- ------- -------- Total costs and expenses .......... 58,614 75,797 (7,705) 126,706 ------- -------- ------- -------- Income (loss) from operations ........... 3,876 (17,785) 7,705 (6,204) ------- -------- ------- -------- Interest and other income (loss) ........ 19 (234) -- (215) Interest expense ........................ (1,008) (3,062) 1,528 (11) (2,542) Reorganization items .................... -- (1,827) 1,827 (10) -- ------- -------- ------- -------- Income (loss) before taxes .............. 2,887 (22,908) 11,060 (8,961) Provision (benefit) for income taxes .... 1,263 (122) (1,263) (14) (122) ------- -------- ------- -------- Net Income (loss) ....................... 1,624 (22,786) 12,323 (8,839) ------- -------- ------- -------- Redeemable common stock accretion ....... (323) -- 323 (7) -- ------- -------- ------- -------- Net income applicable to non-redeemable common stock .......................... $ 1,301 $(22,786) $12,646 $ (8,839) ======= ======== ======= ======== Net income (loss) per common and equivalent share ...................... $ 0.16 $ (0.95) $ (0.29) ======= ======== ======== Shares used in per share calculation .... 7,903 23,984 30,000 ======= ======== ======== EBITDA(1) ............................... $25,169 $ 2,734 $ 31,503 ======= ======== ========
(1) EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See Notes to Pro Forma Financial Statements. P-4 101 ON COMMAND CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands)
OCV SPECTRAVISION PRO FORMA PRO FORMA ACTUAL ACTUAL ADJUSTMENTS NOTE OCC ------ ------ ----------- ---- --- Revenues .................................. $ 102,059 $ 123,986 $ -- $ 226,045 Costs and expenses: Direct cost of revenues ................. 48,417 52,813 -- 101,230 Operating expenses ...................... 9,054 46,843 (8,400) (20) 47,497 Depreciation and amortization ........... 28,737 39,364 (6,536) (15) 61,565 Marketing, general and administrative ... 3,118 22,203 1,200 (19) 26,521 Research and development ................ 2,642 1,769 -- 4,411 Other ................................... 1,540 247 -- 1,787 --------- --------- --------- --------- Total costs and expenses ............ 93,508 163,239 (13,736) 243,011 --------- --------- --------- --------- Income (loss) from operations ............. 8,551 (39,253) 13,736 (16,966) --------- --------- --------- --------- Interest and other income (loss) .......... 61 508 -- 569 Interest expense .......................... (413) (28,177) 1,406 (17) (1,155) 26,029 (18) Reorganization items ...................... -- (7,563) 1,552 (16) (6,011) --------- --------- --------- --------- Income (loss) before taxes ................ 8,199 (74,485) 42,723 (23,563) Provision (benefit) for income taxes ...... 3,297 (840) (3,297) (21) (840) --------- --------- --------- --------- Income (loss) before extraordinary item ... 4,902 (73,645) 46,020 (22,723) Extraordinary loss from debt extinguishment -- (915) -- (915) --------- --------- --------- --------- Net income (loss) ......................... 4,902 (74,560) 46,020 (23,638) --------- --------- --------- --------- Redeemable common stock accretion ......... (641) -- 641 (7) -- --------- --------- --------- --------- Net income applicable to non-redeemable common stock ......................... $ 4,261 $ (74,560) $ 46,661 $ (23,638) ========= ========= ========= ========= Net income (loss) per common and common equivalent share ........................ $ 0.62 $ (3.11) $ (0.79) ========= ========= ========= Shares used in per share calculations ..... 6,833 23,984 30,000 ========= ========= ========= EBITDA(1) ................................. $ 37,288 $ 866 $ 44,599 ========= ========= =========
(1) EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See Notes to Pro Forma Financial Statements. P-5 102 ON COMMAND CORPORATION NOTES TO PRO FORMA FINANCIAL STATEMENTS AT AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 Unaudited Pro Forma Combined Balance Sheet as of June 30, 1996: 1. To eliminate the net assets and liabilities of SpectraVision and SPI NEWCO, Inc. ("SPI NEWCO") which are not being acquired as follows:
Other liabilities........................ $ 74 Liabilities subject to settlement under reorganization................. 494,875 Contingent value rights.................. 20,000 Common stock............................. 24 Paid-in capital.......................... 392,185 Deficit.................................. $901,567 Cash..................................... 1 Debt issuance costs...................... 5,344 Pre-paids and other assets............... 246
2. To adjust selected current assets and liabilities as contemplated by the Acquisition Agreement. 3. To reclassify certain liabilities to other long-term liabilities. 4. To write-off debt issuance costs incurred by and capitalized by Spectradyne. 5. The purchase price for the net assets acquired from SpectraVision was $86.7 million and was allocated as follows:
Estimated fair value of assets acquired: Current assets, including cash of $4,917 ............ $ 23,024 Fixed assets: Video equipment .................................. 87,000 Office equipment and vehicles .................... 2,750 Building ......................................... 1,500 Land ............................................. 2,000 Intangible assets, including hotel contracts and intellectual property ................ 16,750 Goodwill ............................................ 25,400 -------- 158,424 Less the fair value of the liabilities assumed: Current liabilities ................................. (28,721) Note payable - Foothill Capital Corp. ............... (37,919) Capital lease obligations ........................... (5,128) -------- $ 86,656 ========
Both the current assets and current liabilities to be acquired are recorded at their historical cost basis, which approximates fair value. The fair value of the non-current assets to be acquired was determined based on an appraisal conducted by a nationally known firm. The note payable to Foothill Capital Corporation has been reflected at historical cost, as both principal and interest amounts (which reflect current market rates) due under this obligation will be repaid at closing. The capital lease obligations to be assumed have been reflected at historical cost, which approximates the estimated contractual obligation that OCC will assume at closing under these lease obligations. Accordingly, the fair value of the acquired assets and liabilities, based on management's preliminary estimate of their fair value, as noted above, results in the following adjustments: (a) a decrease in other current assets of $1.2 million; (b) a decrease in video equipment of $11.6 million; (c) a decrease in land of $0.6 million; (d) a decrease in building and office equipment and computers of $2.1 million; (e) a decrease in hotel contracts of $39.4 million; (f) to record goodwill relating to the acquisition of $25.4 million; (g) a write-down of deferred contract concession costs of $10.4 million; (h) to record other intangible assets, including technology, software, patents and trademarks, of $10.0 million; and (i) to record direct acquisition costs. 6. To eliminate pre-petition liabilities on Spectradyne's balance sheet that will not be assumed by OCC. 7. To reflect the capitalization of OCC as follows: (a) the issuance of 30,000,000 shares of OCC Common Stock at the closing; (b) the issuance of warrants to purchase OCC Common Stock at the closing; (c) the conversion of OCV redeemable common stock to OCC Common Stock at the closing; (d) the retained earnings of OCV as the ongoing entity and (e) to allocate the net assets acquired of SpectraVision. 8. To reduce SpectraVision's net deferred tax liability to reflect the new tax basis established in OCC. Fair value adjustments result in a net deferred asset balance for OCC that is anticipated to be fully reserved due to uncertainties regarding the recoverability of the net deferred tax assets. P-6 103 Unaudited Pro Forma Combined Statement of Operations for the Six months ended June 30, 1996: 9. To adjust depreciation and amortization expense as follows: Amortization of goodwill............................. $ 620 Reduction in depreciation and other amortization..... (4,725) ---------- Total................................................ $ (4,105) ==========
Amortization of goodwill is based on amortization over 20 years and other identifiable intangibles are amortized over 10 years. The change in depreciation and other amoritization expense results from the decrease in depreciable basis in connection with the allocation of purchase price offset by revisions to the estimated useful lives of the purchased assets. The useful lives of the purchased assets is as follows: video equipment, three years; office equipment, five years; building, 20 years; hotel contracts, seven years. 10. To reduce restructuring costs for non-recurring bankruptcy costs incurred by SpectraVision as a result of its bankruptcy filing. 11. To reflect the terms of the anticipated bank credit agreement and the pro forma borrowings based on (i) average total borrowings of $20.0 million outstanding throughout the period at an average interest rate of 8.5% and (ii) the amortization of deferred financing cost incurred in connection with the transaction. The effect on income of a 1/8% variance in interest rates would approximate $38,000 based on the average borrowings outstanding for the six months ended June 30, 1996. 12. To reduce operating expenses for the anticipated cost savings attributed to the EDS contract (estimated at $700,000 per month) being renegotiated. 13. To adjust general and administrative expenses to reflect the anticipated management fee of $1.2 million per year payable to Ascent. 14. No adjustment is made to reflect the income tax effects of the foregoing adjustments as the net operating losses incurred are still significant to shelter any taxable earnings of OCV. However, OCV's tax provision has been eliminated as it is anticipated that OCC would not record tax expense on a combined basis. Unaudited Pro Forma Combined Statement of Operations for the Year ended December 31, 1995: 15. To adjust depreciation and amortization expense as follows: Amortization of goodwill.............................. $ 1,238 Reduction in depreciation and other amortization...... (7,774) -------- Total................................................. $ (6,536) ========
Amortization of goodwill is based on amortization over 20 years and other identifiable intangibles are amortized over 10 years. The change in depreciation and other amortization expense results from the decrease in depreciable basis in connection with the P-7 104 allocation of purchase price offset by revisions to the estimated useful lives of the purchased assets. The useful lives of the purchased assets is as follows: video equipment, three years; office equipment, five years; building, 20 years; hotel contracts, seven years. 16. To reduce restructuring costs for non-recurring bankruptcy costs incurred by SpectraVision as a result of its bankruptcy filing. 17. To reflect the terms of the anticipated bank credit agreement and the pro forma borrowings, based on (i) average total borrowings of $59.1 million and an average interest rate of 8.5% for the year ended December 31, 1995 and (ii) amortization of deferred financing costs incurred in connection with the transaction. The effect on income of a 1/8% variance in interest rates would approximate $16,000 based on the average borrowing outstanding for the year ended December 31, 1995. 18. To eliminate non-recurring interest expense incurred by SpectraVision and SPI NEWCO. This interest expense relates to the reorganization indebtedness that is not being assumed by OCC. 19. To adjust general and administrative expenses to reflect anticipated management fee payable of $1.2 million per year payable to Ascent. 20. To reduce operating expenses for the anticipated costs savings attributed to the new EDS contract at $700,000 per month. 21. No adjustment is made for the income tax effects of the foregoing adjustments (an income tax benefit) as the recoverability of a net deferred asset would be uncertain. However, OCV's tax provision is eliminated as it is anticipated that OCC would not record tax expense on a combined basis. P-8 105 INDEX TO FINANCIAL STATEMENTS OF ON COMMAND VIDEO CORPORATION Page Audited Financial Statements for the Years Ended December 31, 1995, 1994 and 1993: Report of Deloitte & Touche LLP................................ F-2 Report of Ernst & Young LLP, Independent Auditors.............. F-3 Balance Sheets at December 31, 1995 and 1994................... F-4 Statements of Income for the Years Ended December 31, 1995, 1994 and 1993.......................... F-5 Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993.................... F-6 Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.......................... F-7 Notes to Financial Statements.................................. F-8 Unaudited Condensed Financial Statements for the Six Months Ended June 30, 1996 and 1995: Condensed Balance Sheets at June 30, 1996 and December 31, 1995........................................ F-16 Condensed Statements of Income for the Six Months Ended June 30, 1996 and 1995...................... F-17 Condensed Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995.................. F-18 Notes to Condensed Financial Statements....................... F-19 F-1 106 REPORT OF DELOITTE & TOUCHE LLP The Board of Directors and Stockholders of On Command Video Corporation: We have audited the accompanying balance sheets of On Command Video Corporation (a majority owned subsidiary of Ascent Entertainment Group, Inc.) as of December 31, 1995 and 1994, and the related statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such 1995 and 1994 financial statements present fairly, in all material respects, the financial position of On Command Video Corporation as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP San Jose, California September 19, 1996 F-2 107 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders of On Command Video Corporation: We have audited the accompanying statement of operations, stockholders' equity, and cash flows of On Command Video Corporation (a majority owned subsidiary of Comsat Video Enterprises, Inc.) for the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of On Command Video Corporation for the year ended December 31, 1993, in conforming with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Jose, California January 26, 1994 F-3 108 ON COMMAND VIDEO CORPORATION BALANCE SHEETS AT DECEMBER 31, 1995 AND 1994 (In thousands)
1995 1994 -------- -------- ASSETS Current assets: Cash and cash equivalents ........................ $ 956 $ 8,323 Accounts receivable (less allowance for doubtful accounts of $100 in 1995 and 1994) ............ 9,853 7,882 Accounts receivable from stockholder ............. -- 4,500 Other current assets ............................. 831 312 Deferred income taxes ............................ 1,163 1,290 -------- -------- Total current assets ........................... 12,803 22,307 Video Systems, net ................................. 188,910 113,588 Property and equipment, net ........................ 2,971 2,339 Other assets, net .................................. 6,321 650 -------- -------- Total assets ................................... $211,005 $138,884 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................. $ 3,910 $ 7,145 Accounts payable to stockholder................... 2,300 5,200 Accrued compensation ............................. 1,715 2,070 Taxes payable .................................... 1,813 67 Other accrued liabilities ........................ 934 1,148 Deferred revenue ................................. 803 1,181 Current portion of stockholders' notes payable ... 15,942 817 -------- -------- Total current liabilities ...................... 27,417 17,628 Other accrued liabilities ........................ 1,841 719 Long-term portion of stockholders' note payable .. -- 208 Deferred income taxes ............................ 259 337 -------- -------- Total liabilities .............................. 29,517 18,892 Commitments and contingencies ...................... -- -- Redeemable common stock, $.01 par value: shares issued and outstanding -- 411 in 1995 and 1994.... 11,684 11,043 Stockholders' equity: Common stock, $.01 par value: shares authorized-- 9,000 in 1995 and 7,000 in 1994; shares issued and outstanding--7,277 in 1995 and 5,396 in 1994 73 54 Additional paid-in capital ....................... 166,495 109,920 Retained earnings (deficit) ...................... 3,236 (1,025) -------- -------- Total stockholders' equity ..................... 169,804 108,949 -------- -------- Total ........................................ $211,005 $138,884 ======== ========
See Notes to Financial Statements. F-4 109 ON COMMAND VIDEO CORPORATION STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands, except per share amounts)
1995 1994 1993 -------- --------- --------- Revenues: Movie revenues ......................... $ 75,009 $45,931 $23,415 Video systems sales .................... 22,852 31,698 6,009 Video management services .............. 4,198 3,980 780 -------- ------- ------- Total revenues (see Note 9 for related party revenues)............. 102,059 81,609 30,204 -------- ------- ------- Direct costs of revenues: Movie revenues ......................... 24,052 16,593 7,213 Video systems sales .................... 20,015 27,600 4,936 Video management services .............. 4,350 3,593 763 -------- ------- ------- Total direct costs of revenues ....... 48,417 47,786 12,912 -------- ------- ------- Operating expenses: Depreciation and amortization .......... 28,737 17,534 7,820 Field service .......................... 9,054 5,274 3,300 Research and development ............... 2,642 1,771 1,216 Marketing, general and administrative .. 3,118 3,397 2,619 Settlement of litigation ............... 1,540 -- -- -------- ------- ------- Total operating expenses ............. 45,091 27,976 14,955 -------- ------- ------- Income from operations ................... 8,551 5,847 2,337 Interest income .......................... 61 178 300 Interest expense ......................... (413) (256) (317) -------- ------- ------- Income before income taxes ............... 8,199 5,769 2,320 Provision for income taxes ............... 3,297 2,313 962 -------- ------- ------- Net income ............................... 4,902 3,456 1,358 Redeemable common stock accretion......... (641) (600) (179) Net income applicable to non-redeemable common stock............................ $ 4,261 $ 2,856 $1,179 ======== ======= ======= Net income per common and equivalent share $ 0.62 $ 0.51 $ 0.30 ======== ======= ======= Shares used in per share computations .... 6,833 5,571 3,896 ======== ======= =======
See Notes to Financial Statements. F-5 110 ON COMMAND VIDEO CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands)
COMMON STOCK ADDITIONAL RETAINED TOTAL --------------- PAID-IN EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ------ ------ ------- --------- ------ Balances, January 1, 1993 ........ 3,243 $ 33 $ 45,702 $ (5,060) $ 40,675 Sale of common stock to investors 881 9 24,191 -- 24,200 Exercise of stock options ........ 136 1 868 -- 869 Income tax benefit of stock option transactions ................... -- -- 390 -- 390 Issuance of warrants ............. -- -- 504 -- 504 Accretion of redeemable common stock .......................... -- -- -- (179) (179) Net income ....................... -- -- -- 1,358 1,358 -------- -------- -------- -------- -------- Balances, December 31, 1993 ...... 4,260 43 71,655 (3,881) 67,817 Sale of common stock to investors 1,075 10 37,490 -- 37,500 Exercise of stock options ........ 61 1 601 -- 602 Income tax benefit of stock option -- -- 174 -- 174 transactions Accretion of redeemable common stock .......................... -- -- -- (600) (600) Net income ....................... -- -- -- 3,456 3,456 -------- -------- -------- -------- -------- Balances, December 31, 1994 ...... 5,396 54 109,920 (1,025) 108,949 Common stock issued in connection 1,879 19 56,520 -- 56,539 with contribution agreement with COMSAT (Note 9) Exercise of stock options ........ 2 -- 35 -- 35 Income tax benefit of stock option transactions ................... -- -- 20 -- 20 Accretion of redeemable common stock .......................... -- -- -- (641) (641) Net income ....................... -- -- -- 4,902 4,902 -------- -------- -------- -------- -------- Balances, December 31, 1995 ...... 7,277 $ 73 $166,495 $ 3,236 $169,804 ======== ======== ======== ======== ========
See Notes to Financial Statements. F-6 111 ON COMMAND VIDEO CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands)
1995 1994 1993 -------- -------- -------- Cash flows from operating activities: Net income ................................................................. $ 4,902 $ 3,456 $ 1,358 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................ 28,737 17,534 7,820 Deferred income taxes, net ............................................... 4,506 (383) (1,013) Loss on disposal of fixed assets ......................................... 232 -- 56 Changes in assets and liabilities net of effects from acquired operations: Pledged cash ........................................................... -- -- 436 Accounts receivable .................................................... 3,959 (2,711) (3,843) Accounts receivable from stockholder ................................... 4,500 (3,100) (1,200) Other current assets ................................................... (499) (192) (55) Note receivable from employee .......................................... -- -- 150 Accounts payable ....................................................... (3,235) 482 3,893 Accounts payable to stockholder ........................................ (2,900) 4,000 1,000 Accrued compensation ................................................... (355) 838 880 Income taxes payable ................................................... 1,746 (1,120) 1,685 Other accrued liabilities .............................................. 159 1,054 605 Deferred revenue ....................................................... (378) 193 (12) -------- -------- -------- Net cash provided by operating activities ............................ 41,374 20,051 11,760 -------- -------- -------- Cash flow from investing activities: Capital expenditures ....................................................... (63,693) (64,110) (56,153) Proceeds from sale of property and equipment ............................... -- -- 30 -------- -------- -------- Net cash provided by investing activities ............................ (63,693) (64,110) (56,123) -------- -------- -------- Cash flows from financing activities: Proceeds from stockholders' notes payable .................................. 15,734 -- -- Principal payments on stockholders' notes payable .......................... (817) (817) (792) Proceeds from issuance of redeemable common stock .......................... -- -- 10,264 Proceeds from issuance of common stock ..................................... 35 38,102 15,069 Collection of note receivable from stockholder ............................. -- 10,000 23,000 -------- -------- -------- Net cash provided by financing activities ............................ 14,952 47,285 47,541 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ......................... (7,367) 3,226 3,178 Cash and cash equivalents, beginning of year ................................. 8,323 5,097 1,919 -------- -------- -------- Cash and cash equivalents, end of year ....................................... $ 956 $ 8,323 $ 5,097 ======== ======== ======== Supplemental information: Cash paid for income taxes ................................................. $ 1,426 $ 3,762 $ 349 ======== ======== ======== Cash paid for interest ..................................................... $ 413 $ 256 $ 317 ======== ======== ======== Common stock issued in connection with contribution agreement with Comsat .............................................................. $ 56,539 $ -- $ -- ======== ======== ======== Common stock issued for notes receivable ................................... $ -- $ -- $ 10,000 ======== ======== ======== Ascribed value for issuance of warrants to purchase common stock .................................................................... $ -- $ -- $ 840 ======== ======== ========
See Notes to Financial Statements. F-7 112 ON COMMAND VIDEO CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES ORGANIZATION AND NATURE OF BUSINESS -- On Command Video Corporation (the Company) designs, develops, manufactures and installs proprietary video systems. The Company's video system is a patented video selection and distribution system that allows guests to select motion pictures on computer controlled television sets located in their rooms at any time. The Company also provides in-room viewing of free-to-guest programming of select cable channels and other interactive services under long-term contracts to hotels and businesses. The Company is a majority owned subsidiary of Ascent Entertainment Group, Inc. (Ascent). Ascent is a majority owned subsidiary of COMSAT Corporation (Comsat). CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid debt instruments, with insignificant interest rate risk, acquired with an original maturity of less than three months to be cash equivalents. Cash equivalents, consisting primarily of municipal obligations, money market funds, certificates of deposit and bank savings accounts, are stated at amortized cost which approximates market. The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. There was no cumulative effect of adopting SFAS No. 115 on the Company's financial position or results of operations. VIDEO SYSTEMS, PROPERTY AND EQUIPMENT -- Video systems and property and equipment are stated at cost less accumulated depreciation and amortization. Installed video systems consist of equipment and related costs of installation at hotel locations. Construction in progress consists of purchased and manufactured parts of partially constructed video systems. Depreciation and amortization are provided using the straight-line method over the shorter of the estimated useful lives, generally five to seven years, or lease terms. Effective October 1, 1994, the Company changed the estimated useful life of installed video systems from five years to the following: Video systems.............. Five years All other costs............ Term of the contract, five to seven years The effect in 1994 from this change in estimate was to increase net income and net income per common and equivalent share by approximately $420,000 and $.07, respectively. OTHER ASSETS -- Other assets consist of the warrants referred to in Note 7 plus payments made to customers as inducements for them to enter into contracts with the Company for the installation of pay-per-view video systems. These assets are amortized on a straight-line basis over the term of the contracts, five to seven years. Additionally, other assets at December 31, 1995 include an investment of $1,265,000 in MagiNet Corporation accounted for at cost. F-8 113 REVENUE RECOGNITION -- The Company installs pay-per-view video systems in hotels, generally under five- to seven-year agreements, whereby it recognizes revenues at the time of viewing. Revenue from the sale of video systems is recognized when the equipment is shipped, except for systems requiring installation by the Company, which is recognized upon completion of the installation. Revenues from video management services and royalties are recognized when earned. NET INCOME PER SHARE -- Net income per share is based on the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares include redeemable common stock and common stock options and warrants. INCOME TAXES -- The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires an asset and liability approach to account for income taxes. FOREIGN CURRENCY -- Transaction gains and losses, which are included in the statements of income, have not been material in any of the years presented. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include the allowance for doubtful accounts receivable, the estimated useful lives of video systems and property and equipment, reducing construction in progress to its net realizable value and the amounts of certain accrued liabilities. The Company participates in the highly competitive in-room entertainment industry and believes that changes in any of the following areas could have a material adverse affect on the Company's future financial position or results of operations: decline in hotel occupancy as a result of general business, economic, seasonal or other factors; loss of one or more of the major hotel chain customers; ability to obtain additional capital to finance capital expenditures; ability to retain senior management and key employees; and risks of technological obsolescence. RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to conform to the current year presentation. 2. VIDEO SYSTEMS Video systems at December 31, consist of the following (in thousands):
1995 1994 --------- --------- Installed video systems .... $ 210,335 $ 110,180 Construction in progress ... 31,805 30,381 --------- --------- 242,140 140,561 Accumulated depreciation ... (53,230) (26,973) --------- --------- Video systems, net ......... $ 188,910 $ 113,588 ========= =========
F-9 114 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, consist of the following (in thousands): 1995 1994 ------- ------- Machinery and equipment ...................... $ 3,767 $ 2,485 Furniture, fixtures and leasehold improvements 914 785 ------- ------- 4,681 3,270 Accumulated depreciation and amortization .... (1,710) (931) ------- ------- Property and equipment, net .................. $ 2,971 $ 2,339 ======= =======
4. STOCKHOLDERS' NOTES PAYABLE Stockholders' notes payable at December 31 consist of the following (in thousands):
1995 1994 --------- -------- Ascent.............................. $ 15,734 $ -- Other stockholders.................. 208 1,025 --------- -------- 15,942 1,025 Less current portion................ (15,942) (817) -------- -------- Long-term........................... $ -- $ 208 ======== ========
In 1995, the Company entered into a promissory note agreement with Ascent which is payable upon demand. Interest on principal up to $12,500,000 bears interest at the prime rate (8.5% at December 31, 1995), and principal in excess of $12,500,000 bears interest at the prime rate plus 0.5% per annum. In 1990 and 1991, the Company entered into promissory note agreements with certain of its stockholders. The notes are payable to the stockholders in sixty equal monthly installments with interest at 14% per annum. 5. COMMITMENTS FACILITY LEASES The Company leases its principal facilities from a stockholder under a noncancelable operating lease which expires in December 1999. In addition to lease payments, the Company is responsible for taxes, insurance and maintenance of the leased premises. Rental payments to the stockholder were approximately $538,000, $538,000 and $255,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Rental expense under all operating leases was approximately $616,000, $572,000 and $284,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Future minimum annual payments under noncancelable operating leases at December 31, 1995 are as follows: 1996...................................... $ 627,000 1997...................................... 669,000 1998...................................... 699,000 1999...................................... 653,000 ---------- $2,648,000 ==========
F-10 115 PURCHASE COMMITMENTS Noncancelable commitments for the purchase of video systems amounted to approximately $7,500,000 at December 31, 1995. 6. REDEEMABLE COMMON STOCK In July 1993, pursuant to a stock purchase agreement the Company sold 410,561 shares of common stock at $25.00 per share, subject to a put option. The stock purchase agreement provides that, until May 1998, the stockholder may elect to sell the shares back to the Company upon the earlier of (i) June 1, 1995 or (ii) the date the stockholder determines that ownership of such shares may directly or indirectly jeopardize its ability to retain material licenses in connection with its business. The put price is equal to the original purchase price plus interest from the date the shares were initially purchased, at an interest rate equal to the average of the one-year U.S. Treasury Bill rate compounded annually. Accordingly, the Company has accreted the value assigned to the redeemable common stock for the increasing put price. 7. STOCKHOLDERS' EQUITY STOCK OPTION PLAN The Company has adopted a stock option plan (the Plan), expiring in June 1999, under which employees, directors and consultants may be granted incentive or nonstatutory stock options for the purchase of common stock of the Company. Incentive stock options are granted at fair value on the date of grant as determined by the Board of Directors and nonstatutory stock options are granted at a price per share fixed by the Board of Directors of the Company but not less than 85% of the fair value of the date of grant. Options generally vest over a five-year period and are exercisable in installments of 20% one year from the date of grant and ratably per month thereafter. Unvested options are canceled upon termination of employment.
Options Options Outstanding ------- ------------------- Available Number of Price for Grant Shares Per Share --------- ------ --------- Balance at January 1, 1993 . 169,800 281,607 $ 1.25 - $20.00 Granted .................... (60,000) 60,000 25.00 Exercised .................. -- (135,656) 1.25 - 16.84 ------- ------- Balance at December 31, 1993 109,800 205,951 5.00 - 25.00 Granted .................... (20,000) 20,000 32.50 Exercised .................. -- (60,965) 5.00 - 20.00 Canceled ................... 3,085 (3,085) 20.00 -------- ------- Balance at December 31, 1994 92,885 161,901 7.50 - 32.50 Exercised .................. -- (2,250) 13.41 - 16.84 -------- ------- Balance at December 31, 1995 92,885 159,651 $ 7.50 - $32.50 ======== =======
At December 31, 1995, options to purchase 100,154 shares of common stock were exercisable. F-11 116 WARRANTS In August 1991, the Company issued warrants to two stockholders to purchase 27,964 shares of common stock at $20.12 per share. The warrants are currently exercisable and expire in July 1996. In July 1993, in connection with the sale of common stock, the Company issued warrants to a related party to purchase 410,561 shares of common stock at $27.50 per share through May 1996, increasing to $30.25 per share in June 1996 and $33.28 per share in June 1997. The original value ascribed to the warrants of $840,000 is included in other assets and is being amortized over the estimated period of benefit of seven years. Amortization expense was $120,000 in both 1995 and 1994. The warrants are currently exercisable and expire in May 1998. SHARES RESERVED FOR FUTURE ISSUANCE Common stock reserved for future issuance at December 31, 1995 as follows: Redeemable common stock.......... 410,561 Option plan...................... 252,536 Warrants......................... 438,525 --------- 1,101,622 =========
RECENTLY ISSUED ACCOUNTING STANDARD The Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" in fiscal year 1996. SFAS No. 123 establishes accounting and disclosure requirements using a fair value based method of accounting for stock-based employee compensation plans. Under SFAS No. 123, the Company may either adopt the new fair value based accounting method or continue the intrinsic value based method and provide pro forma disclosures of net income and earnings per share as if the accounting provisions of SFAS No. 123 has been adopted. The Company plans to adopt only the disclosure requirements of SFAS No. 123; therefore, for options issued to employees, such adoption will have no effect on the Company's net income or cash flows. 8. INCOME TAXES In August 1995, Comsat's ownership interest in the Company exceeded 80% and the Company became a member of Comsat's consolidated tax group for income tax purposes. The Company has prepared its tax provision for 1995 based on inclusion in Comsat's consolidated return. However, the provision as calculated would approximate the provision if prepared on a separate return basis. The current and deferred tax expense represent the Company's separately computed tax liability. F-12 117 The provision for income taxes at December 31 consists of the following (in thousands):
1995 1994 1993 ------- ------- ------- Current: Federal $ (714) $ 2,525 $ 1,579 State ........... 48 171 396 ------- ------- ------- (666) 2,696 1,975 ------- ------- ------- Deferred: Federal 3,572 (508) (847) State ........... 391 125 (166) ------- ------- ------- 3,963 (383) (1,013) ------- ------- ------- Total ............... $ 3,297 $ 2,313 $ 962 ======= ======= =======
The provision for income taxes differs from the amount obtained by applying the federal statutory rate (35%) to income before income taxes at December 31 as follows (in thousands):
1995 1994 1993 ------- ------- ------- Tax computed at federal statutory rate $ 2,870 $ 2,019 $ 812 State taxes, net of federal benefit .. 439 296 103 Other ................................ (12) (2) 47 ------- ------- ------- Provision for income taxes ........... $ 3,297 $ 2,313 $ 962 ======= ======= =======
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):
1995 1994 ------- ------- Deferred tax assets: Tax net operating loss and credit carryforwards $ 1,856 $ 3,165 Accruals not recognized for tax purposes ...... 839 823 Deferred revenue .............................. 322 467 Other ......................................... 120 155 ------- ------- Total deferred tax assets .......................... 3,137 4,610 Deferred tax liabilities: Depreciation and amortization ................. (2,233) (3,657) ------- ------- Net deferred tax assets ............................ $ 904 $ 953 ======= =======
Alternative minimum tax credit carryforwards of approximately $1,512,000 and $270,000 are available to offset future regular federal and state tax liabilities, respectively. Research and development tax credit carryforwards of approximately $32,000 and $80,000 are available to offset future federal and state tax liabilities, respectively. The federal research and development credit carryforwards begin expiring in 2006. Additionally, the Company has state net operating loss carryforwards of approximately $1,500,000 which expire beginning in 2000 and may be subject to limitation in the event of certain defined changes in stock ownership. F-13 118 9. RELATED PARTY TRANSACTIONS On August 1, 1995, the Company entered into a Contribution Agreement with Ascent, whereby the Company acquired various assets and liabilities (primarily installed video systems and related construction in progress, accounts receivable, deferred income taxes and other assets) from Ascent with a net book value of approximately $56,539,000 in exchange for 1,878,624 shares of common stock of the Company. This transfer of net assets and shares between companies under common control has been accounted for at historical cost. The Company sold video systems and provided video management services to Ascent totaling approximately $18,900,000, $28,100,000 and $4,200,000 in 1995, 1994 and 1993, respectively. The Company had approximately $2,300,000 in payables to Ascent at December 31, 1995. The Company had approximately $4,500,000 in accounts receivable from, and $5,200,000 in payables to, Ascent at December 31, 1994. Marketing, general and administrative expenses in the accompanying financial statements are net of $732,000, $1,316,000 and $226,000 in 1995, 1994 and 1993, respectively, paid by Ascent based on a percentage of video system sales to Ascent. Research and development expenses in the accompanying financial statements are net of $436,000, $742,000 and $224,000 in 1995, 1994 and 1993, respectively, paid by Ascent based on a percentage of video system sales to Ascent. The Company earned revenues of approximately $15,000,000, $12,400,000 and $4,900,000 in 1995, 1994 and 1993, respectively, from another company and its affiliates, which is a related party by virtue of its ownership of the Company's common stock. The Company also earned video system sales of approximately $3,000,000 and movie revenues of approximately $362,000 in 1995 from a company which is a related party by virtue of the Company's preferred stock investment in this company. Interest expense to related parties was approximately $413,000, $243,000 and $315,000 in 1995, 1994 and 1993, respectively. 10. CONCENTRATION OF CREDIT RISK The Company generates the majority of its revenues from the guest usage of proprietary video systems located in various hotels primarily throughout the United States and Canada. The Company performs periodic credit evaluations of its installed hotel locations and generally requires no collateral. While the Company does maintain allowances for potential credit losses, actual bad debt losses have not been significant. The Company invests its cash in high-credit quality institutions. These instruments are short-term in nature and, therefore, bear minimal risk. Three customers and their affiliates accounted for 35%, 18% (related party), and 15% (related party) of revenues in 1995 (29%, 34% and 15%, respectively, in 1994; and 39%, 14% and 16%, respectively, in 1993). F-14 119 11. EMPLOYEE BENEFIT PLAN Qualified employees are eligible to participate in the Company's 401(k) tax-deferred savings plan. Participants may contribute up to 20% of their eligible earnings (to a maximum of approximately $9,000 per year) to this plan, for which the Company, at the discretion of the Board or Directors, may make matching contributions. Contributions made by the Company were approximately $351,000 and $227,000 in 1995 and 1994, respectively (none in 1993). 12. LEGAL MATTERS In 1995, the Company recorded a charge of $1,540,000 related to the settlement with a former employee who alleged wrongful termination and breach of contract. Additionally, in 1995 the Company settled a lawsuit in which it claimed a competitor had infringed certain of the Company's patents. The settlement had no significant impact on the Company's financial position or results of operations or cash flows. 13. SUBSEQUENT EVENTS In March 1996, a competitor filed suit against the Company alleging patent infringement and seeking unspecified damages. The Company intends to contest the suit vigorously and believes the claim is without merit and will not result in a material adverse effect to the Company's financial position or results of operations or cash flows. On April 19, 1996 Ascent, On Command Video and SpectraVision, Inc ("SpectraVision") entered into an agreement (the agreement) which provides that all of On Command Video's assets and liabilities will be combined with certain assets and liabilities of SpectraVision to form a new company (On Command Corporation ("OCC")). The agreement provides that the stockholders of On Command Video will receive 72.5% of the OCC common stock and SpectraVision's bankruptcy estate will receive 27.5% of the OCC common stock, subject to certain adjustments as defined in the agreement. The agreement also provides that OCC will issue warrants to purchase 20% of OCC's common stock, 65% of which are to be issued to the stockholders of On Command Video and 35% of which are to be issued to SpectraVision's bankruptcy estate. The proposed business combination will be accounted for as a purchase. Ascent, On Command Video and Hilton Hotels Corporation ("Hilton") entered into a letter agreement in August 1996, providing for the cancellation of 470,588 shares of On Command Video common stock issued to Ascent pursuant to the Contribution Agreement more fully described in Note 9. The letter agreement also provided for the extension of the date on which the exercise price of the 410,561 warrants issued to Hilton would increase from June 1, 1996 to the later of (i) 90 days after the closing or the abandonment of the proposed transaction with SpectraVision described above or (ii) December 1, 1996. The letter agreement also provides that if in connection with the proposed transaction with SpectraVision, On Command Video common stock or OCC securities into which it is converted are registered under the Securities Exchange Act of 1933 and Hilton's shares of On Command Video's common stock (or OCC common stock into which they are converted) are freely tradeable, both the Hilton put option with respect to the redeemable common stock and the Hilton warrants, unless exercised before such closing, will terminate as of the closing of the proposed transaction with SpectraVision. F-15 120 In addition, the letter agreement provides that if Hilton exercises its warrants by reason of the closing of the proposed transaction with SpectraVision, Hilton will have the right to put to Ascent all, but not less than all, of those Hilton warrant shares of On Command Video common stock (or OCC common stock into which they are converted) Hilton still owns on the date 90 days after the closing of the proposed transaction with SpectraVision at the same exercise price in the Hilton warrant. F-16 121 ON COMMAND VIDEO CORPORATION CONDENSED BALANCE SHEETS AT JUNE 30, 1996 AND DECEMBER 31, 1995 (In thousands, except per share amounts)
JUNE 30, DECEMBER 31, 1996 1995 ---------- -------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ........................................... $ 145 $ 956 Accounts receivable ................................................. 13,819 9,853 Other current assets ................................................ 922 831 Deferred income taxes ............................................... 1,243 1,163 -------- -------- Total current assets .............................................. 16,129 12,803 Video Systems, net .................................................... 207,504 188,910 Property and equipment, net ........................................... 3,263 2,971 Other assets, net ..................................................... 6,019 6,321 -------- -------- Total assets ...................................................... $232,915 $211,005 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................... $ 7,051 $ 3,910 Accounts payable to stockholder...................................... 1,710 2,300 -------- -------- Accrued compensation ................................................ 1,610 1,715 Taxes payable ....................................................... 3,298 1,813 Other accrued liabilities ........................................... 1,456 934 Deferred revenue .................................................... 471 803 Current portion of stockholders' notes payable ...................... 29,270 15,942 -------- -------- Total current liabilities ......................................... 44,866 27,417 Other accrued liabilities ........................................... 1,816 1,841 Deferred income taxes ............................................... 1,012 259 -------- -------- Total liabilities ................................................. 47,694 29,517 Commitments and contingencies ......................................... -- -- Redeemable Common Stock, $.01 par value: shares issued and outstanding -- 411 12,007 11,684 Stockholders' equity: Common stock, $.01 par value: shares authorized--9,000; shares issued and outstanding--7,279 in 1996 and 7,277 in 1995 .................. 73 73 Additional paid-in capital .......................................... 168,604 166,495 Retained earnings ................................................... 4,537 3,236 -------- -------- Total stockholders' equity ........................................ 173,214 169,804 -------- -------- Total ........................................................... $232,915 $211,005 ======== ========
See Notes to Condensed Financial Statements. F-17 122 ON COMMAND VIDEO CORPORATION CONDENSED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (In thousands, except per share amounts)
SIX MONTHS ENDED JUNE 30, -------------------- 1996 1995 -------- -------- (Unaudited) Revenues: Movie revenues.................................. $ 55,999 $ 31,431 Video systems sales............................. 6,491 16,372 Video management services....................... -- 3,528 -------- -------- Total revenues................................ 62,490 51,331 -------- -------- Direct costs of revenues: Movie revenues.................................. 22,931 9,472 Video systems sales............................. 5,009 14,405 Video management services....................... -- 3,654 -------- -------- Total direct costs of revenues................ 27,940 27,531 -------- -------- Operating expenses: Depreciation and amortization................... 21,293 11,496 Field service................................... 5,240 4,341 Research and development........................ 1,929 1,131 Marketing, general and administrative........... 2,212 1,016 Settlement of litigation........................ -- 1,540 -------- -------- Total operating expenses...................... 30,674 19,524 -------- -------- Income from operations............................ 3,876 4,276 Interest income................................... 19 46 Interest expense.................................. (1,008) (99) -------- -------- Income before income taxes........................ 2,887 4,223 Provision for income taxes........................ 1,263 1,715 -------- -------- Net income........................................ 1,624 2,508 ======== ======== Redeemable common stock accretion................. (323) (334) -------- -------- Net income applicable to non-redeemable common stock.................................... $ 1,301 $ 2,174 ======== ======== Net income per common and equivalent share........ $ 0.16 $ 0.36 ======== ======== Shares used in per share computations............. 7,903 6,015 ======== ========
See Notes to Condensed Financial Statements. F-18 123 ON COMMAND VIDEO CORPORATION CONDENSED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (In thousands)
SIX MONTHS ENDED JUNE 30, --------------------- 1996 1995 --------- --------- (Unaudited) Cash flows from operating activities: Net income................................................................... $ 1,624 $ 2,508 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............................................. 21,293 11,496 Deferred income taxes, net................................................. 673 -- Loss on disposal of fixed assets........................................... 4 231 Changes in assets and liabilities net of effects from acquired operations: Accounts receivable...................................................... (3,966) 436 Accounts receivable from stockholder..................................... -- (1,257) --------- -------- Other current assets..................................................... (91) (82) Accounts payable......................................................... 3,141 2,280 Accounts payable to stockholder.......................................... (590) (1,571) --------- -------- Accrued compensation..................................................... (105) (71) Income taxes payable..................................................... 1,485 839 Other accrued liabilities................................................ 497 13 Deferred revenue......................................................... (332) (58) --------- -------- Net cash provided by (used in) operating activities.................... 23,633 14,764 --------- -------- Cash flow from investing activities: Capital expenditures......................................................... (37,717) (24,718) Other assets................................................................. (70) -- --------- -------- Net cash used in investing activities.................................. (37,787) (24,718) --------- -------- Cash flows from financing activities: Proceeds from stockholders' notes payable.................................... 13,500 5,000 Principal payments on stockholders' notes payable............................ (172) (454) Proceeds from issuance of common stock..................................... 15 35 --------- -------- Net cash provided by financing activities.............................. 13,343 4,581 --------- -------- Net decrease in cash and cash equivalents...................................... (811) (5,373) Cash and cash equivalents, beginning of period................................. 956 8,323 --------- -------- Cash and cash equivalents, end of period....................................... $ 145 $ 2,950 ========= ======== Supplemental information: Cash paid for income taxes................................................... $ 224 $ 1,180 ========= ======== Cash paid for interest....................................................... $ 260 $ 99 ========= ========= Common stock issued in connection with contribution agreement with Ascent................................................................ $ 2,094 $ -- ========= =========
See Notes to Condensed Financial Statements. F-19 124 ON COMMAND VIDEO CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1996 AND 1995 1. In the opinion of management, these unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position as of June 30, 1996 and the results of operations and cash flows for the six months ended June 30, 1996 and 1995. The results of operations for the six months ended June 30, 1996 may not necessarily be indicative of the results of operations for the fiscal year ending December 31, 1996. These condensed financial statements should be read in conjunction with the financial statements and related notes for the years ended December 31, 1995, 1994 and 1993, included elsewhere herein. 2. NET INCOME PER SHARE Net income per share is based on the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares include redeemable common stock and common stock options and warrants. 3. RELATED PARTY TRANSACTION On August 1, 1995, the Company entered into a Contribution Agreement with Ascent, whereby the Company acquired various assets and liabilities (primarily installed video systems and related construction in progress, accounts receivable, deferred income taxes and other assets) from Comsat with a net book value of approximately $56,539,000 in exchange for 1,878,624 shares of common stock of the Company. The transfer of net assets and shares between companies under common control has been accounted for at historical cost. 4. LITIGATION In March 1996, a competitor filed suit against the Company alleging patent infringement and seeking unspecified damages. The Company intends to contest the suit vigorously and believes the claim is without merit and will not result in a material adverse effect to the Company's financial position or results of operations. 5. PROPOSED BUSINESS COMBINATION On April 19, 1996 Ascent, On Command Video and SpectraVision entered into an agreement (the "agreement") which provides that all of On Command Video's assets and liabilities will be combined with certain assets and liabilities of SpectraVision to form a new company (On Command Corporation ("OCC")). The agreement provides that the stockholders of On Command Video will receive 72.5% of the OCC common stock and SpectraVisions' bankruptcy estate will receive 27.5% of the OCC common stock, subject to certain adjustments as defined in the agreement. The agreement also provides that OCC will issue warrants to purchase 20% of OCC's F-20 125 common stock, 65% of which are to be issued to the stockholders of On Command Video and 35% of which are to be issued to SpectraVision's bankruptcy estate. The proposed business combination will be accounted for as a purchase. 6. SUBSEQUENT EVENTS Ascent, On Command Video and Hilton Hotels Corporation ("Hilton") entered into a letter agreement in August 1996 providing for the cancellation of 470,588 shares of On Command Video common stock issued to Ascent pursuant to the Contribution Agreement more fully described in Note 3. The letter agreement also provided for the extension of the date on which the exercise price of 410,561 warrants issued to Hilton would increase from June 1, 1996 to the later of (i) 90 days after the closing or the abandonment of the proposed transaction with SpectraVision described above or (ii) December 1, 1996. The letter agreement also provides that if in connection with the proposed transaction with SpectraVision, On Command Video common stock or OCC securities into which it is converted are registered under the Securities Exchange Act of 1933 and Hilton's shares of On Command Video's common stock (or OCC Common Stock into which they are converted) are freely tradeable, both the Hilton put option with respect to the redeemable common stock and the Hilton warrants, unless exercised before such closing, will terminate as of the closing of the proposed transaction with SpectraVision. In addition, the letter agreement provides that if Hilton exercises its warrants by reason of the closing of the proposed transaction with SpectraVision, Hilton will have the right to put to Ascent all, but not less than all, of those Hilton warrant shares of On Command Video common stock (or OCC Common Stock into which they are converted) Hilton still owns on the date 90 days after the closing of the proposed transaction with SpectraVision at the same exercise price in the Hilton warrant. F-21 126 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF SPECTRAVISION Audited Financial Statements for the Years Ended December 31, 1995, 1994 and 1993: Independent Auditors' Report.............................. F-23 Consolidated Statements of Financial Position at December 31, 1995 and 1994........................... F-24 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993............ F-25 Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1995, 1994 and 1993........................................... F-26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993............ F-27 Notes to Consolidated Financial Statements................ F-28 Unaudited Interim Financial Statements for the Six Months ended June 30, 1996 and 1995: Condensed Consolidated Balance Sheets at June 30, 1996 and December 31, 1995..................... F-59 Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1996 and 1995......... F-60 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995......... F-61 Notes to Condensed Consolidated Financial Statements...... F-62 F-22 127 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders SpectraVision, Inc.: We have audited the accompanying balance sheets of SpectraVision, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SpectraVision, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in notes 1 and 3 to the consolidated financial statements, the Company, together with four of its subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court on June 8, 1995. Although the Company and the subsidiaries are currently operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of their businesses as going concerns is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the creditors and confirmation by the Bankruptcy Court and the ability to generate sufficient cash from operations and financing sources to meet obligations as they come due. In addition, as discussed in Note 7, the Company does not expect that it will be in compliance in 1996 with certain financial covenants related to its debtor-in-possession financing, which could permit its lenders to accelerate the due date of such financing. The Company's filing under Chapter 11 and its expected noncompliance with certain covenants related to its debtor-in-possession financing raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are discussed in Note 3 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Dallas, Texas March 1, 1996, except as to the second paragraph of Note 7, which is as of March 22, 1996 F-23 128 SPECTRAVISION, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Dollars in thousands, except share data)
DECEMBER 31, DECEMBER 31, 1995 1994 --------- --------- ASSETS Cash and Cash Equivalents ............................................ $ 3,438 $ 1,317 Accounts Receivable (net of allowance for doubtful accounts of $1,812 and $1,072 in 1995 and 1994, respectively) ......................... 16,428 20,417 Debt Issuance Costs (net) ............................................ 5,827 6,797 Prepaids and Other Assets ............................................ 8,125 8,108 Video Systems: In Process Video Systems ........................................... 11,329 38,144 Installed Video Systems ............................................ 247,987 242,003 --------- --------- Subtotal ......................................................... 259,316 280,147 Less Accumulated Depreciation and Amortization ....................... (155,604) (148,290) --------- --------- Total Video Systems .................................................. 103,712 131,857 Building and Equipment Building ...................................... 4,300 4,294 Furniture, Fixtures and Other Equipment .............................. 8,002 6,887 --------- --------- Subtotal ........................................................... 12,302 11,181 Less Accumulated Depreciation ........................................ (5,921) (4,965) --------- --------- Total Building and Equipment ......................................... 6,381 6,216 Land ................................................................. 2,559 2,559 Hotel Contracts (net) ................................................ 47,403 50,000 Deferred Contract Concession Costs (net) ............................. 11,749 15,551 --------- --------- TOTAL ASSETS ........................................................... $ 205,622 $ 242,822 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Liabilities Accounts Payable ..................................................... $ 8,128 $ 48,807 Accrued Liabilities Interest ........................................................... -- 3,413 Compensation ....................................................... 2,112 4,495 Other .............................................................. 9,086 21,522 Income Taxes ......................................................... 183 290 Deferred Income Taxes ................................................ 5,467 6,757 Debt Revolving Credit Facility .......................................... -- 12,500 Canadian Bank Credit Facility ...................................... -- 7,350 Foothill Revolving Credit Facility ................................. 26,703 -- 11.5% Senior Discount Notes ........................................ -- 172,295 11.65% Senior Subordinated Reset Notes ............................. -- 294,768 Capitalized Lease Obligations ...................................... 1,964 23,492 Other Debt ......................................................... -- 158 --------- --------- Total Debt ........................................................... 28,667 510,563 Liabilities Subject to Settlement Under Reorganization ................. 579,587 -- --------- --------- Total Liabilities ...................................................... 633,230 595,847 Contingent Value Rights Subject to Settlement Under Reorganization ..... 20,000 20,000 Stockholders' Deficit Class A Common Stock--$0.001 par value, authorized 6,000,000 shares, issued and outstanding, 4,593,526 shares in 1995 and 1994 .......... 5 5 Class B Common Stock--$0.001 par value, authorized 144,000,000 shares, issued and outstanding, 19,390,379 shares in 1995 and 1994 ......... 19 19 Additional Paid in Capital ........................................... 392,185 392,185 Retained Deficit ..................................................... (840,289) (765,729) Foreign Currency Translation Adjustment .............................. 472 495 --------- --------- Total Stockholders' Deficit ............................................ (447,608) (373,025) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ............................ $ 205,622 $ 242,822 ========= =========
See accompanying Notes to the Consolidated Financial Statements. F-24 129 SPECTRAVISION, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share data)
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 1993 -------- --------- -------- Revenues ........................................... $123,986 $ 142,384 $162,993 Costs and Expenses: Total direct costs ............................... 52,813 58,015 58,834 Depreciation and amortization .................... 39,364 50,534 44,103 Write-down of hotel contracts .................... -- 196,256 -- Technology and field service charge .............. -- -- 7,000 Loss on sale of manufacturing assets and inventory -- -- 649 Operating expenses ............................... 17,563 13,205 24,583 Contracted service costs ......................... 29,280 21,029 1,716 Selling and marketing expenses ................... 4,883 8,741 5,054 General and administrative expenses .............. 17,320 19,595 15,431 Research and development (net) ................... 1,769 3,814 1,585 Exchange loss .................................... 247 581 833 -------- --------- -------- Total costs and expenses ....................... 163,239 371,770 159,788 -------- --------- -------- Operating Income (Loss) ............................ (39,253) (229,386) 3,205 Non-operating Income ............................... (508) (1,163) -- Interest expense, net (Contractual interest expense of $67,959 in 1995) .............................. 28,177 54,981 48,990 -------- --------- -------- Loss before Reorganization Items, Income Taxes and Extraordinary Item ........................... (66,922) (283,204) (45,785) Reorganization items ............................... 7,563 -- -- -------- --------- -------- Loss before Income Taxes and Extraordinary Item .... (74,485) (283,204) (45,785) Income Taxes: State and foreign provision (benefit) ............ 126 (448) 1,739 Deferred benefit ................................. (966) (28,472) (4,467) -------- --------- -------- Total Income Tax Benefit ....................... (840) (28,920) 2,728 -------- --------- -------- Loss Before Extraordinary Item ..................... (73,645) (254,284) (43,057) Extraordinary Item--loss from debt extinguishment .. 915 -- 2,699 -------- --------- -------- Net Loss ........................................... $(74,560) $(254,284) $(45,756) ======== ========= ======== Loss Per Common Share: Before extraordinary item ........................ $ (3.07) $ (10.60) $ (2.37) Extraordinary item ............................... (0.04) -- (0.15) -------- --------- -------- Net Loss ......................................... $ (3.11) $ (10.60) $ (2.52) ======== ========= ========
See accompanying Notes to the Consolidated Financial Statements. F-25 130 SPECTRAVISION, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Dollars in thousands)
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 1993 --------- --------- --------- Class A Common Stock Beginning balance ....... $ 5 $ 5 $ 5 --------- --------- --------- Ending balance .......... 5 5 5 --------- --------- --------- Class B Common Stock Beginning balance ....... 19 19 11 Issued in public offering -- -- 8 --------- --------- --------- Ending balance .......... 19 19 19 --------- --------- --------- Additional Paid in Capital Beginning balance ....... 392,185 392,185 314,544 Issued in public offering -- -- 77,641 --------- --------- --------- Ending balance .......... 392,185 392,185 392,185 --------- --------- --------- Retained Deficit Beginning balance ....... (765,729) (511,445) (465,689) Net loss ................ (74,560) (254,284) (45,756) --------- --------- --------- Ending balance .......... (840,289) (765,729) (511,445) --------- --------- --------- Translation Adjustment Beginning balance ....... 495 622 206 Translation adjustment .. (23) (127) 416 --------- --------- --------- Ending balance .......... 472 495 622 --------- --------- --------- Total Stockholders' Deficit $(447,608) $(373,025) $(118,614) ========= ========= =========
See accompanying Notes to the Consolidated Financial Statements. F-26 131 SPECTRAVISION, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
YEAR ENDED DECEMBER 31, 1995 1994 1993 ------------- ----------- ---------- Operating Activities: Net loss......................................................$ (74,560) $ (254,284) $ (45,756) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................... 39,364 50,534 44,103 Loss on sale of manufacturing assets and inventory.......... -- -- 649 Payment of 1992 Restructuring costs......................... -- -- (9,236) Other non-cash items: Write-down of hotel contracts............................. -- 196,256 -- Technology and field service charge....................... -- -- 7,000 Deferred income tax benefit............................... (966) (28,472) (4,467) Extraordinary loss from debt extinguishment............... 915 -- 2,699 Conversion of non-cash interest to secondary notes........ 18,494 33,973 -- Accretion of discount on senior notes..................... 8,609 18,240 4,074 Amortization and write-off of debt issuance costs......... 1,148 1,261 1,055 Loss on disposal of assets................................ 1,344 -- -- Exchange loss............................................. 247 581 833 Other items (net)......................................... (777) (948) 86 Increase (decrease) in: Accounts Payable.......................................... 30,367 27,463 1,377 Accrued interest.......................................... (1,004) 816 (1,248) Other accrued liabilities................................. (9,383) (2,138) 2,374 Income taxes payable...................................... (107) (370) (124) Decrease (increase) in: Accounts receivable....................................... 3,989 (2,504) 559 Prepaids and other assets................................. 1,024 (4,243) 2,282 ------------- ------------ ---------- Total adjustments............................................. 93,264 290,449 52,016 ------------- ------------ ---------- Net cash provided by operating activities............... 18,704 36,165 6,260 ------------- ------------ ---------- Investing Activities: Proceeds from sale of manufacturing assets and inventory.... -- -- 5,201 Decrease (increase) in raw materials........................ -- -- (313) Cost of in-process systems, deferred contract concession costs and capital expenditures............................ (16,131) (57,362) (36,097) -------------- ----------- ---------- Net cash used in investing activities..................... (16,131) (57,362) (31,209) -------------- ----------- ---------- Financing Activities: Borrowings under Revolving Credit Facility.................. 7,396 12,500 -- Borrowings under Supplemental Bank Credit Facility.......... -- -- 23,000 Repayment of Supplemental Bank Credit Facility.............. -- -- (31,000) Repayment of Bank Credit Facility........................... -- -- (180,120) Repayment of other debt and capitalized leases.............. (6,366) (4,187) (1,432) Borrowing under Foothill Revolving Credit Facility.......... 88,618 -- -- Repayment of Foothill Revolving Credit Facility............. (61,915) -- -- Repayment of Revolving Credit Facility...................... (20,811) -- -- Repayment of Canadian Bank Credit Facility.................. (7,350) -- -- Issuance of class B common stock............................ -- -- 84,150 Stock issuance costs........................................ -- -- (6,501) Issuance of senior discount notes........................... -- -- 149,981 Payment of debt issuance costs.............................. -- -- (8,417) ------------- ------------ ----------- Net cash provided by financing activities................. (428) 8,313 29,661 -------------- ------------ ----------- Effect of exchange rate changes on cash....................... (24) (84) (20) -------------- ------------ ----------- Net Increase (Decrease) in cash and cash equivalents.......... 2,121 (12,968) 4,692 Cash and cash equivalents at beginning of period.............. 1,317 14,285 9,593 -------------- ------------ ----------- Cash and cash equivalents at end of period....................$ 3,438 $ 1,317 $ 14,285 ============== ============ ===========
See accompanying Notes to the Consolidated Financial Statements. F-27 132 SPECTRAVISION, INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION SpectraVision, Inc., (the "Company" or "SpectraVision"), previously known as SPI Holding, Inc., is a leading provider of in-room entertainment services to the lodging industry and conducts all operations through Spectradyne, Inc., and Spectradyne's wholly-owned foreign subsidiaries. Founded in 1971, the Company originally developed and patented a system, known as "SpectraVision," which provides in-room television viewing of recently released major and other motion pictures on a pay-per-view ("PPV") basis. From September 1979 until October 1987, Spectradyne, Inc. ("Spectradyne"), a Texas corporation, was a public company whose common stock was traded on the Nasdaq over-the-counter market. In October 1987, SpectraVision, Inc. acquired all of the outstanding stock of Spectradyne in a highly leveraged transaction following which Spectradyne remained the surviving entity and a wholly owned subsidiary of the Company (the "1987 Acquisition"). On April 12, 1989, DP Acquisition Corp. ("DP"), a company controlled by Mr. Marvin Davis, acquired all of the outstanding common stock of SpectraVision (the "1989 Acquisition"). In December, 1990, DP was dissolved into its parent, Rainbow Company ("Rainbow"), a partnership controlled by Mr. Marvin Davis. On September 17, 1992, after obtaining the necessary votes on a prepackaged joint plan of reorganization, the Company and certain of its subsidiaries, including SPI Newco, Inc. ("SPI Newco") and Spectradyne filed a voluntary petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware. On October 29, 1992, the Bankruptcy Court issued an order confirming the plan of reorganization (the "Reorganization Plan"). On November 23, 1992, the Reorganization Plan became effective, and the Company completed a restructuring of its debt and capital structure (the "1992 Restructuring"). The 1992 Restructuring included, among other things, (i) the purchase by Rainbow of 4,995,864 shares of Class A Common Stock, (ii) the exchange of previously outstanding 14.875% reset notes for $260.8 million of 11.5% Senior Subordinated Reset Notes, due 2002 ("Reset Notes"), (iii) the exchange of previously outstanding 14.75% debentures for newly issued Class B Common Stock and (iv) the exchange of previously outstanding preferred stock for shares of Class B Common Stock and Contingent Value Rights ("CVRs"). On October 5, 1993 the Company issued 7,650,000 shares (including 650,000 shares exercised under an over-allotment option) of its Class B Common Stock and $209.5 million aggregate principal amount of 11.5% Senior Discount Notes, due 2001 (the "Senior Notes") through a public offering, (the debt and equity offerings referred to herein as the "1993 Offerings") resulting in net proceeds to the Company of $223.8 million. The net proceeds from the 1993 Offerings were used to refinance an aggregate principal amount of $182.6 million of outstanding obligations under the Company's previous senior bank loan (the "Bank Credit Facility") and previous revolving credit loan (the "Supplemental Credit Facility") and were used for general corporate purposes, including funding capital expenditures required for the implementation of the EDS Service and Technology Agreement and the Company's expansion plans. See Note 4, "EDS Service and Technology Agreement". In connection with the common stock offering, the underwriters exercised an over-allotment option and purchased 400,000 shares of Class B Common Stock from Rainbow upon Rainbow's conversion of 400,000 shares of Class A Common Stock. The Company did not receive any of the proceeds from the shares sold by Rainbow. F-28 133 In early 1995, the Company determined that a financial restructuring would be required to ensure the Company's long-term survival. The Company conducted restructuring negotiations with representatives of its secured and unsecured creditors during April and May 1995, working toward the development of an overall restructuring plan. In June 1995, the Company concluded that a filing under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") should be made in order to preserve the value of its assets and to ensure that the business had sufficient cash resources to continue operations while it completed the financial restructuring process. On June 8, 1995 (the "Petition Date"), SpectraVision, Inc., together with SPI Newco, Inc., Spectradyne, Inc., Spectradyne International, Inc., and Kalevision Systems, Inc.--USA, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") and are currently operating their respective businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. On June 23, 1995, a single unsecured creditors' committee (the "Creditors' Committee") was appointed by the U.S. Trustee for the District of Delaware pursuant to Section 1102 of the Bankruptcy Code. The Creditors' Committee has the right to review and object to certain business transactions and is expected to participate in the negotiation of the Company's plan of reorganization. See Note 3, "Bankruptcy". Unless the context otherwise requires, all references herein to the Company are not intended to imply exact corporate relationships and include SpectraVision, Inc. and its subsidiaries, including SPI Newco, Inc., its direct subsidiary, and Spectradyne, Inc., the direct subsidiary of SPI Newco, Inc., as well as, Spectradyne's foreign operating subsidiaries. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Business and consolidation. The Company owns and operates pay-per-view movie systems and provides satellite delivered free-to-guest sports, news and entertainment to the hotel industry. The Company has operating subsidiaries in the United States, Canada, Mexico, Hong Kong, Singapore, Thailand and Australia. The consolidated financial statements include the accounts of SpectraVision and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation. Cash Flows. For purposes of the Statements of Cash Flows, the Company considers all certificates of deposit and debt instruments with original maturities of three months or less to be cash equivalents. Video systems, building and equipment. Video systems, building and equipment are stated at cost. Capital leases are recorded at the inception of the lease at the lower of the discounted present value of future minimum lease payments or the fair value of the property. Installed video systems include $44.0 million and $28.2 million of equipment, primarily televisions, under capital leases at December 31, 1995 and 1994, respectively. Accumulated amortization of such leased equipment was $12.6 million and $4.5 million (ranging from 4 to 5 years) at December 31, 1995 and 1994, respectively. Depreciation and amortization, which includes the amortization of assets recorded under capital leases, is computed by the straight-line method over the lesser of the estimated useful lives of the assets or the initial terms of the leases. Depreciation and amortization expense related to video systems, building and equipment, was $32.3 million for 1995, $36.0 million for 1994 and $31.2 million for 1993. Prior to installation, in-process video systems are stated at cost, and depreciation of video systems begins when the system is F-29 134 installed and activated. The Company capitalized interest related to the installation of video systems and related equipment of $3.0 million and $2.9 million for the years ended December 31, 1995 and 1994, respectively. Intangible assets. In connection with the 1989 Acquisition, hotel contracts were recorded at fair value and amortized on a straight-line basis over 25 years. Accumulated amortization related to the hotel contracts was $2.6 million and zero at December 31, 1995 and 1994, respectively. As of December 31, 1995, the Company has separately classified certain contract costs related primarily to the purchase of televisions as deferred contract concession costs. Such costs are amortized on a straight-line basis over the anticipated period of benefit, which is generally five to seven years. As of December 31, 1994, such contract costs were included in Video Systems and have been reclassified to conform to the current year presentation. Accumulated amortization related to deferred contract concession costs was $2.6 million and $1.2 million at December 31, 1995 and 1994, respectively. Amortization expense related to hotel contracts and deferred contract concession costs was $7.1 million for 1995, $13.7 million for 1994 and $12.5 million for 1993. The Company routinely assesses the propriety of the carrying amount of hotel contracts and deferred contract concession costs through a future cash flows method as well as the amortization periods to determine whether circumstances warrant adjustments to the carrying amounts or estimated useful lives. At December 31, 1994 the carrying amount of hotel contracts was decreased. See Note 18, "Intangible Assets." The assessment of the recoverability of intangible assets will be adversely impacted if estimated future operating cash flows are not achieved. Maintenance and repairs. Maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed of, the applicable costs and accumulated depreciation are removed from the accounts, and the resulting gains or losses are included in results of operations. Income taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign currency translation. For translation of its international currencies, the Company has determined that the local currencies of its international subsidiaries are the functional currencies. Assets and liabilities of the international subsidiaries are translated at the rate of exchange in effect at period end. Results of operations are translated at the approximate rate of exchange in effect during the period. The translation adjustment is shown as a separate component of stockholders' deficit. The US dollar denominated balances of the international subsidiaries are restated at the rate of exchange at year end and any resulting gains or losses, other than gains/losses on intercompany balances, are included in the results of operations. Fair value of financial instruments. The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1995 and 1994. Cash and cash equivalents, accounts receivable and accounts payable (post-petition) have been excluded since the carrying amounts reported in the accompanying consolidated statements of financial position approximate fair values. F-30 135
DECEMBER 31, 1995 DECEMBER 31, 1994 --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------- ------------ ------------- Financial liabilities: Revolving Credit Facility (Note 7)............................ $ -- $ -- $ 12,500 $ 12,500 Canadian Bank Credit Facility (Note 7)........................ -- -- 7,350 7,350 Senior Discount Notes (Note 7)................................ 180,904 N/A 172,295 75,800 Senior Subordinated Reset Notes (Note 7)...................... 313,262 N/A 294,768 29,500 Contingent Value Rights (Note 10)............................. 20,000 N/A 20,000 800 Foothill Revolving Credit Facility (Note 7)................... 26,703 26,703 -- --
The fair value of the Foothill Revolving Credit Facility at December 31, 1995 approximated the carrying amount as the facility bears interest at a current market rate. Due to the extenuating circumstances involving the Senior Discount Notes, Senior Subordinated Reset Notes, the Contingent Value Rights, other pre-petition liabilities as a result of the Chapter 11 filings and the anticipated reorganization, it is not practicable to estimate the fair value of these debts as of December 31, 1995. The fair value of the Revolving Credit Facility and the Canadian Credit Facility at December 31, 1994 approximated the carrying amount because the facilities bore interest at current market rates. The fair value of the Senior Discount Notes and Reset Notes at December 31, 1994 was estimated using market transaction information. The fair value of the Contingent Value Rights at December 31, 1994 was based upon quoted market prices. New Accounting Standards. The Financial Accounting Standards Board (FASB) has issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which will become effective for fiscal years beginning in 1996. The effect of this Statement, if implemented currently, would not be material to the Company's financial statements. Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. NOTE 3 - BANKRUPTCY In early 1995, the Company determined that a financial restructuring would be required to ensure the Company's long-term survival. The Company conducted restructuring negotiations with representatives of its secured and unsecured creditors during April and May 1995, working toward the development of an overall restructuring plan. In June 1995, the Company concluded that the Chapter 11 filing should be made in order to preserve the value of its assets and to ensure that the business had sufficient cash resources to continue operations while it completed the financial restructuring process. On the Petition Date, SpectraVision, Inc., together with SPI Newco, Inc., Spectradyne, Inc., Spectradyne International, Inc., and Kalevision Systems, Inc.--USA, filed voluntary petitions for reorganization under Chapter 11 in the Bankruptcy Court and are currently operating their respective businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. On June F-31 136 23, 1995, the Creditors' Committee was appointed by the U.S. Trustee for the District of Delaware pursuant to Section 1102 of the Bankruptcy Code. The Creditors' Committee has the right to review and object to certain business transactions and is expected to participate in the negotiation of the Company's plan of reorganization. As of the Petition Date, actions to collect pre-petition indebtedness have been automatically stayed pursuant to Section 362 of the Bankruptcy Code (subject to order of the Bankruptcy Court) and, in certain circumstances, other pre-petition contractual obligations may not be enforced against the Company. In addition, the Company may reject pre-petition executory contracts and lease obligations, and parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the reorganization process. Substantially all liabilities as of the Petition Date are subject to being paid or compromised under a plan of reorganization to be voted upon by all impaired classes of creditors and equity security holders and approved by the Bankruptcy Court. In March 1996, the Company employed Salomon Brothers Inc. as investment bankers and financial advisors. The agreement with Salomon Brothers Inc. calls for a monthly advisory fee and an additional fee ("Transaction Fee") upon the consummation of a transaction resulting in the sale of the Company. The Transaction Fee will be a percentage of the total purchase price. The Company has been actively pursuing several avenues of restructuring its financial position to achieve the maximum return for all parties involved. In January 1996 the Company solicited bids from third parties for financial restructuring proposals which would allow the Company to emerge from bankruptcy. The Company received five bids and intends to select one or more such proposals and, with the Bankruptcy Court's approval, emerge from bankruptcy in 1996. However, there can be no assurance that any agreement for a business combination will be reached or that any agreement will be approved by the creditors or the Bankruptcy Court. The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filings and circumstances relating to these events, such realization of assets and liquidation of liabilities is subject to significant uncertainty. In addition, the Company's independent public accountants included in their report on the Company's consolidated financial statements, an explanatory paragraph that describes the uncertainty about the Company's ability to continue as a going concern. As a Chapter 11 debtor, the Company may sell (subject, in certain circumstances, to Bankruptcy Court approval) or otherwise dispose of assets, and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. The amounts reported in the consolidated financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might result as a consequence of actions taken pursuant to a plan of reorganization. If the Company is unable to obtain confirmation of a plan of reorganization, its creditors, equity security holders or the United States Trustee may seek a liquidation of the Company by conversion to a Chapter 7 bankruptcy proceeding. In that event, it is likely that additional liabilities and claims would be asserted which are not presently reflected in the consolidated financial statements. In the event of a liquidation, the amounts reflected in the consolidated financial statements would be subject to adverse adjustments in amounts which, while not presently determinable, could be material. F-32 137 Financial accounting and reporting during a Chapter 11 proceeding is prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly, certain pre-petition obligations, which may be impaired, have been classified as obligations subject to Chapter 11 reorganization proceedings and include the following estimated amounts at December 31, 1995 (dollars in thousands): Debt instruments: 11.5% Senior Discount Notes Due 2000....................................$ 180,904 11.65% Senior Subordinated Reset Notes due 2001......................... 313,262 ----------- Total debt insturments................................................ 494,166 Accrued expenses: Interest................................................................ 2,411 Liabilities............................................................. 4,549 Compensation............................................................ 885 ----------- Subtotal.............................................................. 7,845 Capital lease obligations................................................. 22,587 Accounts payable.......................................................... 10,918 EDS and EDS affiliates (Note 4)........................................... 45,071 ----------- Total liabilities subject to settlement under reorganization............$ 579,587 =========== Contingent value rights subject to settlement under reorganization........$ 20,000 ===========
Pursuant to SOP 90-7, the Company has discontinued, effective June 8, 1995, the accrual of interest on pre-petition debt that is unsecured or estimated to be undersecured. In September 1995, in connection with the Company's bankruptcy, management approved a company restructuring that it believes is required to maintain the viability of the business. This restructure will result in, among other things, discontinuing service to a number of unprofitable hotels with monthly revenues of approximately $256,000 and $289,000 for 1995 and 1994, respectively, and will further result in the elimination of certain positions within the Company. It is currently anticipated such actions will be completed in 1996. As a result, the Company recorded a restructure charge of $6.0 million in 1995. Of this total, $.9 million relates to the cost of de-installing certain hotels and $1.7 million was recorded for estimated losses on the disposal of de-installed equipment. The Company also recorded $.1 million in employee severance costs which will be incurred in the restructure process. The Company recorded an additional charge of $2.3 million which represents the write-off or abandonment of other fixed assets and $1.0 million for other costs associated with the restructure process. Total bankruptcy reorganization items of $7.6 million for the twelve months ended December 31, 1995 include normal bankruptcy, professional and miscellaneous charges of $1.6 million and the restructure charges discussed above. In addition, as a result of a review during the third quarter of 1995, the Company recorded several adjustments to reflect the impact of certain changes in estimates that are not related to operations in 1995. These changes in estimates totalled $2.6 million. Such adjustments related primarily to revisions in the Company's prior estimates of amounts due Electronic Data Systems Corporation ("EDS") and chargebacks to EDS under the EDS Services and Technology Agreement of $1.7 million and a $.9 million reduction for ASCAP fees. The $1.7 million included additional provisions for doubtful accounts of $.2 million, a reserve of $.8 million of obsolete inventory held by a third party and an increase related to certain liabilities of $.7 million. The $.7 million in increased liabilities included $.4 million for prior years' employee related sick pay liability and other miscellaneous adjustments of $.3 million. F-33 138 The total effect of the bankruptcy reorganization items and changes in estimates was to increase net loss for the twelve months ended December 31, 1995 by approximately $10.2 million or $.43 per common share. NOTE 4 - EDS SERVICE AND TECHNOLOGY AGREEMENT On July 28, 1993, the Company entered into a ten year exclusive agreement with EDS to install the first digital video system in the hotel PPV industry. Under this agreement, EDS and the Company began installing a Compressed Digital Video ("CDV") satellite movie transmission system, STARPATH, throughout most of the Company's current and future U.S. hotel sites. STARPATH replaces the Company's existing analog technology, which relies exclusively on videotape players located at each hotel or studio location and which technology has been used since the Company's inception in 1971. EDS and the Company have also installed a new digital video on-demand movie system utilizing video file servers, "Digital Guest Choice" in select hotels. Also, included in the STARPATH technology is the Company's development of a UNIX based integrated computer system ("SPEXIS") which is installed in conjunction with the Company's PPV systems and will enable the Company to provide enhanced interactive services. In connection with the installation of the STARPATH system, EDS and the Company entered into a contract for EDS to perform all of the field service functions beginning in April 1994. The transition of the Company's field service to EDS involved numerous difficulties for field service personnel in maintaining the normal level of repairs and maintenance of existing PPV rooms concurrent with rapid installation of the CDV sites. The Company pays EDS (i) a fixed fee for network services which includes satellite uplink, customer assistance service and management information services; (ii) a fixed fee (which fee increases and decreases as the number of the Company's hotels served increases and decreases) for field services and maintenance of the Company's hotel systems; and (iii) a fixed monthly fee for transponder access, time and related services for transmission of movies. On February 1, 1996, the Bankruptcy Court approved a modification to the EDS Service and Technology Agreement whereby the field service and the MIS services operations would transition back to the Company. In addition, this modification continues certain other lease agreements and allows for the deferral of certain payments to EDS. Assuming a fixed number of hotels served of 1,750 sites, the contracted service fees for the modified service agreement would be approximately $22.0 million, $17.6 million, and $9.9 million for the years ended December 31, 1996, 1997, 1998, respectively, and $39.2 million thereafter through September 30, 2003. The Company also has committed to purchase certain system components, such as personal computers, integrated receiver/decoders ("IRDs") and antennae from EDS or its affiliate in connection with deployment of the CDV Satellite Network and digital file servers in connection with Digital Guest Choice. The Company has purchased components of this type from EDS, in the amount of approximately $3.4 million, $22.6 million, and $2.5 million for the years ended 1995, 1994 and 1993, respectively. At December 31, 1994 the Company had amounts payable to EDS for equipment purchased during 1994 in connection with the technology change, primarily IRDs, antenna and Digital Guest Choice file servers in the amount of $16.0 million. On January 1, 1995 the Company entered into a special provisions agreement (the "Special Provisions Agreement") with regards to $16 million of outstanding payables for purchases of components ("EDS Equipment Lease") and $24.6 million due for services rendered under the EDS Service and Technology Agreement ("EDS Services Note"). The EDS Services Note accrued interest at 11.5% per annum with payment due in full on or before August 31, 1995. Additionally, the Company was required to make minimum payments of $500,000 for each of January, February and March 1995 for current (1995) service fees. To the extent these current fees exceeded the payments made during this period, the excess was due and payable on August 31, 1995. Notwithstanding F-34 139 the above, 10% of the proceeds from the sale of any of the Company's significant assets, as defined, must be applied to the EDS Services Note. As a result of the Company's Chapter 11 filing, payment of the EDS Services Notes has been stayed and such amount has been classified as a pre-petition liability. As a result of the EDS Equipment Lease, $16.0 million of system components classified in video systems at December 31, 1994, have been accounted for as an operating lease effective January 1, 1995. As a result of the changes in technology and field service operations, the Company accrued charges in the amount of $6.8 million in its results of operations for the year ended December 31, 1993 for the write-off of obsolete equipment (primarily videotape players and obsolete microprocessing equipment), and personnel related costs associated with the transition of the Company's field service operations. Approximately $3.9 million were non-cash charges attributable to the write-down of obsolete equipment and $2.9 million was due to costs of severance and incentives to field operation personnel and costs related to the closing of field service offices. Upon execution of the EDS Service and Technology Agreement, the Company's management determined the impact on operations including obsolete equipment and personnel reductions and accordingly recorded the estimation of these costs in the results of operations for 1993. The cash charges were paid during 1994. NOTE 5 - STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- --------- ---------- (Dollars in thousands) Cash interest paid..........................................$ 3,513 $ 3,643 $ 43,854 State and foreign income taxes paid......................... 126 612 2,191 Non-cash investing and financing activities: Capital lease obligation incurred on lease of equipment... 6,757 13,484 12,915 EDS equipment lease (Note 4).............................. 16,000 16,000 --
NOTE 6 - LOSS PER COMMON SHARE The loss per common share is calculated on the weighted average number of common shares outstanding for the period. Common stock warrants and stock options are not included in the computation as their effect is anti-dilutive. See Note 11, Part II, Item 8, "Stockholders' Deficit". The weighted average number of common shares outstanding for each period are as follows (dollars in thousands):
YEAR AVERAGE SHARES ------------------------- -------------------- 1995..................... 23,983,905 1994..................... 23,983,905 1993..................... 18,178,289
NOTE 7 - DEBT Foothill Revolving Facility: On June 9, 1995, Spectradyne entered into a loan and security agreement with Foothill Capital Corporation to provide debtor-in-possession financing (the "Foothill F-35 140 Loan"). The Foothill Loan allows for revolving advances up to a maximum amount of $40 million and bears interest payable monthly at prime plus 1.75% with a floor of 8.5%. Proceeds from initial advances under the Foothill Loan were used to repay outstanding balances and accrued interest under the Company's revolving credit facility and the Canadian Bank Credit Facility (referred to herein as the "Old Credit Facilities"). The Foothill Loan matures June 15, 1997. At December 31, 1995 there was $26.7 million outstanding under the Foothill Loan. The Foothill Loan is secured by all of the assets of Spectradyne and certain subsidiaries, all of the outstanding stock of the Company's subsidiaries and the guarantees of SpectraVision and certain subsidiaries. The Foothill Loan contains various and customary financial and operating covenants including limitations on additional indebtedness and limitations on capital expenditures. At December 31, 1995 the Company was not in compliance with the financial covenants relating to its operating cash flow and its fixed charges to cash flow ratio requirements. On March 22, 1996, the Company obtained a waiver from Foothill Capital Corporation for the December 31, 1995 covenant violations. However, the Company does not expect that it will be in compliance with the financial covenants relating to its operating cash flow and its fixed charges to cash flow ratios in 1996. Accordingly, in April 1996, Foothill Capital Corporation could elect to terminate the revolving line of credit, demand immediate payment of all outstanding balances and foreclose on the Company's assets securing the revolving line of credit if payment is not made. In this event, if the Company cannot obtain alternative financing, it may be forced to liquidate in a Chapter 7 bankruptcy proceeding. Revolving Credit Facility: Concurrent with the 1993 Offerings, the Company obtained a revolving credit facility with borrowing availability of $20 million with two financial institutions (the "Revolving Credit Facility"). The Revolving Credit Facility includes a letter of credit sub-facility of up to $10 million including a letter of credit in the amount of $7.5 million (the "Standby Letter of Credit") supporting the Canadian Bank Credit Facility, described below. The Revolving Credit Facility matured on October 5, 1997. All outstanding loans bore interest at the Company's option at either (i) the highest of prime rate plus 1.25%, CD rate plus 2.25% and federal funds rate plus 1.75% or (ii) Eurodollar rate plus 3.75%. Interest on loans bearing interest at the rate set forth in clause (i) above were payable quarterly in arrears and interest on Eurodollar loans were payable at the earliest of either three months or the end of the applicable interest period. At December 31, 1994 there was $12.5 million outstanding under the Revolving Credit Facility at 10.75%. The Revolving Credit Facility was secured by a pledge of the outstanding stock of Spectradyne and SPI Newco and assets of the Company and all of its direct and indirect subsidiaries. The Revolving Credit Facility was senior to the Reset Notes and CVRs and pari passu in right of payment with the Senior Notes. The Revolving Credit Facility contained various customary covenants including the maintenance of certain financial ratios, limitation on capital expenditures and capital leases, limitations on dividends or distributions on equity and other junior securities of the Company and prohibited the Company from making any cash payments with respect to the CVRs. Outstanding borrowings under the Revolving Credit Facility were repaid in June 1995 with initial proceeds from the Foothill Loan. Canadian Bank Credit Facility. The Canadian Bank Credit Facility provided borrowings up to US$7.35 million. The loan allowed for Eurodollar Rate loans, as selected by the Company, in denominations of not less than $1 million for a period of not less than one month and not more than five years. The loans bore interest at the Eurodollar rate plus .75%, payable as the Eurodollar loans matured F-36 141 or quarterly, whichever occurred earlier. At December 31, 1994, the Company had $7.35 million in Eurodollar loans at 6.75%. The loan was secured by the $7.5 million Standby Letter of Credit provided by the Revolving Credit Facility. In May 1995, the outstanding balance and accrued interest were repaid. Senior Discount Notes. At October 5, 1993 the Senior Notes were issued at a substantial discount from their $209.5 million principal amount generating gross proceeds to the Company of $150.0 million. The Senior Notes mature October 1, 2001 and accrue interest at 11.5% commencing on October 1, 1996 and are payable semi-annually on April 1 and October 1, beginning April 1, 1997. On or after October 1, 1997, the Company, at its option, may redeem the Senior Notes in whole or in part at the following redemption prices (expressed as a percentage of principal amount) together with accrued and unpaid interest to the redemption date, if redeemed during the twelve-month period beginning October 1 of the years indicated below: REDEMPTION YEAR PRICE ------------------ -------------- 1997.............. 104.929% 1998.............. 103.286% 1999.............. 101.643% 2000.............. 100.000%
The Senior Notes contain certain covenants which, among other things, (a) limit the payment of dividends and certain other restricted payments by both the Company and its subsidiaries, (b) require the purchase by the Company of the Senior Notes at the option of the holder upon a change of control, as defined, (c) limit additional indebtedness and (d) limit transactions with certain affiliates. The Senior Notes are guaranteed by SPI Newco and Spectradyne and are secured on a subordinated basis to the Revolving Credit Facility by a pledge of all of the outstanding stock of SPI Newco and Spectradyne and certain other assets. The Senior Notes are senior to the Reset Notes and CVRs and pari passu in right of payment to the Revolving Credit Facility. In accordance with SOP 90-7, the accruing of interest on the Senior Notes was suspended on June 8, 1995 when the Company filed for protection under Chapter 11 of the Federal Bankruptcy Act. The unrecorded accrued interest since June 8, 1995 is $12.2 million. Other Debt. Other debt consists of a series of collateralized bank loans and other installment debt with fixed and variable interest rates to be repaid in monthly installments of principal and interest over a period ending September 1997. Senior Subordinated Reset Notes. The Reset Notes, issued in November 1992, initially carried an interest rate of 11.50% per annum payable semi-annually in cash on June 1 and December 1. On November 23, 1993 (the "Reset Date"), the interest rate was reset, in accordance with the Reset Note indenture, to an interest rate determined to cause the market value of the Reset Notes to equal 101.7% of the principal amount. On the Reset Date, the interest rate was reset to 11.65% per annum. In accordance with the Reset Note indenture, the Company elected to pay interest on the Reset Notes on June 1, 1994, December 1, 1994 and June 1, 1995 through the issuance of additional Reset Notes in the amount of $34.0 million in 1994 and $18.5 million in 1995 (the "PIK Option"). The annual F-37 142 interest rate on the Reset Notes for the interest period for which such option was exercised was increased to 12.65%. On December 1, 1995 and each interest payment thereafter, the Reset Note indenture requires interest to be paid in cash. In accordance with SOP 90-7, the accruing of interest on the Reset Notes was suspended on June 8, 1995 when the Company filed for protection under Chapter 11 of the Federal Bankruptcy Act. The unrecorded accrued interest since June 8, 1995 is $21.3 million. The Reset Notes are redeemable at the following redemption prices (expressed as percentages of principal amount) plus accrued interest to the redemption date, if redeemed during the 12-month period beginning December 1 of the years indicated below: REDEMPTION YEAR PRICE ------------------ -------------- 1997.............. 105.00% 1998.............. 103.75% 1999.............. 102.50% 2000.............. 101.00% 2001.............. 100.00%
The Reset Notes contain certain covenants which, among other things, (a) limit the payment of dividends and certain other restricted payments by both the Company and its subsidiaries, (b) require the purchase by the Company of the Reset Notes at the option of the holder upon a change of control, (c) limit additional indebtedness and (d) limit transactions with certain affiliates. The Reset Notes are senior in right of payment to the CVRs and junior in right of payment to the Revolving Credit Facility, the Canadian Bank Credit Facility and the Senior Notes. The Reset Notes are secured on a subordinated basis, by a pledge of the capital stock of both Spectradyne and SPI Newco and subordinated guarantees of Spectradyne and SPI Newco. Interest Rate Protection Agreement. The Company entered into an interest rate protection agreement with Wells Fargo Bank on June 30, 1993, the lender under the Bank Credit Facility, for a period of one year on a principal amount up to the lesser of $75 million or 50% of the outstanding balance under the Bank Credit Facility. Under the terms of the agreement, the Company would have received compensation when the 90 day LIBOR (London Interbank Offered Rate) exceeded 6.00% (ceiling) and the Company paid compensation when LIBOR is less than 3.31% (floor). Compensation paid or received was recognized as interest rates deviate beyond the stated rates. The Interest Rate Protection Agreement expired June 30, 1994. For the twelve months ended December 31, 1994 and 1993, additional interest expense under this agreement and a previous similar agreement was $23,000, and $1.7 million, respectively. The Company currently has no financial derivatives. In connection with the Foothill Loan in 1995, a portion of the proceeds was used to extinguish the Revolving Credit Facility originally due in 1997. The unamortized debt issuance cost of $.9 million was expensed resulting in an extraordinary loss on extinguishment of debt. In connection with the 1993 Offerings, a portion of the proceeds was used to extinguish the Bank Credit Facility and Supplemental Credit Facility originally due in 1998. The unamortized debt issuance cost of $2.7 million was expensed resulting in an extraordinary loss on extinguishment of debt. F-38 143 The following table indicates future maturities of all debt, excluding liabilities subject to settlement under reorganization and minimum annual rentals under capital lease obligations: 1996................... $ -- 1997................... 26,703 1998................... -- 1999................... -- 2000................... -- After 2000............. -- ------------- $ 26,703 =============
F-39 144 NOTE 8 - INCOME TAXES The income tax benefit attributable to continuing operations for the years ended December 31, 1995, 1994 and 1993 consists of the following (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 ---------- ----------- ----------- CURRENT: U.S. Federal........... $ -- $ -- $ -- State and local........ 41 (812) 1,275 Foreign................ 85 364 464 ---------- ----------- ----------- $ 126 $ (448) $ 1,739 ========== =========== =========== DEFERRED: U.S. Federal........... (693) $ (18,519) $ (3,325) State and local........ (273) (9,946) (1,044) Foreign................ -- (7) (98) ---------- ----------- ----------- $ (966) $ (28,472) $ (4,467) ========== =========== ===========
Income tax benefit for the years ended December 31, 1995, 1994, and 1993 differed from the amount computed by applying the U.S. Federal income tax rate of 35 percent in 1995, 1994 and 1993 to the loss before income taxes and extraordinary item as a result of the following (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1994 1993 ------------- ----------- ---------- Computed "expected" tax benefit $ (26,070) $ (99,122) $ (16,025) Change in income tax benefit resulting from: State income taxes..................................... (341) (6,993) 150 Current year loss for which no benefit is recognized... 25,737 76,963 10,112 Other, net............................................. (166) 232 3,035 ------------- ----------- ---------- Total................................................ $ 840 $ (28,920) $ (2,728) ============== =========== ==========
F-40 145 At December 31, 1995 and 1994 the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):
YEAR ENDED DECEMBER 31, 1995 1994 ------------ --- Deferred tax assets: Net operating loss carryforwards.............................. $ 114,836 $ 99,764 Tax benefit of deferred state taxes........................... 865 1,063 Original issue discount....................................... 33,485 25,034 Other......................................................... 9,454 9,226 ------------ ----------- Total gross deferred tax assets............................... 158,640 135,087 Less valuation allowance.................................... (139,432) (113,375) ------------ ----------- Net deferred tax assets..................................... 19,208 21,712 Deferred tax liabilities: Intangible assets, principally due to differences in basis.... 18,961 20,000 Video systems and fixed assets, principally due 3,222 6,569 to differences in depreciation.............................. Other......................................................... 2,492 1,900 ------------ ----------- Total gross deferred tax liabilities.......................... 24,675 28,469 ------------ ----------- Net deferred tax liability.................................... $ 5,467 $ 6,757 ============ ===========
At January 1, 1995 the valuation allowance for deferred tax assets was $113.4 million. The net change in the total valuation allowance for the years ended December 31, 1995 and 1994 were increases of $26.1 million and $75.1 million, respectively. The Company has recognized deferred tax assets to the extent such assets can be realized through future reversals of existing taxable temporary differences. At December 31, 1995, subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets will be reported in the consolidated statement of operations. At December 31, 1995, SpectraVision had an unused net operating loss ("NOL") carryforward for federal income tax purposes of $328 million which will expire in years 2002 through 2010. However, because the consummation of the 1992 Restructuring triggered an ownership change of the Company on November 23, 1992 (the "Effective Date"), the Company's pre-ownership change NOL carryforwards are subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company has applied Section 382(l)(6) of the Code which will limit the Company's use of its pre-ownership change NOLs (approximately $220 million) in each taxable year following the 1992 Restructuring. The Company has calculated the annual limitation by taking the product of (i) the long-term tax-exempt rate prevailing on the Effective Date and (ii) the value of the Company's stock immediately after the Effective Date. The Company also has available any NOLs not utilized from post-ownership change taxable years. The Company currently estimates the annual amount available under this limitation to be approximately $14 million. NOTE 9 - STOCK OPTIONS F-41 146 The 1994 Management Incentive Equity Plan (the "1994 Option Plan") was approved by stockholders on May 25, 1994. The 1994 Option Plan provides that officers and key employees may be granted either nonqualified stock options or incentive stock options for the purchase of the Company's Class B Common Stock, and also authorized the issuance of stock appreciation rights, either coupled with or independent of outstanding or concurrently granted stock options. Up to 1,800,000 shares of the Company's common stock may be issued upon exercise of options and rights granted under this plan. The compensation committee of the board of directors administers the plan. Stock options vest at the rate of 25 percent per year commencing on the first anniversary of the date of grant, except for the initial options granted, and expire ten years from the date of grant. On February 2, 1994, subject to stockholder approval of the 1994 Option Plan, options with respect to 359,756 shares were granted (the "Initial Options"). The Initial Options vested on the date of stockholder approval and 25 percent per year on each subsequent anniversary date of grant. In connection with certain employment contracts, options with respect to 460,000 shares were granted during 1994. All outstanding options for 3,060 shares under the 1988 stock option plan became fully vested upon the change of control of the Company as a result of the 1989 Acquisition on April 12, 1989. Pursuant to the terms of the purchase agreement dated April 12, 1989, DP purchased options with respect to 3,010 shares from several employees of the Company in 1989, for a price of $402.70 per option. Options were granted at an exercise price of $37.30 (restated for the effects of the 1-for-20 reverse stock splits on September 13, 1991 and June 30, 1992), which was the fair market value of the Company's common stock on the date of grant. The options for 3,010 shares of Class B Common Stock held by DP were transferred to Rainbow on December 20, 1990, and are outstanding and unexercised at December 31, 1995. The following table summarizes transactions under the Company's 1988 and 1994 stock option plans:
SHARES UNDER EXERCISE PRICE OPTION PER OPTION ------------ -------------- Outstanding at December 31, 1992....................................... 3,010 $ 37.30 Granted.............................................................. -- -- Exercised............................................................ -- -- Canceled............................................................. -- -- Outstanding at December 31, 1993....................................... 3,010 $ 37.30 Granted.............................................................. 819,756 $7.875 - $0.375 Exercised............................................................ -- -- Canceled............................................................. (151,100) $ 7.875 -------- Outstanding at December 31, 1994....................................... 671,666 $37.30 - $0.375 Granted.............................................................. -- -- Exercised............................................................ -- -- Canceled............................................................. -- -- -------- Outstanding at December 31, 1995....................................... 671,666 $37.60 - $0.375 -------- Exercisable at December 31, 1995....................................... 671,666 $37.50 - $0.375 ========
F-42 147 NOTE 10 - CONTINGENT VALUE RIGHTS In November 1992, the Company issued 3,269,544 CVRs. Holders of the CVRs were entitled to a payment (the "Mandatory Redemption Payment") on November 23, 1995 (the "Mandatory Redemption Date"). For each CVR, the holder was to have received a payment equal to the lesser of $6.12 (the "Ceiling Price") or the amount, if any, by which $30.59 (the "Target Price") exceeded the current market value per share of Class B Common Stock, subject to certain adjustments. The Mandatory Redemption Payment was to be made in cash, except where agreements under senior obligation of the Company prohibited cash payments. The Company has recorded the maximum obligations as temporary equity. These payments have been stayed as a result of the Chapter 11 filings. NOTE 11 - STOCKHOLDERS' DEFICIT Class A and Class B Common Stock. The Company has authorized 6,000,000 shares of Class A Common Stock and 144,000,000 shares of Class B Common Stock. Holders of Class A Common Stock are entitled to ten votes for each share and holders of Class B Common Stock are entitled to one vote for each share. Holders of Class A Common Stock have the right to elect nine members of the Company's Board of Directors and holders of Class B Common Stock have the right to elect five members of the Company's Board of Directors. Except as described above, the Class A Common Stock and the Class B Common Stock have equal rights and privileges and rank equally, share ratably, and are identical in all respects as to all matters. Each share of Class A Common Stock is convertible into one fully paid and nonassessable share of Class B Common Stock at the option of the holder thereof. Upon transfer by the holder of Class A Common Stock, other than to a permitted transferee (as defined), each share of Class A Common Stock shall automatically be converted into one share of Class B Common Stock. In the event of a stock split, reverse stock split or stock dividend, the holders of Class A Common Stock will receive in exchange thereof the number of shares of Class B Common Stock which such holder would have been entitled to receive had the conversion occurred prior to such subdivision, combination or distribution. The indentures governing the Reset Notes, the Senior Notes and the Foothill Loan limit payment of cash dividends on both Class A and Class B Common Stock. The following table shows capital stock transactions in share amounts during 1995, 1994 and 1993:
1995 1994 1993 -------------- ------------- ------------- Class A Common Stock: Beginning of the year................................... 4,593,526 4,745,526 5,145,526 Converted to Class B Common Stock....................... -- (152,000) (400,000) -------------- ------------- ------------- End of year............................................. 4,593,526 4,593,526 4,745,526 ============== ============= ============= Class B Common Stock: Beginning of the year................................... 19,390,379 19,238,379 11,188,379 Issued in 1993 Offering................................. -- -- 7,650,000 Converted to Class B Common Stock....................... -- 152,000 400,000 -------------- ------------- ------------- End of year............................................. 19,390,379 19,390,379 19,238,379 ============== ============= =============
F-43 148 Warrants. A total of 4,322,260 warrants were issued to former holders of Spectradyne Common Stock who affirmatively elected to receive such warrants in lieu of cash at the 1987 Acquisition. The warrants became exercisable on October 8, 1992 and expire on October 8, 1997. Due to the 1-for-20 reverse stock splits on September 13, 1991 and June 30, 1992, the tender of 400 warrants at a stated exercise price of $0.13 per warrant or an aggregate exercise price of $52.00 are required to purchase one share of Class B Common Stock. At December 31, 1995 there were 4,322,260 warrants outstanding. NOTE 12 - COMMITMENTS Capital and Operating Leases: SpectraVision leases certain office space and equipment used in operations under operating lease agreements. The Company finances certain equipment used in its PPV systems, primarily televisions and video racks, under capital leases. Rental expense for operating leases totaled $7.0 million, $5.1 million, and $4.0 million in 1995, 1994 and 1993, respectively. Future minimum annual rentals under lease arrangements are as follows (in thousands):
YEAR CAPITAL LEASES OPERATING LEASES - -------------- --------------- ---------------- 1996.......... $ 9,148 $ 7,557 1997.......... 7,190 7,083 1998.......... 7,383 828 1999.......... 4,455 270 2000.......... 911 133 Thereafter.... -- 366 --------------- ---------------- $ 29,087 $ 16,237 ================ Less imputed interest... (4,536) --------------- Total...............$ 24,551 ===============
In connection with the EDS Service and Technology Agreement, certain operating lease payments are reimbursable to the Company by EDS. As a result of the modification of this agreement on February 1, 1996, the reimbursed rents portion of the agreement will be terminated. The amount of reimbursed rents included in Operating Leases above will be $1,565 for the year ended December 31, 1996. See Note 4, "EDS Service and Technology Agreement" for additional description of other commitments. NOTE 13 - CONTINGENCIES On October 20, 1994, a purported class action complaint was filed in the United States District Court alleging misrepresentations and omissions concurrent and following the 1993 Offerings. The plaintiffs seek unspecified damages, prejudgment interest, and fees and costs of the plaintiffs. While the Company believes that it has meritorious defenses to the claims and intends to vigorously defend itself, an unfavorable resolution could have a material adverse effect on the Company. In addition, the Company is presently unable to estimate the amount, if any, of such loss. Proceedings in this lawsuit with respect to the Company have been stayed as a result of the Chapter 11 filings. F-44 149 The Company and its subsidiaries and related companies are potential and named defendants in several other lawsuits and claims arising in the ordinary course of business. While the outcome of such claims, lawsuits or other proceedings against the Company cannot be predicted with certainty, management expects that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the operating results or financial condition of the Company. Proceedings in connection with any lawsuit against the Company have been stayed as a result of the Chapter 11 filings. NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 1995 and 1994 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------------ ------------ ------------ ------------ 1995(a) Revenues........................................ $ 33,135 $ 32,073 $ 30,599 $ 28,179 Operating loss.................................. (5,365) (6,871) (14,786) (12,231) Income taxes (benefit).......................... (241) (223) (141) (235) Net loss........................................ (19,954) (19,690) (22,455) (12,461) Loss per common share before extraordinary item..................... $ (0.83) $ (0.82) $ (0.94) $ (0.52) 1994(b) Revenues........................................ $ 37,100 $ 37,700 $ 34,602 $ 32,982 Operating loss.................................. (3,392) (2,163) (7,873) (215,958) Income taxes (benefit).......................... (1,821) (1,782) 61 (25,378) Net loss........................................ (15,218) (14,094) (22,631) (202,341) Loss per common share before extraordinary item..................... $ (0.63) $ (0.59) $ (0.95) $ (8.43)
(a) The second quarter of 1995 includes an extraordinary item for the write-off of unamortized debt issuance costs in the amount of $915,000. (b) The fourth quarter of 1994 includes the revaluation of hotel contracts and write-off of patent costs in the amount of $196.3 million. F-45 150 NOTE 15 - OPERATIONS BY GEOGRAPHIC AREA The following table presents the Company's revenues and operating loss before income taxes for the years ended December 31, 1995, 1994 and 1993 and identifiable assets net of accumulated depreciation and amortization as of December 31, 1995, 1994 and 1993 by geographic area. The United States includes branch operations in Puerto Rico and the U.S. Virgin Islands and Other includes operations in Hong Kong, Australia, Thailand, Singapore and Mexico (dollars in thousands):
1995 1994 1993 ------------ ---------- ---------- Revenues: United States.......................................$ 100,667 $ 119,869 $ 140,457 Canada.............................................. 12,115 12,879 12,867 Other............................................... 11,204 9,636 9,669 ------------ ---------- ---------- Total Revenues....................................$ 123,986 $ 142,384 $ 162,993 ============ ========== ========== Operating Income (Loss) Before Corporate Expense: United States.......................................$ (39,015) $ (22,870) $ 13,562 Canada.............................................. 4,107 2,035 1,518 Other............................................... 4,255 2,944 3,113 ------------ ---------- ---------- (30,653) (17,891) 18,193 Less corporate expenses and non-operating (income): Parent company expenses............................. 1,606 1,993 2,105 Amortization of corporate intangibles............... 6,994 13,246 12,883 Write-down of hotel contracts....................... -- 196,256 -- Non-operating income................................ (508) (1,163) -- Interest expense.................................... 28,177 54,981 48,990 Reorganization items................................ 7,563 -- -- ------------ ---------- ---------- Loss Before Income Taxes and Extraordinary item..................................$ (74,485) $ (283,204) $ (45,785) ============ ========== ========== Identifiable assets, net: United States.......................................$ 129,719 $ 166,782 $ 137,151 Canada.............................................. 11,749 9,276 10,958 Other............................................... 10,710 9,819 7,650 Total identifiable assets, net.................... 152,178 185,877 155,759 Hotel Contracts, net.................................. 47,403 50,000 253,508 Corporate Assets...................................... 6,041 6,945 211 ------------ ---------- ---------- Total Assets, net...................................$ 205,622 $ 242,822 $ 409,478 ============ ========== ========== PPV Rooms: (unaudited) United States....................................... 441,672 527,608 584,354 Canada.............................................. 71,600 73,987 74,777 Other............................................... 37,134 33,783 25,468 ------------ ---------- ---------- 550,406 635,378 684,599 ============ ========== ==========
F-46 151 NOTE 16 - RELATED PARTIES The Company entered into a new management agreement (the "Management Agreement") effective November 23, 1992 with Rainbow to provide continuation of the services provided in the Old Management Agreement as well as the continuation of Mr. Davis's guarantee of the Company's then outstanding supplemental credit facility. In consideration for these services, the Company paid Rainbow a monthly fee equal to 1.2% of the maximum available commitment under the supplemental credit facility. Fees paid under this agreement were $182,189 in 1993. Upon closing of the 1993 Offerings and Revolving Credit Facility, the Management Agreement was terminated. In connection with the 1993 Offerings and Revolving Credit Facility, the Board of Directors approved payment of an advisory fee of $1.0 million to Davis Capital Advisors, an entity controlled by Mr. Marvin Davis. Additionally, the Company reimbursed Rainbow for out-of-pocket expenses in connection with advisory services provided in 1993 of $56,000. The Company believes the Advisory Fee and the fees under the Management Agreement are at least as favorable as could be obtained from an unrelated third party. NOTE 17 - SAVINGS FOR RETIREMENT PLAN The Company provides a Savings for Retirement Plan under Section 401(k) of the Internal Revenue Code. The plan allows participation by all employees of Spectradyne and United States based employees of Spectradyne International, Inc., who are not covered by a collective bargaining agreement, after three months of employment. Eligible employees are allowed to contribute up to 15% of their compensation, subject to other limitations of the plan and the Internal Revenue Code; the Company's discretionary matching contribution is limited to 100% of the first 3% of a participant's 401(k) contribution and 50% of the next 2% of a participant's contribution. Employee contributions in excess of 5% of their annual compensation are not matched by the Company. In March 1995, the Company suspended its matching contribution. The Company contributions vest to the employee ratably to 100% after the third year of service. The Company's matching contribution to the 401(k) plan was $47,000, $425,000, and $564,000 for 1995, 1994, and 1993, respectively. NOTE 18 - INTANGIBLE ASSETS The hotel contracts were recorded at fair value as a result of the 1989 Acquisition and amortized on a straight-line basis over 25 years. Fair value of hotel contracts was calculated utilizing the future cash flows to be produced by the Company's existing hotel contracts discounted at the then prevailing interest rate and further discounted at the historical contract renewal rate. During 1994, the Company experienced a significant reduction of cash flows from existing hotel contracts, an increase in capital expenditures in support of contract renewals and significant capital expenditures for the deployment of the new STARPATH technology without any immediate cash flow improvement. The Company continually assesses the carrying amount of hotel contracts by determining whether its balance can be recovered over its remaining life. The Company's analysis of undiscounted future cash flows indicated that a substantial portion of the carrying amount of hotel contracts would not be recoverable. Accordingly, based on the Company's estimate of discounted future cash flows from existing hotel contracts, the Company wrote off $191.0 million of the carrying amount of hotel contracts at December 31, 1994 which resulted in a remaining balance of hotel contracts of $50.0 million as of F-47 152 December 31, 1994. Additionally, the Company wrote-off $5.2 million in patent costs at December 31, 1994. As of December 31, 1995, the Company has separately classified certain contract costs related primarily to the purchase of televisions as Deferred Contract Concession Costs. Such costs were previously included in Video Systems as of December 31, 1994 and have been reclassified to conform to the current year presentation. NOTE 19 - GUARANTOR SUBSIDIARIES The Company's obligations under the Reset Notes and Senior Notes are guaranteed on a subordinated basis by the Company's direct subsidiary, SPI Newco and by SPI Newco's direct subsidiary, Spectradyne (the "Subordinated Guarantees"). Such guarantee is full, unconditional and joint and several. The following supplemental combining financial information presents: (1) Statements of Financial Position as of December 31, 1995 and 1994 and Statements of Operations and Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 of (a) SpectraVision, the parent, (b) SPI Newco and Spectradyne, the Guarantors, (c) combined nonguarantor subsidiaries and (d) the consolidated Company. (2) Elimination entries required to consolidate SpectraVision, SPI Newco and Spectradyne and the combined nonguarantor subsidiaries. F-48 153 SPECTRAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SUPPLEMENTAL COMBINING STATEMENT OF FINANCIAL POSITION DECEMBER 31, 1995 (in thousands) Guarantor Subsidiaries
Parent NONGUARANTOR SPECTRAVISION Company NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ----- ----------- ------------ ------------ ------------ ASSETS: Cash and cash equivalents .......... $ -- $ 2 $ 2 $ 3,434 $ -- $ 3,438 Accounts receivable, less ......... allowance for doubtful accounts .. -- -- 13,050 3,378 -- 16,428 Prepaids and other assets ......... 5,604 -- 7,318 1,030 -- 13,952 Intercompany receivables .......... 188,105 37,332 20,660 782 (346,879) -- Intercompany note receivable ...... 350,000 -- -- -- (350,000) -- Intercompany investments .......... (476,381) 477,150 3,072 2 (3,843) -- Video systems ..................... -- -- 220,198 39,118 -- 259,316 Less accumulated depreciation ..... and amortization ................ -- -- (130,921) (24,683) -- (155,604) --------- --------- --------- --------- --------- --------- Total video systems ............. -- -- 89,277 14,435 -- 103,712 Land, building and equipment ...... -- -- 13,449 1,412 -- 14,861 Less accumulated depreciation ..... -- -- (4,720) (1,201) -- (5,921) --------- --------- --------- --------- --------- --------- Total land, building and equipment ..................... -- -- 8,729 211 -- 8,940 Hotel contracts (net).............. -- -- 47,403 -- -- 47,403 Deferred contract concession costs (net) ..................... -- -- 11,749 -- -- 11,749 --------- --------- --------- --------- --------- --------- Total assets .................... $ 67,328 $ 614,484 $ 201,260 $ 23,272 $(700,722) $ 205,622 ========= ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities Accounts payable ................ $ -- $ -- $ 7,691 $ 437 $ -- $ 8,128 Other accrued liabilities ....... 61 1 10,689 447 -- 11,198 Income taxes .................... -- -- 5,583 67 -- 11,198 Intercompany payables ........... -- 177,553 138,142 31,184 (346,879) -- Intercompany note payable ....... -- 350,000 -- -- (350,000) -- Debt Foothill Revolving Credit Facility ...................... -- -- 26,703 -- -- 26,703 Capitalized lease obligations ... -- -- 1,618 346 -- 1,964 --------- --------- --------- --------- --------- --------- Total debt ........................ -- -- 28,321 346 -- 28,667 Liabilities subject to settlement under reorganization............. 494,875 -- 84,712 -- -- 579,587 Contingent value rights subject to settlement under reorganization . 20,000 -- -- -- -- 20,000 Stockholders' equity (deficit) Class A common stock ............ 5 -- -- -- -- 5 Class B common stock ............ 19 -- -- -- -- 19 Common stock--subsidiaries ...... -- -- -- 420 (420) -- Additional paid-in capital ...... 392,185 127,150 477,149 2,655 (606,954) 392,185 Retained deficit ................ (840,289) (40,220) (551,027) (14,511) 605,758) (840,289) Foreign currency translation .... adjustment .................... 472 -- -- 2,227 (2,227) 472 --------- --------- --------- --------- --------- --------- Total stockholders' equity (deficit) ................... (447,608) 86,930 (73,878) (9,209) (3,843) (447,608) --------- --------- --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ................... $ 67,328 $ 614,484 $ 201,260 $ 23,272 $(700,772) $ 205,622 ========= ========= ========= ========= ========= =========
F-49 154 SPECTRAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SUPPLEMENTAL COMBINING STATEMENT OF FINANCIAL POSITION DECEMBER 31, 1994 (in thousands) GUARANTOR SUBSIDIARIES
Parent NONGUARANTOR SPECTRAVISION Company NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ----- ----------- ------------ ------------ ------------ ASSETS Cash and cash equivalents.................... $ 2 $ -- $ 260 $ 1,055 $ -- $ 1,317 Accounts receivable, less allowance for doubtful accounts..................... -- -- 16,646 3,771 -- 20,417 Prepaids and other assets................... 6,942 1 6,674 1,288 -- 14,905 Intercompany receivables.................... 163,604 160,096 16,547 100 (340,347) -- Intercompany note receivable................ 350,000 -- -- -- (350,000) -- Intercompany investments.................... (390,484) 477,150 3,072 -- (89,738) -- Video systems............................... -- -- 245,510 34,637 -- 280,147 Less accumulated depreciation and amortization.......................... -- -- 127,391 (20,899) -- 148,290 --------- -------- --------- -------- ---------- --------- Total video systems......................... -- -- 118,119 13,738 -- 131,857 Land, building and equipment................ -- -- 12,536 1,204 -- 13,740 Less accumulated depreciation............... -- -- (3,911) (1,054) -- (4,965) --------- -------- --------- -------- ---------- --------- Total land, building and equipment........ -- -- 8,625 150 -- 8,775 Hotel contracts, net........................ -- -- 50,000 -- -- 50,000 Deferred contract concession costs (net).... -- -- 15,551 -- -- 15,551 --------- -------- --------- -------- ---------- --------- Total assets.............................. $ 130,064 $637,247 $ 235,494 $ 20,102 $(780,085) $ 242,822 ========= ======== ========= ======== ========== ========= Liabilities and stockholders' equity (deficit) Liabilities Accounts payable.......................... $ -- $ -- $ 48,404 $ 403 $ -- $ 48,807 Other accrued liabilities................. 3,526 -- 25,406 498 -- 29,430 Income taxes.............................. -- -- 6,563 484 -- 7,047 Intercompany payables..................... -- 160,448 160,196 19,703 (340,347) -- Intercompany note payable................. -- 350,000 -- -- (350,000) -- Debt Revolving Credit Facility................. 12,500 -- -- -- -- 12,500 Canadian Bank Credit Facility............. -- -- -- 7,350 -- 7,350 11.5% Senior Discount Notes............... 172,295 -- -- -- -- 172,295 11.65% Senior Reset Notes................. 294,768 -- -- -- -- 294,768 Capitalized lease obligations............. -- -- 23,036 456 -- 23,492 Other debt................................ -- -- 150 8 -- 158 --------- -------- --------- -------- ---------- --------- Total debt................................ 479,563 -- 23,186 7,814 -- 510,563 Contingent value rights subject to -- -- -- -- 20,000 settlement under reorganization........... 20,000 Stockholders' equity (deficit) Class A common stock...................... 5 -- -- -- -- 5 Class B common stock...................... 19 -- -- -- -- 19 Common stock--subsidiaries................. -- -- -- 420 (420) -- Additional paid-in capital................ 392,185 127,150 477,150 2,652 (606,952) 392,185 Retained deficit.......................... (765,729) (351) (505,411) (13,540) 519,302 (765,729) Foreign currency translation adjustment... 495 -- -- 1,668 (1,668) 495 --------- -------- --------- -------- ---------- --------- Total stockholders' equity (deficit)........ (373,025) 126,799 (28,261) (8,800) (89,738) (373,025) --------- -------- --------- -------- ---------- --------- TOTAL LIABILITIES AND STOCK HOLDERS' EQUITY (DEFICIT)................................... $ 130,064 $637,247 $ 235,494 $ 20,102 $(780,085) $ 242,822 ========= ======== ========= ======== ========== =========
F-50 155 SPECTRAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (in thousands)
GUARANTOR SUBSIDIARIES ---------------------- PARENT SPECTRAVISION COMPANY NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ----- ----------- ------------ ------------ ------------ Revenues................................... $ -- $ -- $ 102,436 $25,731 $ (4,181) $ 123,986 Costs and Expenses: Direct Costs............................. -- -- 44,007 8,806 -- 52,813 Depreciation and amortization............ -- -- 34,272 5,092 -- 39,364 Operating expenses....................... -- -- 12,771 4,792 -- 17,563 Contracted service costs................. -- -- 28,921 359 -- 29,280 Selling and marketing expenses........... -- -- 4,321 562 -- 4,883 General and administrative expenses...... 1,606 3 13,796 1,915 -- 17,320 Research and development (net)........... -- -- 1,769 -- -- 1,769 Exchange loss............................ -- -- (18) 846 (581) 247 Intercompany charges..................... -- 3 -- 4,181 (4,181) -- --------- --------- --------- ------- --------- --------- Total costs and expenses................. 1,606 (3) 139,839 26,553 (4,762) 163,239 --------- --------- --------- ------- --------- --------- Operating Income (Loss).................... (1,606) -- (37,403) (822) 581 (39,253) Non-operating income....................... -- -- (458) (50) -- (508) Equity in losses of subsidiaries........... 85,874 -- -- -- (85,874) -- Interest expense (net)..................... 26,030 -- 1,859 288 -- 28,177 Intercompany interest expense (39,865) 39,865 -- -- -- -- (income)................................. Reorganization items....................... -- 1 7,561 1 -- 7,563 --------- --------- --------- ------- --------- --------- Gain (Loss) Before Income Taxes and Extraordinary Item....................... (73,645) (39,869) (46,365) (1,061) 86,455 (74,485) Income Taxes: State and foreign provision.............. -- -- 1 125 -- 126 Deferred benefit......................... -- -- (966) -- -- (966) --------- --------- --------- ------- --------- --------- Total Income Tax Benefit................... -- -- (965) 125 -- (840) --------- --------- --------- ------- --------- --------- Gain (Loss) before extraordinary item...... (73,645) (39,869) (45,400) (1,186) 86,455 (73,645) Extraordinary item Loss on debt extinguishment.............. 915 -- -- -- -- 915 --------- --------- --------- ------- --------- --------- Net Income (Loss)........................ $(74,560) $(39,869) $(45,400) $(1,186) $ 85,455 $(74,560) ========= ========= ========= ======= ========= =========
F-51 156 SPECTRAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS DECEMBER 31, 1994 (in thousands)
GUARANTOR SUBSIDIARIES PARENT NONGUARANTOR SPECTRAVISION COMPANY NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ----- ----------- ------------ ------------ ------------ Revenues................................... $ -- $ -- $ 122,138 $24,659 $ (4,413) $ 142,384 Costs and Expenses: Direct Costs............................. -- -- 50,576 7,439 -- 58,015 Depreciation and amortization............ 20 -- 45,353 5,161 -- 50,534 Write-down of hotel contracts............ -- -- 196,256 -- -- 196,256 Operating expenses....................... -- -- 9,802 3,403 -- 13,205 Contracted service costs................. -- -- 19,563 1,466 -- 21,029 Selling and marketing expenses........... -- -- 8,467 274 -- 8,741 General and administrative expenses...... 1,990 3 16,277 1,325 -- 19,595 Research and development (net)........... -- -- 3,649 165 -- 3,814 Exchange loss............................ -- -- -- 1,754 (1,173) 581 Intercompany charges..................... -- -- -- 4,413 (4,413) -- --------- --------- --------- ------- --------- --------- Total costs and expenses............... 2,010 3 349,943 25,400 (5,586) 371,770 --------- --------- --------- ------- -------- --------- Operating Income (Loss).................... (2,010) (3) (277,805) (741) 1,173 (229,386) Non-operating expense (income):............ -- -- (1,163) -- -- (1,163) Equity in losses of subsidiaries......... 239,991 -- -- -- (239,991) -- Interest expense (net)................... 54,628 -- (239) 592 -- 54,981 Intercompany interest expense (42,345) 42,345 -- -- -- -- (income)............................... Intercompany dividend expense -- (42,345) 42,345 -- -- -- --------- --------- --------- ------- --------- --------- (income)............................... Income (Loss) Before Income Taxes........ (254,284) (3) (268,748) (1,333) 241,164 (283,204) Income Taxes: State and foreign provision (benefit).... -- -- (812) 364 -- (448) Deferred benefit......................... -- -- (28,465) (7) -- (28,472) --------- --------- --------- ------- --------- --------- Total Income Tax (Benefit)................. -- -- (29,277) 357 -- 28,920 --------- --------- --------- ------- --------- --------- Net Income (Loss).......................... $(254,284) $ (3) $(239,471) $(1,690) $ 241,164 $(254,284) ========= ========= ========= ======= ========= =========
F-52 157 SPECTRAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 (in thousands)
GUARANTOR SUBSIDIARIES ---------------------- PARENT NONGUARANTOR COMPANY NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ----- ----------- ------------ ------------ ------------ Revenues $ -- $ -- $ 143,493 $ 23,576 $ (4,079) $ 162,993 Costs and expenses Direct Costs -- -- 52,108 6,726 -- 58,834 Depreciation and amortization 34 45 38,427 5,597 -- 44,103 Technology and field service charges -- -- 6,703 297 -- 7,000 Loss on sale of manufacturing assets and inventory -- -- 649 -- -- 649 Operating expenses -- -- 21,103 3,480 -- 24,583 Contracted service costs -- -- 1,716 -- -- 1,716 Selling and marketing expenses -- -- 4,887 167 -- 5,054 General and administrative expenses 2,102 3 11,539 1,787 -- 15,431 Research and development (net) -- -- 1,426 159 -- 1,585 Exchange loss -- -- 9 824 -- 833 Intercompany charges -- -- -- 4,079 (4,079) -- --------- --------- --------- --------- --------- --------- Total costs and expenses 2,136 48 138,567 23,116 (4,079) 159,788 --------- --------- --------- --------- --------- --------- Operating Income (Loss) (2,136) (48) 4,926 463 -- 3,205 Non-operating expense (income): Equity in losses of subsidiaries . 50,691 -- -- -- (50,691) -- Interest expense (net) 47,762 -- 696 532 -- 48,990 Intercompany interest expense (income) (57,532) 57,532 -- -- -- -- Intercompany dividend expense (income) -- (57,532) 57,532 -- -- -- --------- --------- --------- --------- --------- --------- Income (Loss) Before Income Taxes and Extraordinary Item (43,057) (48) (53,302) (69) 50,691 (45,785) Income Taxes: State and foreign provision -- -- 1,275 464 -- 1,739 Deferred benefit -- -- (4,369) (98) -- (4,467) --------- --------- --------- --------- --------- --------- Total Income Tax Provision (Benefit) -- -- (3,094) 366 -- (2,728) --------- --------- --------- --------- --------- --------- Income (loss) before 43,057 (48) (50,208) (435) 50,691 (43,057) extraordinary item Extraordinary item loss from debt extinguishment (2,699) -- -- -- -- (2,699) --------- --------- --------- --------- --------- --------- Net Income (Loss) $ (45,576) $ (48) $ (50,208) $ (435) $ 50,691 $ (45,756) ========= ========= ========= ========= ========= =========
F-53 158 SPECTRAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 (in thousands)
GUARANTOR SUBSIDIARIES ---------------------- PARENT NONGUARANTOR SPECTRAVISION COMPANY NEWCO SPECTRADYNE SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ----- ----------- ------------ ------------ ------------ Operating activities: Net cash provided by (used in) operating activities $ 13,436 $ 2 $(10,432) $ 15,137 $ 561 $ 18,704 -------- -------- -------- -------- -------- -------- Investing activities: Cost of in-process systems and capital expenditures -- -- (10,379) (5,752) -- (16,131) -------- -------- -------- -------- -------- -------- Net cash used in investing activities -- -- (10,379) (5,752) -- (16,131) -------- -------- -------- -------- -------- -------- Financing activities: Borrowings under Revolving Credit Facility 7,396 -- -- -- -- 7,396 Repayment of Revolving Credit Facility (20,811) -- -- -- -- (20,811) Borrowings under Foothill Revolving Facility -- -- 88,618 -- -- 88,618 Repayment of Foothill Revolving Facility -- -- (61,915) -- -- (61,915) Repayment of other debt and capitalized lease obligations -- -- (6,150) (7,566) -- (13,716) -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing (13,415) -- 20,553 (7,566) -- (428) activities -------- -------- -------- -------- -------- -------- Effect of exchange rate changes on cash flow (23) -- -- 560 (561) (24) Net increase (decrease) in cash and cash equivalents (2) 2 (258) 2,379 -- 2,121 Cash and cash equivalents at beginning of period 2 -- 260 1,055 -- 1,317 -------- -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 2 $ 2 $ 3,434 $ -- $ 3,438 ======== ======== ======== ======== ======== ========
F-54 159 SPECTRAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1994 (in thousands)
GUARANTOR SUBSIDIARIES ---------------------- PARENT NONGUARANTOR SPECTRAVISION COMPANY NEWCO SPECTRADYNE SUBSIDIARIES CONSOLIDATED ------- ----- ----------- ------------ ------------ Operating activities: Net cash provided by (used in) operating activities $(12,504) $ (1) $ 43,314 $ 5,356 $ 36,165 -------- -------- -------- -------- -------- Investing activities: Cost of in-process systems and capital expenditures $ -- $ -- $(52,350) $ (5,012) $(57,362) -------- -------- -------- -------- -------- Net cash used in investing activities $ -- $ -- $(52,350) $ (5,012) $(57,362) -------- -------- -------- -------- -------- Financing activities: Borrowings under Revolving Credit Facility $ 12,500 $ -- $ -- $ -- $12,500 Repayment of other debt and capitalized lease obligations -- -- (3,897) (290) (4,187) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities $ 12,500 $ -- $ (3,897) $ (290) $ 8,313 Effect of exchange rate changes on cash flow -- -- -- (84) (84) -------- -------- -------- -------- -------- Net decrease in cash and cash equivalents (4) (1) (12,933) (30) (12,968) Cash and cash equivalents at beginning of period 6 1 13,193 1,085 14,285 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ 2 $ -- $ 260 $ 1,055 $ 1,317 ======== ======== ======== ======== ========
F-55 160 SPECTRAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1993 (in thousands)
GUARANTOR SUBSIDIARIES ---------------------- PARENT NONGUARANTOR SPECTRAVISION COMPANY NEWCO SPECTRADYNE SUBSIDIARIES CONSOLIDATED ------- ----- ----------- ------------ ------------ Operating activities: Net cash provided by (used in) operating activities $ (31,102) $ (4) $ 31,138 $ 6,228 $ 6,260 Investing activities: Proceeds from sale of manufacturing assets and inventory $ -- $ -- $ 5,201 $ -- $ 5,201 Increase in raw materials -- -- (313) -- (313) Cost of in-process systems and capital expenditures -- -- (30,941) (5,156) (36,097) --------- --------- --------- --------- --------- Net cash used in investing activities $ -- $ -- $ (26,053) $ (5,156) $ (31,209) --------- --------- --------- --------- --------- Financing activities: Borrowings under Supplemental -- $ 23,000 Bank Credit Facility 23,000 -- -- Repayment of Supplemental Bank Credit Facility (31,000) -- -- -- (31,000) Repayment of Bank Credit Facility (180,120) -- -- -- (180,120) Repayment of other debt and capitalized lease obligations -- -- (1,043) (389) (1,432) Issuance of class B common stock 84,150 -- -- -- 84,150 Stock issuance costs (6,501) -- -- -- (6,501) Issuance of senior discount notes 149,981 -- -- -- 149,981 Payment of debt issue costs (8,417) -- -- -- (8,417) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities $ 31,093 $ -- $ (1,043) $ (389) $ 29,661 --------- --------- --------- --------- --------- Effect of exchange rate changes on cash flow -- -- (9) (11) (20) --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents (9) (4) 4,033 672 4,692 Cash and cash equivalents at beginning of period 15 5 9,160 413 9,593 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period $ 6 $ 1 $ 13,193 $ 1,085 $ 14,285 ========= ========= ========= ========= =========
F-56 161 NOTE 20 - FINANCIAL STATEMENTS OF ENTITIES UNDER CHAPTER 11 The condensed balance sheet as of December 31, 1995 of SpectraVision and all entities included in the Chapter 11 filings is as follows (dollars in thousands):
ASSETS Cash and cash equivalents ....................................... $ 84 Accounts receivable ............................................ 13,346 Debt issuance costs ............................................ 5,827 Prepaids and other assets ...................................... 7,304 Video systems .................................................. 222,802 Less accumulated depreciation and amortization ............................................. 132,332 --------- Total video systems .......................................... 90,470 Building and equipment ......................................... 4,300 Furniture, fixtures and other equipment ........................ 6,649 Less accumulated depreciation .................................. (4,769) --------- Total building and equipment ................................. 6,180 Land ........................................................... 2,559 Hotel contracts ................................................ 47,403 Deferred contract concession costs (net) ....................... 11,749 Investment in and advances to subsidiaries, at cost ............ 33,202 --------- TOTAL ASSETS ................................................. $ 218,124 ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable ............................................. $ 7,723 Other accrued liabilities .................................... 10,881 Deferred income taxes ........................................ 5,467 Foothill Revolving Facility .................................. 26,703 Capital lease obligations .................................... 1,617 --------- 52,391 --------- Liabilities subject to settlement under reorganization ....... 579,587 Intercompany payable ......................................... 4,947 Total liabilities .......................................... 636,925 Contingent value rights subject to settlement under reorganization 20,000 Stockholders' deficit: Common stock ................................................. 24 Paid-in capital .............................................. 393,092 Retained deficit ............................................. (831,917) --------- Total stockholders' deficit ................................ (438,801) --------- TOTAL LIABILITIES AND STOCKHOLDERS' .............................. $ 218,124 ========= EQUITY (DEFICIT) ...............................................
F-57 162 The condensed statement of operations for the year ended December 31, 1995 of SpectraVision and all entities included in the Chapter 11 filings is as follows (dollars in thousands): Revenues ........................................ $ 104,063 Costs and expenses: Direct costs ................................... 44,779 Depreciation and amortization .................. 34,676 Operating expenses ............................. 12,771 Contracted service costs ....................... 29,686 Selling and marketing expenses ................. 4,294 General and administrative expenses ............ 15,646 Research and development (net) ................. 1,769 Exchange loss .................................. 1,051 --------- Total costs and expenses ..................... 144,672 --------- Operating income (loss) .......................... (40,609) Non-operating income ............................. (508) Interest expense (contractual interest expense of $67,596 in 1995)(net) .......................... 27,873 --------- Loss before reorganization items, income taxes and extraordinary item ......................... (67,974) ................................................. --------- Reorganization items ............................. 7,593 --------- Loss before income taxes and extraordinary items.. (75,567) Income taxes: State and foreign provision (benefit) .......... 1 Deferred benefit ............................... (966) --------- Total income tax benefit ..................... (965) Loss before extraordinary item ................... (74,602) Extraordinary item ............................... 915 --------- Net loss ......................................... $ (75,517) =========
F-58 163 SPECTRAVISION, INC (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, December 31, 1996 1995 -------- ------------- ASSETS (unaudited) Cash and Cash Equivalents ................................................ $ 4,918 $ 3,438 Accounts Receivable (net) ................................................ 13,763 16,428 Debt Issuance Costs (net) ................................................ 5,662 5,827 Prepaids and Other Assets ................................................ 6,323 8,125 Video Systems: ........................................................... In Process Video Systems ............................................... 10,823 11,329 Installed Video Systems ................................................ 258,573 247,987 --------- --------- Subtotal ............................................................. 269,396 259,316 Less Accumulated Depreciation and Amortization ........................... (170,815) (155,604) --------- --------- Total Video Systems ...................................................... 98,581 103,712 Building and Equipment Building .......................................... 4,300 4,300 Furniture, Fixtures and Other Equipment .................................. 8,882 8,002 --------- --------- Subtotal ............................................................... 13,182 12,302 Less Accumulated Depreciation ............................................ (6,881) (5,921) --------- --------- Total Building and Equipment ............................................. 6,301 6,381 Land ..................................................................... 2,559 2,559 Hotel Contracts (net) .................................................... 46,104 47,403 Deferred Contract Concession Costs (net) ................................. 10,426 11,749 --------- --------- TOTAL ASSETS ........................................................... $ 194,637 $ 205,622 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT ...................................... Liabilities ................................................................ Accounts Payable ......................................................... $ 12,289 $ 8,128 Accrued Liabilities ...................................................... Interest ............................................................... 328 -- Compensation ........................................................... 3,914 2,112 Other .................................................................. 7,655 9,086 Income Taxes ........................................................... 358 183 Deferred Income Taxes .................................................. 4,920 5,467 Debt ..................................................................... Foothill Revolving Credit Facility ..................................... 37,919 26,703 Capitalized Lease Obligations .......................................... 3,379 1,964 --------- --------- Total Debt ............................................................... 41,298 28,667 Liabilities Subject to Settlement Under Reorganization ................... 576,040 579,587 --------- --------- Total Liabilities .......................................................... 646,802 633,230 Contingent Value Right Subject to Settlement Under Reorganization .......... 20,000 20,000 Stockholders' Deficit: ..................................................... Class A Common Stock--$0.001 par value, authorized 6,000,000 shares, issued and outstanding, 4,593,526 shares in 1996 and 1995 ............. 5 5 Class B Common Stock--$0.001 par value, authorized 144,000,000 shares, issued and outstanding, 19,390,379 shares in 1996 and 1995 ............. 19 19 Additional Paid in Capital ............................................... 392,185 392,185 Retained Deficit ......................................................... (863,075) (840,289) Foreign Currency Translation Adjustment .................................. (1,299) 472 --------- --------- Total Stockholders' Deficit ................................................ (472,165) (447,608) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................................ $ 194,637 $ 205,622 ========= =========
See accompanying Notes to the Condensed Consolidated Financial Statements. F-59 164 SPECTRAVISION, INC (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, --------------------------- 1996 1995 ----------- ----------- Revenues: Pay-Per-View..................................................................................... $ 50,382 $ 55,110 Free-To-Guest.................................................................................... 5,489 6,876 Other............................................................................................ 2,141 3,222 ----------- ----------- Total Revenues................................................................................. 58,012 65,208 Direct Costs: Pay-Per-View..................................................................................... 20,174 19,156 Free-To-Guest.................................................................................... 5,882 5,673 Other............................................................................................ 1,032 1,055 ----------- ----------- Total Direct Costs............................................................................. 27,088 25,884 Depreciation and Amortization...................................................................... 20,519 18,920 Operating Expenses................................................................................. 20,016 20,992 Selling, General and Administrative Expense........................................................ 7,190 10,211 Research and Development (net)..................................................................... 988 1,183 Exchange Gain (Loss)............................................................................... (4) 254 ----------- ----------- Total Costs and Expenses........................................................................... 75,797 77,444 ----------- ----------- Operating Loss..................................................................................... (17,785) (12,236) ----------- ----------- Non-Operating Loss (Income)........................................................................ 234 (139) Interest Expense, net (Contractual interest expense of $34,975 and $30,576 for the six months ended June 30, 1996 and 1995, respectively)........................................... 3,062 26,919 ----------- ----------- Loss Before Reorganization Items and Income Taxes.................................................. (21,081) (39,016) Reorganization Items............................................................................... 1,827 177 ----------- ----------- Loss Before Income Taxes and Extraordinary Item.................................................... (22,908) (39,193) Income Taxes: State and Foreign Provision...................................................................... 495 20 Deferred Benefit................................................................................. (617) (484) ----------- ----------- Total Income Tax Benefit....................................................................... (122) (464) ----------- ----------- Loss Before Extraordinary Item..................................................................... (22,786) (38,729) Extraordinary Item (Loss from Debt Extinguishment)................................................. -- (915) ----------- ----------- Net Loss........................................................................................... $ (22,786) $ (39,644) =========== =========== Loss Per Common Share.............................................................................. $ (0.95) $ (1.65) =========== =========== Average Common Shares Outstanding.................................................................. 23,983,905 23,983,905
See accompanying Notes to the Condensed Consolidated Financial Statements. F-60 165 SPECTRAVISION, INC (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 1995 --------- --------- Operating Activities: Net Loss $(22,786) $(39,644) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 20,519 18,920 Other non-cash items: Conversion of non-cash interest to secondary notes -- 18,494 Deferred income tax benefit (617) (484) Increase in pre-petition liabilities (899) -- Extraordinary loss from debt extinguishment -- 915 Write-off of assets 373 -- Loss on sale of fixed assets 270 -- Accretion of discount on senior notes -- 8,609 Amortization of debt issuance cost 165 553 Exchange loss (4) 254 Other items, net (469) (651) Increase (decrease) in: Accounts Payable 4,161 13,639 Accrued interest 328 (993) Other accrued liabilities 371 1,239 Income taxes payable 175 10 Decrease (increase) in: Accounts receivable 2,665 (623) Prepaids and other assets 1,570 335 Income tax receivable 232 -- -------- -------- Net cash provided by operating activities 6,054 20,573 Investing Activities: Cost of in-process systems and capital expenditures (10,368) (12,216) Financing Activities: Borrowing under Foothill revolving facility 67,696 25,052 Repayment of Foothill revolving facility (56,480) (9,644) Repayment of revolving facility -- (19,896) Repayment of Canadian bank credit facility -- (7,350) Borrowing under revolving credit facility -- 7,396 Repayment of other debt and capitalized leases (3,651) (3,225) -------- -------- Net cash provided by (used in) financing activities 7,565 (7,667) Effect of exchange rate changes on cash (1,771) (55) -------- -------- Net Increase in cash and cash equivalents 1,480 635 Cash and cash equivalents at beginning of period 3,438 1,317 -------- -------- Cash and cash equivalents at end of period $ 4,918 $ 1,952 ======== ========
See accompanying Notes to the Condensed Consolidated Financial Statements. F-61 166 SPECTRAVISION, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 1. General These condensed consolidated financial statements should be read in the context of the financial statements and notes thereto filed with the Securities and Exchange Commission in the 1995 Annual Report on Form 10-K of SpectraVision, Inc. ("SpectraVision" or the "Company"). The accompanying unaudited condensed consolidated financial statements include SpectraVision and all of its subsidiaries. Intercompany transactions have been eliminated. Certain prior period amounts have been reclassified to conform with the current period presentation. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, except as described in note 3, necessary to present fairly the Company's financial position and results of its operations for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations for the entire year. 2. Organization and Basis of Presentation The Company is a leading provider of in-room entertainment services to the lodging industry. Founded in 1971, the Company originally developed and patented a system known as "SpectraVision", which provides in-room television viewing of recently released major and other motion pictures on a pay-per-view ("PPV") basis. Unless the context otherwise requires, all references herein to the Company are not intended to imply exact corporate relationships and include SpectraVision, SPI Newco, Inc. ("Newco") its direct subsidiary, Spectradyne, Inc. ("Spectradyne") the direct subsidiary of Newco, and the foreign subsidiaries. 3. Bankruptcy On June 8, 1995 (the "Petition Date"), SpectraVision, together with Newco, Spectradyne, Spectradyne International, Inc., and Kalevision Systems, Inc. - USA, filed voluntary petitions for reorganization under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") and are currently operating their respective businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. The Canadian and Far East Subsidiaries are not a part of the Bankruptcy Proceedings. On June 23, 1995, a single unsecured creditors' committee was appointed by the U.S. Trustee for the District of Delaware pursuant to Section 1102 of the Bankruptcy Code (the "Creditors' Committee"). The Creditors' Committee has the right to review and object to certain business transactions and is expected to participate in the negotiation of the Company's plan of reorganization. As of the Petition Date, actions to collect pre-petition indebtedness have been automatically stayed pursuant to Section 362 of the Bankruptcy Code (subject to order of the Bankruptcy Court) and, in certain circumstances, other pre-petition contractual obligations may not be enforced against the Company. In addition, the Company may reject pre-petition executory contracts and lease obligations, and parties F-62 167 affected by these rejections may file claims with the Bankruptcy Court in accordance with the reorganization process. Substantially all liabilities as of the Petition Date are subject to being paid or compromised under a plan of reorganization to be voted upon by all impaired classes of creditors and equity security holders and approved by the Bankruptcy Court. As of December 1995, the Company employed Salomon Brothers Inc. as investment bankers and financial advisors. The agreement with Salomon Brothers Inc. calls for a monthly advisory fee and an additional fee ("Transaction Fee") upon the consummation of a transaction resulting in the sale of the Company. The Transaction Fee will be a percentage of the total purchase price. In January 1996 the Company solicited bids from third parties for financial restructuring proposals which would allow the Company to emerge from bankruptcy. On April 19, 1996, the Company announced the signing of an agreement with Ascent Entertainment Group, Inc. ("Ascent") in which Ascent would acquire the assets and certain of the liabilities of the Company. Ascent intends to combine its 85 percent-owned subsidiary, On Command Video Corporation, ("OCV") with the Company's assets and certain of its liabilities to form a new company ("Newco") which will be 72.5 percent-owned by Ascent and the current minority stockholders of OCV. The Company's bankruptcy estate will receive 27.5 percent of Newco's stock, which will be distributed through a bankruptcy plan to the Company's creditors to resolve claims of approximately $600 million. Newco will also issue warrants to be distributed to OCV stockholders and certain other persons to purchase 13 percent of Newco's common stock and warrants to the Company's estate to purchase another 7 percent of the stock. The transaction is subject to Bankruptcy Court approval and certain other conditions. If the transaction is consummated, shares of Newco are expected to be publicly traded upon completion of the transaction, which is expected to be completed by the end of the third quarter of 1996. The Company filed with the United States Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") in early May, 1996. No comments were received from any agency of the United States having jurisdiction under the HSR Act during the time limits set out in the HSR Act. On June 21, 1996, the Company filed its proposed Plan of Reorganization and Disclosure Statement with the Bankruptcy Court. The Plan provides for the implementation of the transaction with Ascent and the distribution of the Newco stock and Newco warrants to the Company's creditors. The Plan does not provide for any distribution to the Company's equity security holders. The Court must still conduct a hearing of the adequacy of the Disclosure Statement at which time the Plan of Reorganization and Disclosure Statement and certain other supporting materials will be distributed to creditors and certain other parties in interest. Thereafter certain of the creditors will be allowed an opportunity to vote to accept or reject the Plan. After the balloting process is completed, the Court will conduct a hearing to determine whether the Plan should be confirmed. No hearing has been set for the Court to consider confirmation of the Plan, but the Company believes the closing on the transaction with Ascent can occur by the end of the third quarter of 1996. The Company's cash on hand and cash flow from operations in 1996 will not be sufficient to satisfy its current demands for cash. There can be no assurance that the amount the Company can borrow under its revolving line of credit will be sufficient to meet its cash requirements for 1996. If the Company cannot borrow or otherwise obtain the cash necessary to operate throughout 1996 or the Company is unable to obtain confirmation of a plan of reorganization, its creditors, equity security holders or the United States Trustee may seek a liquidation of the Company by conversion to a Chapter 7 bankruptcy proceeding. F-63 168 The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filings and circumstances relating to these events, such realization of assets and liquidation of liabilities is subject to significant uncertainty. In addition, the Company's independent public accountants included in their report on the Company's consolidated financial statements as of December 31, 1995, an explanatory paragraph that describes the uncertainty about the Company's ability to continue as a going concern. As a Chapter 11 debtor, the Company may sell (subject, in certain circumstances, to Bankruptcy Court approval) or otherwise dispose of assets, and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements. The amounts reported in the condensed consolidated financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might result as a consequence of actions taken pursuant to a plan of reorganization. If the Company is unable to obtain confirmation of a plan of reorganization, its creditors, equity security holders or the United States Trustee may seek a liquidation of the Company by conversion to a Chapter 7 bankruptcy proceeding. In that event, it is likely that additional liabilities and claims would be asserted which are not presently reflected in the condensed consolidated financial statements. In the event of a liquidation, the amounts reflected in the condensed consolidated financial statements would be subject to adverse adjustments in amounts which, while not presently determinable, could be material. Financial accounting and reporting during a Chapter 11 proceeding is prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly, certain pre-petition obligations, which may be impaired, have been classified as obligations subject to Chapter 11 reorganization proceedings and include the following estimated amounts at June 30, 1996 (dollars in thousands): Debt Instruments: 11.5% Senior Discount Notes due 2000 ........................... $180,904 11.65% Senior Subordinated Reset Notes due 2001 ................ 313,262 -------- Total debt instruments 494,166 Accrued Expenses: Interest ....................................................... 2,411 Liabilities .................................................... 3,662 Compensation ................................................... 885 -------- Subtotal ..................................................... 6,958 Capital lease obligations ........................................ 20,437 Accounts payable ................................................. 11,952 EDS and EDS affiliated ........................................... 42,527 -------- Total liabilities subject to settlement under reorganization ... $576,040 ======== Contingent value rights subject to settlement under reorganization $ 20,000 ========
The total effect of the bankruptcy reorganization items was to increase the net loss for the six months ended June 30, 1996 and 1995 by approximately $1.8 million or $0.08 per common share and $.2 million or $0.01 per common share, respectively. The bankruptcy reorganization items consist of normal bankruptcy, professional and miscellaneous charges. F-64 169 4. Debt Foothill Revolving Facility: On June 9, 1995, Spectradyne entered into a loan and security agreement with Foothill Capital Corporation to provide debtor-in-possession financing (the "Foothill Loan"). The Foothill Loan allows for revolving advances up to a maximum amount of $40 million and bears interest payable monthly at prime plus 1.75% with a floor of 8.5%. Due to collateral restrictions, the Company was only allowed to borrow up to $38.1 million at June 30, 1996. The Foothill Loan matures June 15, 1997. The Foothill Loan is secured by all of the assets of Spectradyne and certain subsidiaries, all of the outstanding stock of the Company's subsidiaries and the guarantees of SpectraVision and certain subsidiaries. The Foothill Loan contains various and customary financial and operating covenants including limitations on additional indebtedness and limitations on capital expenditures. At June 30, 1996 the Company was not in compliance with the financial covenants relating to its operating cash flow and its fixed charges to cash flow ratio requirements. On July 24, 1996 the Company obtained a waiver from Foothill Capital Corporation for these covenant violations. However, the Company does not expect that it will be in compliance with the financial covenants relating to its operating cash flow and its fixed charges to cash flow ratios for the remainder of 1996. Accordingly, in October, Foothill Capital Corporation could elect to terminate the revolving line of credit for noncompliance with the Financial Covenants. Foothill Capital Corporation could then demand immediate payment of all outstanding balances and foreclose on the Company's assets securing the revolving line of credit if payment is not made. In this event, if the Company cannot obtain alternative financing, it may be forced to liquidate in a Chapter 7 bankruptcy proceeding. Pursuant to SOP 90-7, the Company has discontinued, effective June 8, 1995, the accrual of interest on pre-petition debt that is unsecured or estimated to be undersecured. 5. Contingencies On October 20, 1994, a purported class action complaint was filed in the United States District Court alleging misrepresentations and omissions concurrent with and following the Company's 1993 offerings of Class B Common Stock and Senior Discount Notes. The plaintiff seeks unspecified damages, prejudgment interest, and fees and costs of the plaintiff. The Company believes that it has meritorious defenses to the claims and it intends to vigorously defend itself. Proceedings in this lawsuit with respect to the Company have been stayed as a result of the Chapter 11 filings. The Company and its subsidiaries and related companies are potential and named defendants in several other lawsuits and claims arising in the ordinary course of business. While the outcome of such claims, lawsuits or other proceedings against the Company cannot be predicted with certainty, management expects that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the operating results or financial condition of the Company. Proceedings in connection with any lawsuit against the Company have been stayed as a result of the Chapter 11 filings. F-65 170 6. Balance Sheet of Entities under Chapter 11 The condensed balance sheet of SpectraVision and all entities included in the Chapter 11 filings is as follows (dollars in thousands):
JUNE 30, 1996 ----------- ASSETS (unaudited) Cash and Cash Equivalents ................................................. $ 46 Accounts Receivable (net) ................................................. 10,858 Debt Issuance Costs (net) ................................................. 5,662 Prepaids and Other Assets ................................................. 5,344 Video Systems ............................................................. In Process Video Systems ................................................ 8,099 Installed Video Systems ................................................. 223,469 --------- Subtotal .............................................................. 231,568 Less Accumulated Depreciation and Amortization ............................ (146,314) --------- Total Video Systems ....................................................... 85,254 Building and Equipment Building ........................................... 4,300 Furniture, Fixtures and Other Equipment ................................... 7,480 Subtotal ................................................................ 11,780 Less Accumulated Depreciation ............................................. (5,649) --------- Total Building and Equipment .............................................. 6,131 Land ...................................................................... 2,559 Hotel Contracts (net) ..................................................... 46,104 Deferred Contract Concession Costs (net) .................................. 10,427 Investment In and Advances to Subsidiaries ................................ 35,191 --------- TOTAL ASSETS $ 207,576 ========= LIABILITIES AND STOCKHOLDERS' DEFICIT: ...................................... Liabilities ................................................................. Accounts Payable .......................................................... $ 12,052 Accrued Liabilities ....................................................... 9,669 Deferred Income Taxes ..................................................... 4,850 Debt ...................................................................... Foothill Revolving Credit Facility ...................................... 37,919 Capitalized Lease Obligations ........................................... 3,002 --------- Total Debt ................................................................ 40,921 Liabilities Subject to Settlement Under Reorganization .................... 576,040 Intercompany Payables ..................................................... 5,183 --------- Total Liabilities ........................................................... 648,715 Contingent Value Right Subject to Settlement Under Reorganization ........... 20,000 Stockholders' Deficit ....................................................... Class A Common Stock ...................................................... Class B Common Stock ...................................................... Additional Paid in Capital ................................................ 392,185 Retained Deficit .......................................................... (852,633) Foreign Currency Translation Adjustment ................................... (715) --------- Total Stockholders' Deficit ............................................. (461,139) --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................................. $ 207,576 =========
F-66 171 ON COMMAND CORPORATION AND ON COMMAND VIDEO CORPORATION Annexes to the Information Statement/Prospectus I. Agreement and Plan of Merger* II. Acquisition Agreement* III. Warrant Agreement* IV. Registration Rights Agreement* V. Opinion of Allen & Company* VI. Section 262 of the Delaware General Corporation Law* ---------- * Previously filed as an exhibit to the Registration Statement of which this Information Statement is a part. 172 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Certificate of Incorporation of On Command Corporation provides for the indemnification by On Command Corporation of each director and officer of On Command Corporation to the fullest extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended. Section 145 of the Delaware General Corporation Law provides in relevant part that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. In addition, Section 145 provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such a person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Delaware law further provides that nothing in the above-described provisions shall be deemed exclusive of any other rights to indemnification or advancement of expenses to which any person may be entitled under any bylaw, agreement, vote of stockholders or disinterested director or otherwise. Article Tenth of the Certificate of Incorporation of On Command Corporation provides that a Director of On Command Corporation shall not be personally liable to On Command Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a Director. Article Eighth of the Bylaws provides that a director, officer, employee, or other agent of the corporation shall be indemnified against actions by reason of the fact that the person is or was an agent of the corporation. Section 102(b)(7) of the Delaware General Corporation Law provides that a provision so limiting the personal liability of a director shall not eliminate or limit the liability of a director, for, among other things: breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; unlawful payment of dividends; and transactions from which the director derived an improper personal benefit. II-1 173 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION 2.1 Agreement and Plan of Merger, dated as of August 13, 1996, by and among On Command Corporation, On Command Merger Corporation, and On Command Video Corporation* 2.2 Acquisition Agreement, dated as of August 13, 1996, by and among On Command Corporation, Ascent Entertainment Group, Inc., the Official Creditors' Committee for SpectraVision, Inc. and certain of its subsidiaries, SpectraVision, Inc., Spectradyne, Inc. and the other Debtors named therein* 3.1 Certificate of Amended and Restated Certificate of Incorporation of On Command Corporation* 3.2 Form of Certificate of Merger of On Command Merger Corporation with and into On Command Video Corporation* 3.3 Bylaws of On Command Corporation* 4.1 Registration Rights Agreement by and among On Command Corporation and the other parties named therein* 4.2 Warrant Agreement by and among On Command Corporation and the other parties named therein* 5.1 Opinion of Latham & Watkins regarding the legality of the securities being issued 8.1 Opinion of Latham & Watkins relating to certain tax matters 10.1 Master Services Agreement, dated as of August 3, 1993, by and between Marriott International, Inc., Marriott Hotel Services, Inc. and On Command Video Corporation (confidential treatment requested) (Incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1 (File No. 33-98502) of Ascent Entertainment Group, Inc.) 10.2 Amended and Restated SpectraVision and Interactive Services National Agreement, dated August 31, 1993, by and between Hyatt Corporation and Spectradyne, Inc. (confidential treatment requested) 10.3 Amended and Restated SpectraMax National Agreement, dated August 31, 1993, by and between Hyatt Corporation and Spectradyne Inc. (confidential treatment requested) 10.4 Hilton Hotels Corporation-ON COMMAND VIDEO Agreement, dated April 27, 1993, by and between Hilton Hotels Corporation and On Command Video Corporation (confidential treatment requested) 10.5 EDS Agreement, dated August 5, 1996, among Electronic Data Systems Corporation, EDS Technical Products Corporation, Ascent Entertainment Group, Inc. and On Command Video Corporation* 10.6 Form of Employment Agreement between On Command Corporation and Robert Kavner* 10.7(a) Purchase and Option Agreement, dated as of July 7, 1993, between On Command Video Corporation and Hilton Hotels Corporation* 10.7(b) Letter Agreement, dated as of December 8, 1995, among Ascent Entertainment Group, Inc., COMSAT Video Enterprises, Inc., On Command Video Corporation, COMSAT Corporation and Hilton Hotels Corporation* 10.7(c) Letter Agreement, dated as of August , 1996, among Ascent Entertainment Group, Inc., Ascent Network Services, Inc. (formerly COMSAT Video Enterprises, Inc.), On Command Video Corporation, COMSAT Corporation and Hilton Hotels Corporation 10.8 Form of Employment Agreement between On Command Corporation and Brian A.C. Steel 10.9 Employment and Consulting Agreement of Robert Snyder, dated November 20, 1991, between Robert Snyder and On Command Video Corporation 11.1 Statement regarding computation of per share earnings* 21.1 Subsidiaries of On Command Corporation* 23.1 Consent of Latham & Watkins (included in their opinion filed as Exhibit 5.1) 23.2 Deloitte & Touche LLP Consent and Report on Schedule 23.3 Consent of Ernst & Young LLP, Independent Auditors 23.4 Consent of KPMG Peat Marwick LLP 24.1 Power of Attorney* 99.1 Opinion of Allen & Company (included as Annex V to the Information Statement/Prospectus included herein)* 99.2 Section 262 of the Delaware General Corporation Law (included as Annex VI) to the Information Statement/Prospectus included herein)* 99.3 Notice of Consent of Stockholders in Lieu of Meeting (included immediately following the cover page of this Registration Statement)*
- ------------------------------------ * Previously filed. (b) Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts (OCV)* Schedule II--Valuation and Qualifying Accounts (SpectraVision)* II-2 174 ITEM 22. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) to file during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through the use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by any other items of the applicable form. (c) The registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (e) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (f) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 175 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Denver, State of Colorado, on October 4, 1996. ON COMMAND CORPORATION By: /s/ Arthur M. Aaron --------------------------- Name: Arthur M. Aaron Title: Vice President, Acting General Counsel and Secretary
SIGNATURE TITLE DATE /s/ * - -------------------------------------- Chief Executive Officer October 4, 1996 Robert M. Kavener (Principal Executive Officer) /s/ Brian A.C. Steel - -------------------------------------- Executive Vice President, Chief October 4, 1996 Brian A.C. Steel Financial Officer and Chief Operating Officer (Principal Financial Officer) /s/ * - -------------------------------------- Director October 4, 1996 James A. Cronin, III /s/ * - -------------------------------------- Director October 4, 1996 Charles Lyons /s/ * Director October 4, 1996 - -------------------------------------- Robert M. Kavner /s/ Edward B. Newmann - -------------------------------------- Vice President--Finance October 4, 1996 Edward B. Newmann (Principal Accounting Officer)
* By /s/ Arthur M. Aaron --------------------- Arthur M. Aaron Attorney-in-Fact II-4 176 SPECTRAVISION, INC. SCHEDULE II SPECTRAVISION, INC. VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED TO BALANCE AT BEGINNING COSTS AND CHARGED TO AT END DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD - --------------------------- ------------ ----------- ----------- ----------- ----------- From January 1, 1995 to December 31, 1995 Deferred tax asset valuation allowance... $113,375,000 $26,057,000 $ -- $ -- $139,432,000 Bad debt allowance....... 1,072,268 739,732 -- -- 1,812,000 From January 1, 1994 to December 31, 1994 Deferred tax asset valuation allowance... $ 38,240,000 $ 75,135 $ -- $ -- $113,375,000 Bad debt allowance....... 967,000 285,197 -- 179,929 1,072,268 From January 1, 1993 to December 31, 1993 Deferred tax asset valuation allowance... $ 14,584,000 $23,656,000 $ -- $ -- $38,240,000 Bad debt allowance....... 524,000 900,000 -- 457,000 967,000
S-1 177 OCV SCHEDULE II ON COMMAND VIDEO CORPORATION VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED TO BALANCE AT BEGINNING COSTS AND CHARGED TO AT END DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD - ------------------------------------------ ------------ ---------- ---------- ---------- --------- From January 1, 1995 to December 31, 1995 Bad debt allowance...................... $100,000 $ -- $ -- $ -- $ 100,000 From January 1, 1994 to December 31, 1994 Bad debt allowance...................... $ 50,000 $ 50,000 $ -- $ -- $ 100,000 From January 1, 1993 to December 31, 1993 Bad debt allowance...................... $ 25,000 $ 25,000 $ -- $ -- $ 50,000
S-2 EX-5.1 2 OPINION OF LATHAM & WATKINS:LEGALITY OF SECURITIES 1 EXHIBIT 5.1 [L&W NY LETTERHEAD] October 4, 1996 On Command Corporation 3301 Olcott Street Santa Clara, California 95054 Re: On Command Corporation Registration Statement on Form S-4 (File No. 333-10407) 31,425,000 Shares of Common Stock and 1,425,000 Warrants to Purchase Common Stock Ladies and Gentlemen: In connection with the registration by On Command Corporation, a Delaware corporation (the "Company), of 31,425,000 shares (the "Shares") of common stock, par value $0.01 per share (the "Common Stock"), and 1,425,000 warrants to purchase Common Stock (the "Warrants") under the Securities Act of 1933, as amended (the "Act"), on Form S-4, filed with the Securities and Exchange Commission (the "Commission") on August 16, 1996 (File No. 33-10407), as amended by Amendment No. 1 filed with the Commission on September 4, 1996, Amendment No. 2 filed with the Commission on September 26, 1996 and Amendment No. 3 filed with the Commission on October 4, 1996 (the "Registration Statement"), you have requested our opinion with respect to the matters set forth below. In our capacity as your counsel in connection with such registration, we are familiar with the proceedings taken by the Company in connection with the authorization and issuance of the Shares and the Warrants. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals or copies certified or otherwise identified to our satisfaction of such documents, corporate records and instruments, as we have deemed necessary or appropriate for purposes of this opinion. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to authentic original documents of all documents submitted to us as copies. We are opining herein as to the effect on the subject transaction only of the General Corporation Law of the State of Delaware, and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or, in the case of Delaware, any other laws, or as to any matters of municipal law or the laws of any other local agencies within the state. 2 On Command Corporation October 4, 1996 Page 2 Subject to the foregoing, it is our opinion that the Shares and the Warrants have been duly authorized, and, upon issuance and delivery therefor in the manner contemplated by the Registration Statement, will be validly issued, fully paid and nonassessable. We consent to your filing this opinion as an exhibit to the Registration Statement and to the reference to our firm contained under the heading "Legal Matters." Very truly yours, EX-8.1 3 OPINION OF LATHAM & WATKINS: TAX MATTERS 1 EXHIBIT 8.1 [LATHAM & WATKINS LETTERHEAD] October 4, 1996 On Command Video Corporation 3301 Olcott Street Santa Clara, California 95054 Re: Merger of On Command Video Corporation and On Command Merger Corporation Ladies and Gentlemen: You have requested our opinion with respect to certain United States federal income tax consequences of the proposed merger pursuant to the Agreement and Plan of Merger (the "Agreement") dated as of August 13, 1996 by and among On Command Video Corporation, a Delaware corporation ("OCV"), On Command Merger Corporation, a Delaware corporation ("Merger Subsidiary"), and On Command Corporation, a Delaware corporation ("Buyer"), and the transactions contemplated in connection therewith described in the Registration Statement of Buyer (forming part of the Registration Statement on Form S-4 under the Securities Act of 1933, as amended, as filed by Buyer with the Securities and Exchange Commission) dated August 16, 1996, as amended (the "Registration Statement"). Transactions contemplated in connection with the proposed merger include the merger of OCV with and into Merger Subsidiary (the "Merger") pursuant to the terms of the Agreement. Specifically, you have requested our opinion as to whether, for United States federal income tax purposes, the Merger qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). We hereby 2 On Command Corporation October 4, 1996 Page 2 consent to the use of our name under the caption "Certain Tax Consequences - Certain U.S. Federal Income Tax Consequences" and "Legal Matters" in the Registration Statement.(1) In rendering our opinion, we have examined and relied upon the accuracy and completeness of the facts, information and representations contained in the Agreement and the Registration Statement. In connection with this opinion, OCV and Buyer have made representations with respect to certain factual matters set forth in the Tax Representation Letter of OCV and Buyer, dated October 4, 1996. The opinions expressed herein are conditioned on the initial and continuing accuracy of the facts, information and representations set forth in the documents referred to above. In our examination, we have assumed the genuineness of all signatures, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such documents. In rendering our opinion, we have considered the applicable provisions of the Code, the Treasury Regulations promulgated thereunder, pertinent judicial authorities and published rulings and other pronouncements of the Internal Revenue Service, all as of the date hereof. Based solely on the foregoing and provided that the Merger is consummated in the manner set forth in the Registration Statement, we are of the opinion that, under present law, for United States federal income tax purposes, (i) the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code and (ii) OCV, Buyer and Merger Subsidiary will each be a party to the reorganization within the meaning of Section 368(b) of the Code. Except as set forth above, we express no other opinion as to the tax consequences of the Merger and related transactions to any party under United States federal, state, local or foreign laws. We are furnishing this opinion to you solely in connection with the Merger, and this opinion is not to be relied upon by any other person for any other purpose. Our opinion is not binding on the Internal Revenue Service or the courts, and there is no assurance that the Internal Revenue Service will not assert a contrary position. Furthermore, no assurance can be given that future legislative, judicial or administrative changes, on either a prospective or retroactive basis, would not adversely affect the accuracy of the conclusions herein. If all the transactions described in the Agreement are not consummated in accordance with the terms of such Agreement or if all of the representations, - -------- 1 For purposes of this opinion, all capitalized terms, unless otherwise specified, have the meanings assigned to them in the Registration Statement. 3 On Command Corporation October 4, 1996 Page 3 warranties, statements and assumptions upon which we relied are not true and accurate at all relevant times, our opinion might be adversely affected and may not be relied upon. Very truly yours, /s/ Latham & Watkins EX-10.2 4 AMENDED AND RESTATED SPECTRAVISION NATIONAL AGREE. 1 EXHIBIT 10.2 NOTE: THIS DOCUMENT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933. PORTIONS OF THIS DOCUMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN REDACTED AND ARE MARKED HEREIN BY "***". SUCH REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE COMMISSION PURSUANT TO THE CONFIDENTIAL TREATMENT REQUEST. AMENDED AND RESTATED SPECTRAVISION AND INTERACTIVE SERVICES NATIONAL AGREEMENT THIS AMENDED AND RESTATED NATIONAL AGREEMENT (hereinafter referred to as the "National Agreement"), made this 31st day of August, 1993, but effective as of July 1, 1993, by and between Hyatt Corporation, a Delaware corporation, on its own behalf and on behalf of its subsidiaries and affiliates (hereinafter collectively called "Hyatt") and Spectradyne, Inc., a Texas corporation (hereinafter called "Spectradyne"). W I T N E S S E T H: WHEREAS, Hyatt, located at 200 West Madison Street, Chicago, Illinois 60606, operates the Hyatt hotels set forth on Exhibit A attached hereto and made a part hereof; WHEREAS, Spectradyne, located at 1501 North Plano Road, P. 0. Box 830775, Richardson, Texas 75083-0075, provides its Spectravision and Interactive Services, as hereinafter described, to certain of Hyatt hotels pursuant to that certain Spectravision and Interactive Services National Agreement dated July 26, 1989, but effective July 1, 1989 (the "Original National Agreement") and under separate license agreements and interactive services riders (the "Original Individual Agreements") made pursuant thereto (all such hotels and all other Hyatt hotels who utilize Spectradyne in the future are hereinafter individually called a "Hotel" and collectively called the "Hotels"); WHEREAS, the parties wish to amend and restate all of their rights and obligations under the original National Agreement pursuant to this National Agreement; NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby accepted and acknowledged the parties hereto agree as follows: 1. National Agreement. It is understood and agreed between the parties that the provisions of this National Agreement shall be included in and considered a part of the Individual License Agreements (as further defined in Section 5(a) of this National Agreement) as if 2 the provisions of this National Agreement were incorporated therein. In the event any of the provisions of any Individual License Agreements are inconsistent with any of the provisions of this National Agreement, the provisions of this National Agreement shall prevail. 2. Term. (a) This National Agreement shall be for a seven (7) year term commencing on July 1, 1993 ("Commencement Date") and expiring on June 30, 2000 ("Expiration Date") unless terminated earlier in accordance with the provisions of this National Agreement. (b) The provisions of this National Agreement notwithstanding, any Individual License Agreement may be suspended, at Hyatt's option, upon thirty (30) days prior written notice, in the event a Hotel or any material portion thereof is closed for renovation. In the event Hyatt chooses to suspend the Individual License Agreement, the applicable fees shall abate during such renovations and shall resume on the date when such Hotel or sections thereof reopen to the public. (c) The provisions of this National Agreement notwithstanding, either party may cancel any Individual License Agreement in the event Hyatt ceases to manage a Hotel as of the date of such cessation. The cancelling party shall provide the non-cancelling party with at least thirty (30) days prior written notice of such cancellation. (d) This National Agreement and the Individual License Agreements are subject to early termination in accordance with the provisions of section 18 herein and section 16 of the Individual License Agreements. (e) Except for the reasons that constitute a force majeure as set forth in Section 18 of this National Agreement, which would not be grounds for termination hereunder, this National Agreement may be cancelled by Hyatt upon the early termination of that certain Amended and Restated Spectramax National Agreement of even date herewith, between the parties hereto (the "Spectramax National Agreement"). 3. Spectravision and Interactive Services. (a) Spectravision is a registered trademark of Spectradyne. Spectravision Services are the services of telecasting, in closed circuit, of pay-per-view movies over the hotel master antenna television system ("MATV") to television receivers located in Hotel guest rooms by means of transmission equipment manufactured, acquired, installed and maintained by Spectradyne or on Spectradyne's behalf. Interactive Services are software driven services which interface with Hotel property management systems and shall include, at a minimum, (i) interfaces with Hotel safes and bars, as applicable, and currently provided to 3 the Hotels by vendors of such safes and bars; and, (ii) the following services: Video Check-out/Account Review, Video Messages, Video Breakfast Menu, Instant Room Inventory, Bellman Assistance and Guest Comment Cards. Spectradyne shall use its best efforts to make its Interactive Services compatibly interface with safes and bars provided to the Hotels by any new vendors. (b) Spectravision Services and Interactive Services shall be provided in the manner described throughout this National Agreement and the Individual License Agreements. (c) On or before November 15, 1993, Spectradyne shall provide each Exhibit A Hotel with those Interactive Services described in Section 3(a)(i) above and, in English, those Interactive Services described in Section 3 (a) (ii) above as well as the following Spectravision Services: (i) Spectradyne's Guest Choice "A", on demand, in-room, guest pay movie and entertainment service ("Guest Choice"), which shall provide a selection of up to two hundred (200) tapes or movies available to guests for viewing on demand; and, (ii) pursuant to Phase One of the New Technology as more fully described in Section 4 (a) below, Spectradyne shall commence to equip the first Exhibit A Hotel and each Exhibit A Hotel thereafter with a method by which a minimum of eight (8) different television channels shall receive and deliver eight (8) regularly-scheduled programs of guest pay movies and entertainment service ("Guest Choice") including up to two hundred (200) movies and entertainment programs each day at the Hotel and which shall be available to Hotel guests for viewing on demand at any time in any one day. In connection with the Guest Choice service "on demand" shall mean that the system is capable of meeting a guest's request to view a particular selection within an average of three (3) minutes of initiation of such request. On or before April 30, 1994, the Interactive Services described in Section 3(ii) above shall be available to all of the Exhibit A Hotels in Japanese, French, Spanish and German and each Hotel may select and Spectradyne shall provide those of the foregoing languages such Hotel deems desirable. Pursuant to Phase Two of the New Technology as more fully described in Section 4(b) below, on or before December 31, 1994, Spectravision Services shall include and Spectradyne shall provide to ninety percent (90%) of all Exhibit A Hotels, an advanced compressed digital means of providing on demand, in-room guest pay movie and entertainment services (as further described in Section 4(b) hereof) which shall replace the eight (8) regularly-scheduled movies or programs and shall be provided in addition to the Guest Choice service, unless otherwise determined by Hyatt in its sole discretion. (d) It is understood and agreed that, except as otherwise provided below, Spectradyne shall have absolute control and discretion in the selection of movies to be projected at the hotels; provided, however, that Spectradyne shall provide (1) a method whereby a guest must reconfirm his movie or entertainment 4 selection electronically before actually viewing the selection, (2) a method whereby a guest may select and preview up to three (3) movies or other entertainment selections for up to five (5) minutes apiece without charge, and (3) a method whereby a guest will be able to electronically restrict movies or entertainment selections from being offered in his guest room by title, category, on a day-to-day basis or for the length of the guest's stay. Notwithstanding the foregoing, at no time shall Spectradyne offer movies or entertainment which, in the versions as presented, have been rated "XI" by the Motion Picture Association of America. At periodic intervals, Hyatt may review the entertainment offered by Spectradyne. If, in the reasonable opinion of Hyatt, following such review, Hyatt is of the opinion that the materials which are available for viewing would offend the sensibilities of a substantial number of Hyatt's guests in any Hotel, then Hyatt may notify Spectradyne in writing of such determination and Spectradyne shall provide an alternative movie or entertainment selection in that certain Hotel. In addition to the foregoing, the President of Hyatt Corporation, Thomas J. Pritzker, (or his successor), reserves the right, at any time from time to time, to veto the projection of any movie, regardless of its rating. Spectradyne agrees to immediately cease the projection of any and all such vetoed movies and provide an alternate movie which is acceptable to Hyatt. In the event that Spectradyne can demonstrate that Thomas J. Pritzker's veto of a movie leads to adverse material economic consequences to Spectradyne, the parties agree to meet to discuss a mutually agreeable solution to avoid such adverse economic results. (e) All movies shall be free of distortion and of a first class video quality. Any inferior tapes or other videos shall be replaced immediately. (f) In supplying movies to any Hotel, Spectradyne will use its reasonable efforts not to violate any censorship rules or prohibitions applicable to the Hotel. To that end, Spectradyne shall inform Hyatt in writing of the movies proposed to be projected not later than seventy two (72) hours in advance of the scheduled projection. If any such movie is known by Hyatt to be in violation of the censorship rules or otherwise prohibited by Hyatt, Hyatt will promptly inform Spectradyne of such fact and Spectradyne shall provide a substitution acceptable to Hyatt. Spectradyne understands and agrees that Hyatt may not be familiar with the contents of each movie scheduled for projection at the hotels; therefore, Hyatt reserves the right to reasonably veto any movie which violates such censorship rules or prohibitions at any time prior to or during its projection. (g) Hotel guests may view Spectravision in their guest rooms at the per view fee(s) set forth in the Individual License Agreements or otherwise agreed to between the parties. (h) Spectradyne shall furnish, install and maintain certain monitoring equipment to monitor particular movies viewed in the 5 guest rooms and to print out or interface such information for use by the Hotel in its billing. (i) Hyatt agrees that the movies and such other video programming provided by Spectradyne under this Agreement remain the property of Spectradyne. Each Hotel shall (i) ensure that the movies and such other video programming are stored under the strictest reasonable security measures, and (ii) shall not allow anyone other than in-room Hotel guests and invitees to view the movies or such other video programming. Each Hotel shall not allow any copying under any circumstances of the movies or such other video programming and shall not allow the movies or such other video programming to be taken from the Premises. 4. New Technology Rollout. Spectradyne shall provide certain New Technology, as described below, to at least ninety percent (90%) of Exhibit A Hotels pursuant to a timetable and schedule for delivery as agreed upon in writing by Hyatt and Spectradyne for Exhibit A Hotels, but in no event later than the time frames specified below. (a) Phase One (1). On or before November 15, 1993, Spectradyne shall commence to deploy and install, at its sole cost and expense, a new method and system of movie and entertainment delivery in the first Exhibit A Hotel and each Exhibit A Hotel thereafter. The new method will provide at least eight television channels for compressed digital television, video decoders, and integrated receiver decoders, and an appropriate microwave satellite dish antenna or earth station in order for Spectradyne to receive and to deliver eight (8) regularly-scheduled programs of movies or entertainment at each such hotel per day. Phase One (I) shall be completed by Spectradyne no later than March 31, 1994. (b) Phase Two (II). Commencing on or before September 1, 1994, and ending no later than December 31, 1994, Spectradyne shall deploy and install, at its sole cost and expense, appropriate video store-and-forward equipment and the computer-drive equipment necessary to provide (i) on demand movie or entertainment programming in each Exhibit A Hotel already equipped with Phase I equipment, and (ii) a system whereby, per module, no fewer than thirty-two (32) users or separate Hotelroom guests can access a single title or entertainment program at the same time. Spectradyne shall add additional modules to each site, as necessary, to meet one hundred percent (100%) of guest demand, and allow simultaneous viewing by all who wish to view the same selection. All such programming in Phase II shall be available on demand to Hotel guests. For purposes of this paragraph "on demand" shall mean that the system is capable of meeting a guest's request to view a particular selection virtually instantaneously. (c) Spectradyne hereby covenants that such New Technology will 6 be user-friendly and will meet those specifications and performance characteristics set forth on Exhibit C attached hereto and incorporated herein by reference. 5. Individual Hyatt Spectravision Agreements. (a) A number of Hotels have entered into Individual License Agreements and/or Interactive Services Riders with Spectradyne to provide Spectravision and Interactive Services at such Hotels. These original Individual Agreements along with all individual license agreements to be executed pursuant to Section 5 (b) hereof shall be the "Individual License Agreements" referenced hereunder and shall be subject to and governed by the terms of this National Agreement. (b) Each Hyatt Hotel which is not already a party to an Original Individual Agreement desiring to retain Spectradyne to provide its Spectravision Services shall enter into an Individual License Agreement substantially in the form set forth as Exhibit B attached hereto and made part hereof. (c) The term of each Individual License Agreement shall be coterminous with the term of this National Agreement. (d) Under no circumstances shall the term of any Individual License Agreement automatically renew. (e) Spectradyne agrees that any Hyatt Hotel set forth on Exhibit A is eligible for Spectravision and Interactive Services and the other benefits hereunder. Hyatt may, from time to time, add or delete Hyatt Hotels from Exhibit A. Any Hyatt hotel desiring to hire Spectradyne to provide Spectravision must enter into an Individual License Agreement which shall expire on the Expiration Date regardless of its commencement date. Hyatt shall use all commercially reasonable efforts to ensure that Hyatt hotels enter into Individual License Agreements. 6. Additional Spectradyne-provided Equipment and TV Sets. (a) In addition to the transmission, monitoring and related equipment and software heretofore furnished and/or installed at the Hotels, Spectradyne shall provide equipment necessary to deliver Spectradyne's Guest Choice service, and any equipment or software necessary to be installed in connection with providing Interactive Services or Spectravision Services using the New Technology. All of the foregoing equipment and software to be furnished and/or installed pursuant to this paragraph (a) shall hereafter be collectively referred to as the "Equipment" and shall be subject to the terms and conditions applicable to Equipment under this National Agreement and the Individual License Agreements. (b) Except as otherwise provided for below, Spectradyne shall provide and install, free of charge, a number of new television 7 sets and remote controls meeting the specifications described on Exhibit D attached hereto (the "TV Sets") equal to the number of television sets currently installed in all of the guest rooms at Exhibit A Hotels. In addition, Spectradyne shall deliver to each Hotel a number of spare TV sets equal to four percent (4%) of the number of television sets at such Hotel. Each Exhibit A Hotel will also receive at least one (1) character generator, free of charge. On a Hotel by Hotel basis, as the TV Sets are installed, each Hotel shall surrender to Spectradyne for trade-in the televisions sets currently in use at such property free and clear of all liens and encumbrances, provided the Hotel has or is able to easily procure title to such trade-in television sets. In the event the television sets currently in use at any Hotel are leased or financed by such Hotel and the Hotel is therefore unable to surrender them to Spectradyne free and clear of all liens and encumbrances, then the provisions of this Section 6(b) which references surrender of such trade-in television sets shall not apply to either Spectradyne or such Hotel until such time as Hotel is able to surrender same to Spectradyne at the expiration date of such lease or financing arrangement, free and clear of all liens and encumbrances. (c) Such TV Sets and character generators shall be provided by Spectradyne at such Hotels and delivered to each Hotel in a sequence in accordance with the make and model number of each TV Set and character generator and in a quantity pursuant to a written plan of installation, which is agreed upon by Spectradyne and Hyatt; provided, however, all such TV Sets (except the spares) shall be fully installed on or before November 14, 1994. Upon delivery to each Hotel, Spectradyne shall convey to such Hotel good title to and ownership of the TV Sets (including all remote controls thereto) and the character generator for such Hotel, free and clear of any lien, claim or encumbrance. The TV Sets shall become the sole property of the Hotels and neither Spectradyne nor any third party shall have any right, title or interest in or claim to such TV Sets. (d) In the event any Exhibit A Hotel is equipped already with "Smart Plug" television sets, Spectradyne may instead provide such Hotels with a *** trade credit per "Smart Plug" television set against future amounts due Spectradyne under such Hotels' Individual License Agreements, including refits, as necessary, to SpectraMate room units and Spectradyne remote control units containing the features set forth on Exhibit D. (e) In the event Spectradyne submits to a plan of reorganization pursuant to the Bankruptcy laws of the United States, or enters into a plan for the benefit of creditors, Spectradyne shall cause Wells Fargo Bank to ratify that certain letter agreement between Wells Fargo Bank and Hyatt dated July 25, 1989, which pertains to certain Spectradyne equipment installed in Hyatt Hotels. (f) The Hotels, at their sole cost and expense, shall provide and maintain one (1) dedicated direct dial up voice quality 8 circuit for use by Spectradyne for its monitoring system provided herein. (g) During the term of this National Agreement, title to the Equipment is and shall remain with Spectradyne and title to all installed or delivered TV Sets is and shall remain with the respective Hotel. (h) Upon the expiration or early termination of this National Agreement or any Individual License Agreement (other than pursuant to a default by Hyatt under Section 19 hereof), Hyatt may give notice no later than (30) days following such termination, at Hyatt's option to either: (i) have the Hotels purchase and/or obtain Spectradyne's interest in or right to use all or any portion of the existing Equipment, as determined solely by Hyatt, for an amount mutually agreed to be the fair market value of such Equipment and/or interest or right therein, except for any Equipment not owned by Spectradyne or Equipment which Spectradyne cannot convey any interest in or right to use. If, however, Hyatt and Spectradyne are unable to determine the fair market value of such Equipment and/or interest or right therein, the Equipment shall remain at the Hotel(s) as set forth in Section 6(h)(ii) below. In the event Hyatt elects to have the Hotels purchase such Equipment and/or interest or right therein, Spectradyne shall deliver to each respective Hotel free and clear title to such Equipment, along with the Bill of Sale upon receipt of payment of the agreed upon amount; or, (ii) require Spectradyne to keep and maintain all Equipment provided to the Hotels pursuant to the Spectramax National Agreement, including the license for the use of the on-site software required to operate such Equipment or provide the Interactive Services at the Hotels for a total rental,maintenance, license and service fee chargeable to the Hotels in the amount of *** per guest room per month for a term not to exceed thirty six (36) months; and, (iii) the parties agree that in the event Hyatt exercises its option to keep such Equipment in the Hotels pursuant to Section 6(h) (ii) above, Hyatt agrees not to use such Equipment to show in room pay-per-view movies and such other video programming. (iv) However, Hyatt may elect to offer guest pay movies and such other video programming through the rented Spectradyne Equipment provided that Spectradyne shall be the exclusive provider of those guest pay movies and such other video programming over the rented systems, and Spectradyne shall continue to pay the Hotels the fees specified in Section 9 below. If Hyatt fails to exercise the option set forth in this section 6(h)(iv) upon termination of the rental period pursuant to 9 Section 6 (h) (ii), Spectradyne may, following written notice, elect to remove the Equipment. (i) In the event Hyatt elects to have the Hotels either purchase all or any portion of the Equipment and/or the interest and rights therein, or rent the Equipment from Spectradyne as described in Section 6(h) above, Spectradyne agrees to license to the Hotels for their use at no additional cost to Hyatt or the Hotels, the on-site software and any and all upgrades thereto, which are necessary to operate the Equipment or provide the Interactive Services for a period not to exceed thirty-six (36) months. After the end of the initial thirty-six (36) months, if the parties have not previously terminated this Agreement, it shall automatically renew for continuous ninety (90) day terms, until such time as one party provides the other party with ninety (90) days' prior written notice of intent to terminate. Spectradyne warrants and represents that it owns, free and clear, title to all such on-site software required to provide Interactive Services and to operate the Equipment. 7. MATV. (a) Each Hotel shall provide access to its MATV system to Spectradyne, which Spectradyne shall upgrade, at its sole cost and expense, to the minimum specifications set forth on Exhibit C attached hereto. The upgraded MATV System shall be capable of transmitting off-the-air channels or network programming, Interactive Services, and Spectravision Services compatible with the New Technology and with the highest possible picture quality. Such upgrades shall be performed on a schedule and timetables to be agreed upon in writing by Hyatt and Spectradyne. (b) From time to time, Spectradyne has made and will make repairs to and replacement of Hotel's MATV. It is understood and agreed that before and after the completion date of the upgrade described in (a) above, all equipment which encompasses the MATV system is hereby considered property of the Hotel where such MATV is located. 8. Maintenance. (a) Equipment, MATV Systems and TV Sets. Spectradyne, at its sole cost and expense, shall service, repair, replace and maintain the Equipment, the MATV systems of the Hotels and the TV Sets (including the remote controls thereto) in good working condition. Spectradyne agrees to replace all lost remote control units and/or those TV Sets and remote control units broken beyond repair. All costs associated with such service, repairs, replacements and maintenance shall be borne by Spectradyne, except for repairs required due to the willful misconduct or gross negligence of Hyatt and its agents. Such repairs shall be made by Spectradyne at its cost and reimbursed by Hyatt. 10 (b) Service. In addition to providing Hyatt automated diagnostic and repair services, Spectradyne shall at all times during the term hereof maintain or cause to be maintained a sufficient staff of trained technicians meeting the requirements of Section 12 below who shall be available to perform such service, repairs, replacements and maintenance on the Equipment, the MATV, and the TV Sets (including the remote controls thereto). Spectradyne shall continue to maintain a "live" person service desk reachable twenty-four (24) hours a day, seven (7) days a week by phone and shall provide a guaranteed response of four (4) hours on any service calls. 9. Fee. (a) The Hotels shall, at no cost to Spectradyne, bill Hotel guests for viewing movies and such other video programming projected through Spectravision at the rate(s) agreed upon between Hyatt and Spectradyne as set forth in the Hotels' respective Individual License Agreements or as otherwise agreed to in writing. Billing shall be made on a daily basis in the same manner as other Hotel charges are billed to guests. (b) In consideration of the rights and privileges granted to Spectradyne hereunder and under the Individual License Agreements, with respect to each month during the term hereof, Spectradyne shall pay each respective Hotel in accordance with the following formula: (i) in the event Gross Viewing Receipts generated by such Hotel for any month do not exceed *** per room, an amount equal to *** of the monthly Gross Viewing Receipts generated by each such Hotel (the "Commission Fee") and an amount equal to *** of the monthly Gross Viewing Receipts generated by such Hotel as an advertising allowance (the "Advertising Allowance"), and (ii) in the event Gross Viewing Receipts generated by such Hotel for any month exceed *** per room, an additional amount equal to *** of the monthly Gross Viewing Receipts generated by such Hotel in excess of *** per room (the "Revenue Share"). As used herein, "Gross Viewing Receipts" for any period shall mean the aggregate gross amount billed by Hyatt to Hotel guests during such period less (i) the amount of taxes, if any, chargeable to Hotel guests in connection with any viewing of movies, and (ii) any uncollectible charges theretofore billed to Hotel guests for viewing movies through the Spectravision System which were previously reported to Spectradyne to the extent such charges are written off on any Hotel's books during such period. All Advertising Allowances may be used by the Hotels for any advertising purposes they deem appropriate in their sole discretion and shall tn no way obligate the Hotels to use the funds to recognize or promote Spectradyne, any of its services, or their relationship with Spectradyne. (c) The Commission Fee, Advertising Allowance and Revenue Share shall be payable monthly in accordance with the provisions of 11 Section 10 of the Individual License Agreements. (d) All Interactive Services shall be provided by Spectradyne to the Hotels at no cost to Hyatt or such Hotels. (e) Spectradyne warrants and represents that the value provided to Hyatt Hotels hereunder is the best or better value provided by Spectradyne to any comparable hotel company's hotels and in particular is the best or better value provided by Spectradyne to hotels operated by Marriott Corporation and Hilton Hotels Corporation. Comparable hotels are defined as those hotels with like Spectradyne equipment and substantially similar movie or such other video programming, room counts, and guest occupancy rates. In the event that at any time during the term of this Agreement, Spectradyne shall offer a better combined value to any comparable hotel than that value provided to Hyatt, the value provided to Hyatt Hotels under this Agreement shall be automatically increased to the same level. In no event shall Marriott or Hilton hotels be considered non-comparable hotels. For purposes of this paragraph "value,, shall mean the value of (i) all fees, allowances and revenues, (ii) all Equipment including television sets and remote control units, (iii) all software, software licenses and/or other intellectual property rights, (iv) all services including installation, maintenance, repair and replacement, and (v) all cost savings or other benefits provided to the hotels, their parent companies or affiliates. (f) On behalf of Spectradyne, each Hotel shall collect applicable taxes from Hotel guests and remit same to Spectradyne for payment by Spectradyne to the applicable government or governmental agencies. It is the responsibility of Spectradyne to provide Hyatt with notification as to the applicability of which taxes are to be collected by Hyatt on behalf of Spectradyne, including revisions thereof. In the event Spectradyne fails to pay any taxes when due, Hyatt shall have the right to remit such taxes to such agencies on behalf of Spectradyne and Spectradyne shall immediately reimburse Hyatt for payment of such taxes. 10. Books and Records. During the term of this National Agreement and the Individual License Agreements, the Hotels shall maintain books and records, in the form as determined by Hyatt, as such books and records are pertinent to the determination of Gross Viewing Receipts. The Hotels shall maintain such books and records for a period of not less than two (2) years following the expiration of the term of this National Agreement. Spectradyne may, during normal business hours, view such books and records at the respective Hotels upon seven (7) days' prior written notice. 11. Marketing Funds. 12 Spectradyne shall dedicate substantial marketing funds to the announcement of the agreement with Hyatt and promoting the fact that Hyatt will be offering the New Technology on a system wide basis. 12. Personnel. Spectradyne shall provide or cause to be provided adequate personnel and any subcontractors, as approved by Hyatt, to permit the timely completion of all work. All such personnel shall be trained and supervised in accordance with accepted industry practices and shall conform to the reasonable rules and regulations of Hyatt established from time to time by Hyatt for the conduct of, and in relation to, the employees of the contractors of the Hotels when such employees are on Hotel premises. Spectradyne's employees, subcontractors or agents shall be neat in appearance and shall wear badges identifying them as employees or representatives of Spectradyne. 13. Equipment Material. Spectradyne shall provide and maintain adequate equipment to permit timely completion of all operations and shall use materials which are in conformance with existing federal, state and local laws and ordinances. 14. Licenses or Permits. If any governmental license or permit shall be required of Spectradyne for the proper and lawful conduct of Spectradyne's business or other activity carried on, in or at any Hotel, or if a failure to procure such a license or permit might or would in any way affect the operations of any Hotel, then Spectradyne, at its expense, shall duly procure and thereafter maintain such license or permit and submit the same to inspection by Hyatt. Spectradyne, at its sole cost and expense, shall at all times comply with the requirements of each such license or permit. Spectradyne shall, at its sole cost and expense, secure and maintain in full force and effect during the term of this National Agreement and every Individual License Agreement, all necessary patents, copyrights, distribution rights, music rights, licenses, intellectual property rights, releases, waivers and all other necessary consents of third parties required of Spectradyne to meet its obligations as set forth in this National Agreement. 15. Compliance with Laws. Spectradyne agrees, at its own expense, to comply promptly with all requirements of any federal, state and local laws and ordinances. 16. Insurance. 13 Spectradyne shall carry and maintain worker's compensation insurance in statutory amounts, comprehensive general liability insurance endorsed to include products and completed operations and contractual liability in a minimum amount of $1,000,000 combined single limit, and automobile liability insurance in a minimum amount of $1,000,000 combined single limit. All such policies (except workers' compensation) or certificates of insurance shall specifically state: "Hyatt Corporation, its affiliates and subsidiaries and the owners of Hyatt hotels are named as additional insureds under the above policies; such insurance shall be primary and not contributory with Hyatt's insurance." Each policy shall provide that it may not be cancelled or changed without at least ten (10) days, prior written notice to Hyatt. Spectradyne shall furnish to Hyatt a certificate of insurance evidencing such coverage prior to the commencement of services hereunder and shall continue to provide Hyatt with subsequent certificates of insurance evidencing uninterrupted compliance with the insurance requirement until the termination of this National Agreement. Spectradyne shall provide Hyatt with certified copies of the policies required herein upon Hyatt's request. 17. Indemnification. Spectradyne shall defend, indemnify and hold harmless Hyatt Corporation, its affiliates and subsidiaries and the owners of Hyatt Hotels and each of their respective officers, directors, agents and employees from and against any and all actions, costs, claims, losses, expenses and/or damages, including reasonable attorney's fees, arising out of or in any way relating to or incidental to the performance of the services to be performed by Spectradyne hereunder or the presence of Spectradyne at the Hotels. Spectradyne shall further indemnify Hyatt Corporation, its affiliates and subsidiaries and the owners of Hyatt Hotels and each of their respective officers, directors, agents and employees from and against any and all actions, costs, claims, losses, expenses and/or damages, including reasonable attorneys, fees, for or arising out of bodily injuries to or the death of any Spectradyne's employees working at any Hotel, however caused or occasioned, excepting the willful misconduct or gross negligence of Hyatt. Further, Spectradyne shall defend, indemnify and hold harmless Hyatt Corporation, its subsidiaries, affiliates and the owners of Hyatt Hotels, and each of their respective officers, directors, agents and employees from and against any claims, demands, causes of action, loss, cost and expense (including reasonable attorneys, fees) arising out of or in connection with or based upon a real or alleged breach by Spectradyne of the provisions of this National Agreement pertaining to Spectradyne's intellectual property rights, including, but not limited to, those provisions 14 set forth in Sections 6(h)(i) and 6(h)(ii) above, and any claims, demands, causes of action, loss, cost, expense (including attorneys' fees) or fee based upon an alleged or actual infringement of any patent or copyright or an alleged unauthorized broadcast or use of any license as set forth in Section 14 above. Hyatt shall promptly notify Spectradyne for any matter for which indemnity is sought under this paragraph and, in any event, prior to the incurrence of any expenditures under this section. Spectradyne agrees that it is as fully responsible for the acts and omissions of its subcontractors and of persons either directly or indirectly employed by them as it is for the acts and omissions of persons directly employed by Spectradyne. Spectradyne agrees to bind every subcontractor by the terms of this National Agreement so far as is applicable to the subcontractor's work. However, nothing contained in the provision of this National Agreement shall create any-contractual relationship between Hyatt and any subcontractor. 18. Force Majeure. Neither party shall have any liability for the failure to perform or a delay in performing any of its obligations under this National Agreement if that failure or delay is the result of any legal restriction, labor dispute, strike, boycott, flood, fire, unavoidable mechanical failure, electricity interruption or any other cause beyond the control of either party whether similar or dissimilar to the causes enumerated herein except in any case any event which can be cured or mitigated by the payment of money; provided, however, that the failure of Spectradyne to deploy and install the New Technology on the schedule established and as required pursuant to Section 4 of this National Agreement shall under no circumstances be deemed a force majeure event. 19. Default. (a) In the event that (i) Spectradyne fails to begin Phase Two installations of the New Technology by September 1, 1994, (ii) Spectradyne fails to deliver all of the New Technology to at least ninety percent (90%) of the Exhibit A Hotels on or before December 31, 1994, (iii) Spectradyne fails to install the new TV Sets in, or provide the trade credit to, Exhibit A Hotels in accordance with Section 6 above on or before November 14, 1994, or (iv) the New Technology fails to meet the standards set forth on Exhibit C, then Hyatt may terminate this National Agreement upon one hundred eighty (180) days prior written notice. In the event of such termination, in addition to all other remedies available to Hyatt at law or equity, each Hotel shall retain ownership of all TV Sets installed in or delivered to such Hotel prior to the effective date of such termination. (b) In the event that Spectradyne fails, in any material way, to provide the services described in Section 8 above, to Hyatt's sole satisfaction, Hyatt or any Hotel, at its sole option, upon 15 three (3) days' notice to Spectradyne and opportunity to cure, may elect to have such service(s) performed by another vendor at the sole cost and expense of Spectradyne. All amounts owed by Spectradyne under this paragraph shall be deducted from amounts payable to Spectradyne by the applicable Hotel. Hyatt shall provide Spectradyne, at Spectradyne's request, with copies of any such amounts. (c) Except (i) as otherwise provided in paragraph (a) and (b) above, and (ii) for the reasons that constitute force majeure as set forth in Section 18 hereinabove, in the event that either Hyatt or Spectradyne fails to perform or comply with any other material obligation under this National Agreement or the Amended and Restated Spectramax National Agreement or any Individual License Agreement or Hyatt Spectramax Agreement that failure shall constitute a default. The non-defaulting party shall notify the defaulting party in writing of the failure and default. In the event the default is not remedied to the satisfaction of the party having given such notice within forty five (45) days after receipt of notice, or if such default is of a nature that it cannot, with due diligence and in good faith, be cured within forty five (45) days and such defaulting party fails to proceed promptly and with due diligence and in good faith to cure the same, then the non-defaulting party may declare this National Agreement or the Amended and Restated Spectramax National Agreement or any or all of the Individual License Agreements and Hyatt Spectramax Agreements, as appropriate, terminated as of the one hundred and eightieth (180th) day following delivery of the original notice. In the event that this National Agreement is terminated pursuant to this Section 191 all the Individual License Agreements shall automatically terminate on the same terms without further action or notice of any kind by Hyatt. 20. Test sites. Spectradyne understands and agrees that from time to time, during the term of this National Agreement and the Individual License Agreements, Hyatt may use certain of the Hotels as test sites side-by-side with existing and operating Spectradyne equipment for the purpose of investigating and evaluating the services offered by other companies which provide services which are the same as or similar to the services provided by Spectradyne, so long as such testing causes no damage to Spectradyne nor uses its Equipment. Any such test shall not exceed a period of ninety (90) days. Hyatt shall not be deemed to be in default of this National Agreement or the Individual License Agreements in the event any testing is conducted at a Hotel serviced by Spectradyne. 21. Independent Contractor. Spectradyne is an independent contractor and all persons employed to furnish services hereunder are employees or agents of 16 Spectradyne and not of Hyatt. 22. Notices. All notices, requests, demands and other communications hereunder shall be in writing and delivered or mailed with postage prepaid, to the party intended at its address as hereinbefore set forth. 23. Binding. This National Agreement shall inure to and bind the successors, assigns and representatives of the parties; provided, however, this National Agreement may not be assigned by Spectradyne without the prior written consent of Hyatt. Spectradyne shall not have the right to subcontract its obligations as set forth herein to third parties without the prior written approval of Hyatt. 24. Governing Law. This National Agreement is subject to and governed by the internal laws of the State of Illinois without regard to the external laws or federal laws pertaining to conflicts of laws. 25. Entire Agreement This National Agreement contains the entire agreement between the parties hereto; no representations, inducements, promises or agreements, oral or other, between the parties not embodied herein, shall be of any force or effect. 26. Amendment of Agreement. This National Agreement may be amended only by a written instrument signed by the parties hereto. 27. Legal Fees. In the event any legal action is taken by either party against the other party to enforce any of the terms and conditions of this National Agreement, it is agreed that the unsuccessful party to such action shall pay to the prevailing party therein all court costs, reasonable attorneys' fees or other professional fees and expenses incurred by the prevailing party. 28. Heading The headings used in this National Agreement are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this National Agreement nor the intent of any provision thereof. 29. Hyatt-Agent. 17 Spectradyne acknowledges that Hyatt acts as the agent of the owners of the Hotels and any action or obligation to be performed or carried out by any Hotel hereunder shall be performed by Hyatt solely in its capacity as agent for the owner of such Hotel. Accordingly, Spectradyne acknowledges that Hyatt's obligations in this Agreement in respect of matters relating to Hotels are obligations of Hyatt as agent only. IN WITNESS WHEREOF, the parties have executed this National Agreement as of the day and year first above written. HYATT CORPORATION, on its own behalf and on behalf of its subsidiaries and affiliates BY: /s/ Peter D. Connolly Printed Name: Peter D. Connolly Title: Vice President Hyatt Corporation SPECTRADYNE, INC., a Texas corporation By: /s/ Albert D. Jerome Printed Name: Albert D. Jerome Title: President and Chief Executive Officer LH:corp\specvis 18 Spectravision Exhibits Exhibits Description A Amended and Restated List of Hyatt Hotels B Form of License Agreement C New Technology Features D Television Features 19 EXHIBIT A AMENDED AND RESTATED LIST OF HYATT HOTELS Hyatt Regency Albuquerque 330 Tijeras NW Albuquerque, NM 87102 Hyatt Arlington 1325 Wilson Blvd. Arlington, VA 22209 Hyatt Regency Atlanta 265 Peachtree St., NE Atlanta, GA 30303 Hyatt Regency Austin 208 Barton Springs Austin, TX 78704 Hyatt Regency Beaver Creek 136 East Thomas Place Avon, CO 81620 Hyatt Regency Bethesda One Bethesda Metro Center Bethesda, MD 20814 Hyatt Regency Cambridge 575 Memorial Drive Cambridge, MA 02139 Hyatt Regency Cerromar Beach Dorado, Puerto Rico 00646 Hyatt Cherry Hill 2349 West Marlton Pike Cherry Hill, NY 08002 Hyatt Regency Cincinnati 151 West 5th Street Cincinnati, OH 45202 Hyatt Regency Coral Gables 50 Alhambra Plaza Coral Gables, FL 33134 Hyatt Regency Alicante 100 Plaza Alicante Harbor & Chapman Blvd. Garden Grove, CA 92640 Hyatt Regency Aruba 20 L.G. Smith Blvd. 85 Palm Beach, Aruba Hyatt Regency Baltimore 300 Light Street Baltimore, MD 21202 Hyatt Regency Bellevue 900 Bellevue Way, N. E. Bellevue, WA 98004 Hyatt Regency Buffalo Two Fountain Plaza Buffalo, NY 14202 Hyatt on Capitol Square 75 East State Street Columbus, OH 43215 Hyatt Charlotte 5501 Carnegie Charlotte, NC 28209 Hyatt Regency Chicago 151 East Wacker Drive Chicago, Illinois 60601 Hyatt Regency Crown Center 2345 McGee Street Kansas City, MO 64108 Hyatt Regency Columbus 350 North High Street Columbus, OH 43215 Hyatt Regency Crystal City 2799 Jefferson Davis Hwy. Arlington, VA 22202 Hyatt Regency Dallas 300 Reunion Boulevard Dallas, TX 75207 Hyatt Deerfield 1750 Lake Cook Road Deerfield, IL 60015 Hyatt Dorado Beach Dorado, P.R. 00646 Hyatt Fair Lakes 12777 Fair Lakes Circle Fairfax, VA 22033 21 Hyatt Regency Grand Cypress One Grand Cypress Blvd. Orlando, FL 32836 Hyatt Regency Greenwich 1800 East Putnam Avenue Old Greenwich, CT 06870 Hyatt Regency Hill Country Resort 9800 Resort Drive San Antonio, TX 78251 Hyatt Regency Houston 1200 Louisiana Street Houston, TX 77002 Hyatt Regency Irvine 17900 Jamboree Boulevard Irvine, CA 92714 Hyatt Regency Kauai 1571 Poipu Road Koloa, HI 96756 Hyatt Regency DFW Airport International Pkway. DFW Airport, TX 75261 Hyatt Regency Dearborn Fairlane Town Center Dearborn, MI 48126 Hyatt Regency Denver 1750 Welton Street Denver, CO 80202 Hyatt Dulles 2300 Dulles Corner Blvd. Herndon, VA 22070 Hyatt at Fisherman's Wharf 555 N. Point Street San Francisco, CA 94133 Hyatt Grand Champions Resort 44-600 Indian Wells Ln. Indian Wells, CA 92210 Hyatt Regency Greenville 220 North Main Street Greenville, SC 29601 Harborside Hyatt Conference 22 Center & Hotel 101 Harborside Drive Boston, MA 92128 Hyatt Regency Hilton Head at Palmetto Dunes P.O. Box 6167 Hilton Head, SC 29938 Hyatt Regency Indianapolis One South Capitol Avenue Indianapolis, IN 46204 Hyatt Islandia 1441 Quivira Road San Diego, CA 92109 Hyatt Key West 601 Front Street Key West, FL 33040 Hyatt Regency Knoxville 500 Hill Avenue, SE Knoxville, TN 37901 Hyatt Regency Lake Tahoe Resort & Casino 111 Country Club Drive Incline Village, NV 89450 Hyatt Lisle 1400 Corporetum Drive Lisle, IL 60532 Hyatt Regency Long Beach 200 South Pine Avenue Long Beach, CA 90802 Hyatt Regency Los Angeles 711 South Hope Street Los Angeles, CA 90017 Hyatt Regency Maui 200 Nohea Kai Drive Lahaina, Maui Hawaii 96761-1990~ Hyatt Regency Milwaukee 333 West Kilbourn Avenue Milwaukee, WI 53203 Hyatt Regency Monterey One Old Golf Course Road Monterey, CA 93940 23 Hyatt Regency New Orleans Poydras Plaza & Loyola Avenue New Orleans, LA 70140 Hyatt Newporter 1107 Jamboree Road Newport Beach, CA 92660 Hyatt Regency Oak Brook 1909 Spring Road Oak Brook, IL 60521 Hyatt Regency LaJolla 3777 LaJolla Village Drive San Diego, CA 92122 Hyatt Regency Lexington 400 West Vine Street Lexington, KY 40507 The Lodge Ronald Lane Oak Brook, IL 60521 Hyatt at Los Angeles Airport 6225 West Century Boulevard Los Angeles, CA 90045 Hyatt Regency Louisville 320 West Jefferson Louisville, KY 40202 Hyatt Regency Miami 400 SE Second Avenue Miami, FL 33131 Hyatt Regency Minneapolis 1300 Nicollet Mall Minneapolis, MN 55403 Hyatt Regency New Brunswick Two Albany Street New Brunswick, NJ 08901 Grand Hyatt New York Park Avenue at Grand Central New York, NY 10017 Hyatt Regency O'Hare 9300 West Bryn Mawr Rosemont, IL 60018 Hyatt Orlando 6375 West Irlo Bronson 24 Memorial Highway Kissimee, FL 32741 Hyatt Regency Orlando International Airport 9300 Airport Boulevard Orlando, FL 32827 Park Hyatt Chicago 800 North Michigan Avenue Chicago, IL 60611 Hyatt Regency Phoenix 122 North Second Street Phoenix, AX 85004 Hyatt Regency Pittsburgh 112 Washington Place Pittsburgh, PA 15219 70130 Hyatt Regency Reston 1800 President Street Reston, VA 22090 Hyatt Regency Rochester 125 East Main Street Rochester, NY 14604 Hyatt Rickeys 4219 El Camino Real Palo Alto, California 94306-4493 Hyatt Regency San Antonio 123 Losoya San Antonio, TX 78205 Hyatt Regency San Francisco Airport San Diego, CA 92101 Burlingame, CA 94010 Hyatt Regency San Francisco 5 Embarcadero Center San Francisco, CA 94111 Hyatt Regency Sarasota 1000 Boulevard of the Arts Sarsota, FL 33577 Park Hyatt San Francisco At Embarcadero Center 333 Battery Street San Francisco, CA 94111 25 Park Hyatt Washington 1201 24th Street NW Washington, D.C. 20037 Hyatt on Printers Row 500 South Dearborn Chicago, IL 60605 Hyatt Regency Princeton 102 Carnegie Center Princeton, NJ 08540 Hyatt Richmond 6223 Broad Street Richmond, VA 23230 Hyatt Regency Sacramento 1209 "L" Street Sacramento, CA 95814 Hyatt Regency San Diego One Market Place San Diego, CA 92101 Grand Hyatt San Francisco 345 Stockton Street San Francisco, CA 94108 Hyatt San Jose 1740 North First Street San Jose, CA 95112 Hyatt Regency Savannah Two West Bay Street Savannah, GA 31401 Hyatt Regency Scottsdale 7500 East Doubletree Ranch Road Scottsdale, AZ 85258 Hyatt Regency St. Louis at Union Square One St. Louis Union Square St. Louis, MO 63103 Hyatt Regency Suites Perimeter Northwest 2999 Windy Hill Road Marietta, GA 30067 Hyatt on Sunset 8401 Sunset Boulevard West Hollywood, CA 90069 26 Hyatt Regency Vancouver 655 Burrard Street Vancouver, B.C. Canada V6C 2R7 Grand Hyatt Washington 1000 H Street NW Washington, DC 20001 Hyatt Westlake Plaza 880 South Westlake Boulevard Westlake Village, CA 91361 Hyatt Regency St. John P.O. Box 8310 Great Cruz Bay, St. John US Virgin Islands 00830 Hyatt Regency Suites Palm Springs 285 North Palm Canyon Drive Palm Springs, CA 92262 Hyatt Regency Tech Center 7800 E. Tufts Avenue Denver, Colorado 80237 Hyatt Regency Tampa Two Tampa City Center Tampa, FL 33602 Hyatt Regency Waikiki 2424 Kalakaua Avenue Honolulu, Oahu HI, 96815 Hyatt Regency Washington 400 New Jersey Avenue, NW Washington, D. C. 20001 Hyatt Regency Westshore 6200 Courtnery Campbell Cswy. Tampa, FL 33607 Hyatt Regency Woodfield 1800 East Golf Road Shaumburg, Illinois 60173 27 EXHIBIT B LICENSE AGREEMENT BY THIS AGREEMENT made this _____ day of _________________ 199__, between HYATT CORPORATION, as agent of with offices at 200 West Madison Street, Chicago, Illinois 60606, (hereinafter "Hyatt"), and SPECTRADYNE, INC., a Texas corporation, with offices at 1501 North Plano Road, Richardson, Texas 75083 (hereinafter "Spectradyne"), the parties hereby RECITE and AGREE as follows: RECITALS A. Spectradyne is engaged in the business of telecasting, in closed-circuit, movies over hotel master antenna television systems to television receivers located in hotel guest rooms-by means of equipment manufactured, supplied, acquired, installed and maintained by Spectradyne or on behalf of Spectradyne (sometimes referred to herein as "Spectravision") and providing certain interactive services which interface with hotel property management systems including (i) Hotel guest room safe and bar interfaces, as applicable, and (ii) other services including Video Check-Out/Account Review, Video Messages, Video Breakfast Menu, Instant Room Inventory, Bellman Assistance and Guest Comment Cards (collectively referred to herein as "Interactive Services"). B. Hyatt is the operator of that certain hotel known as the ___________________ (the "Hotel") located at ___________________. The Hotel is equipped with a master antenna television system (herein collectively called the "MATV"), which is a network of cables, wall taps, antennas and specially designed radio frequency signal processing components, which receive, process, amplify and distribute video and audio TV and FM signals from a central location on to a multiplicity of televisions within a building or group of buildings. C. The parties desire to enter into an agreement whereby Spectradyne will provide to the Hotel upon the terms herein provided, Spectravision and Interactive Services. AGREEMENT In consideration of their respective covenants, the parties hereto mutually agree as follows: 1. Amended and Restated National Agreement. This Agreement is subject to and governed by the terms and conditions of that certain Amended and Restated Spectravision and Interactive Services National Agreement effective July 1, 1993, between Hyatt Corporation on its own behalf and on behalf of its subsidiaries and affiliates and Spectradyne, Inc. (the "National Agreement"). Capitalized terms which are contained in this 28 Agreement shall have the same definition and meaning as provided for under the National Agreement unless specifically defined differently herein. In the event any of the provisions of this License Agreement conflict with the provisions of the National Agreement, the provisions of the National Agreement shall prevail. 2. Installation of Equipment. (a) Spectradyne shall, at its sole cost and expense, and at the time and in the manner hereinafter provided, install in or furnish to the Hotel all of the Equipment which shall consist of the following: (i) equipment for the transmission of video programming over the MATV, and such other equipment as shall be necessary, in the opinion of Spectradyne, as approved by Hyatt, for telecasting movies and such other video programming in all guest rooms of the Hotel (all such equipment being herein called "Transmission Equipment"); (ii) equipment or software necessary, in the opinion of Spectradyne, as approved by Hyatt, to provide the Interactive Services; (iii) equipment designed to monitor the particular programs viewed in the guest rooms and to print out the information--for billing purposes (all such equipment being herein referred to as ("Monitoring Equipment"); and, (iv) all equipment or software necessary, in the opinion of Spectradyne, as approved by Hyatt, in connection with provision of the New Technology described in the National Agreement. All of the equipment and software furnished and/or installed pursuant to this subparagraph (a) is herein collectively referred to as the "Equipment". (b) Spectradyne shall, as soon as practicable, commence installation in the Hotel of the Equipment. Spectradyne shall furnish _____ Television Sets (number is devised in accordance with the number of Hotel guest rooms) meeting the specifications outlined in the National Agreement (the "TV Sets") plus _____ spare TV Sets in the Hotel and will use commercially reasonable efforts to timely complete such installation of the Equipment and the TV Sets so that the telecasting service to be provided hereunder by Spectradyne shall be available for use by guests of the Hotel not later than sixty (60) days after the Installation of Equipment commences. Upon installation of the Equipment at the Hotel and pursuant to Section 6 of the National Agreement as it applies to the TV Sets, Spectradyne shall either (i) convey to the Hotel good title to and ownership by the Hotel of the TV Sets (including all remote controls thereto) and the character generator for such Hotel, free and clear of any lien, claim or encumbrance. The TV Sets shall become the sole property of the Hotel and neither Spectradyne nor any third party shall have any right, title or interest in or claim to such TV Sets; or, (ii) accept the Hotel's surrender to Spectradyne for trade-in all television sets as soon as they are free and clear of all liens and encumbrances and title to the TV Sets provided by Spectradyne shall pass to the Hotel, along with the bill of sale. Spectradyne shall warrant that such TV Sets are free and clear of 29 all liens and encumbrances as stated in 2(b)(i) above; or, (iii) provide a trade credit of *** per "Smart Plug" television set at the Hotel against future amounts due Spectradyne under this Agreement, including refits, as necessary, to SpectraMate room units and Spectradyne remote control units containing the features set forth on Exhibit D of the National Agreement. (c) As herein used, the term "installation of Equipment" shall include upgrading the MATV as provided in the National Agreement, connecting the Equipment to the MATV system and all other work required to provide the Spectravision and Interactive Services, along with all necessary monitoring of guest viewing to all Hotel guest rooms. In this connection all of the elements in the Hotel, including the TV Sets, the Equipment and the MATV, functioning as a telecasting service, are herein collectively referred to as the "System". (d) Immediately upon execution of this License Agreement, Hyatt shall (i) make available at no cost to Spectradyne a non-public area in the Hotel comprising approximately twenty (20) square feet which is reasonably satisfactory to Spectradyne to be used for the installation of the Transmission Equipment and which is hereinafter referred to as the "Transmission Location." Hotel shall provide at no cost to Spectradyne an appropriate area located near the cashier and billing departments for the installation of the Monitoring Equipment and the Hotel shall (ii) permit Spectradyne to conduct a technical inspection of the MATV and related facilities to determine the adequacy thereof for providing the telecasting services herein contemplated, and (iii) give Spectradyne access to the MATV and to such areas of the Hotel (including the guest rooms) as may be reasonably necessary for installing the Equipment, upgrading the MATV, and making the necessary connections to the MATV so as to permit the telecasting of movies from the Transmission Location over the MATV. In this connection, Spectradyne is hereby authorized: (1) with the prior approval of Hyatt and at Spectradyne's expense to make such changes in the MATV as shall be required to provide Spectradyne's services, consistent with the requirements of the National Agreement, and (2) to connect the output cable from Spectradyne's systems to the MATV and the TV Sets located in the Hotel guest rooms and, to the extent required, to install wires, cables, conduits, risers and other similar devices throughout the Hotel; provided, however, that such installations comply with all applicable laws or regulations, are reasonably acceptable to Hyatt, and do not violate any reasonable rules or regulations established by Hyatt or any Hotel from time to time governing work to be performed on Hotel premises. (e) In the event Hyatt installs services requiring signals on the MATV, such signals shall not impair the operation or signal quality of Spectradyne's services. 30 3. Rights and Obligations of the Parties with Respect to the Equipment. (a) Notwithstanding the fact that parts thereof may be affixed to the Hotel, the Equipment shall remain the property of spectradyne and/or its partners or suppliers throughout the term hereof. However, Spectradyne hereby acknowledges that the Hotel retains the rights in the television sets Spectradyne provided to the Hotel, in conjunction with the provisions of Section 6 of the National Agreement. Hyatt acknowledges that the Equipment and the manner of its operation as part of the System are proprietary to Spectradyne and other third parties. Accordingly, Hyatt will use all reasonable efforts to ensure that information regarding and access to the System is not given to any person or persons other than personnel authorized by Spectradyne. Such restrictions shall not apply during emergency situations. (b) At the expiration or earlier termination of this Agreement as herein provided and subject to the terms of Section 6 of the National Agreement. Spectradyne shall have the right, at its sole risk, cost and expense, to remove the Equipment. Spectradyne shall effect such removal within thirty (30) days from the expiration or termination of this Agreement in a neat and workmanlike manner. (c) Spectradyne shall, at its sole cost and expense, repair any damage to the Hotel caused by the installation, removal, repair, servicing, maintenance or replacement of the Equipment, or any part thereof, at its sole cost and expense, and shall return the Hotel premises to its original condition at the time of installation, normal wear and tear excepted. (d) Spectradyne shall, diligently throughout the term hereof, maintain the Equipment, the TV Sets (complete with remote control units) and the MATV in good operational condition and make all necessary repairs thereto and service all replacements thereof, at its sole cost and expense. In this connection, Spectradyne agrees to: (i) designate technical representatives to provide maintenance as needed (and Hyatt will designate an engineer of the Hotel staff for the day-to-day control of operations); and, (ii) bear the responsibility for transmitting and maintaining a good quality signal for distribution through the MATV consistent with the requirements of the National Agreement. Spectradyne agrees to replace all lost remote control units or those television sets and remote control units broken beyond repair. The foregoing provisions notwithstanding, in the event of any damage to or loss of the Equipment, the TV Sets, the MATV or any part thereof caused by the willful misconduct or grossly negligent act of Hyatt or any of its employees, any repairs or replacements necessitated by such damage shall be at the expense of Hyatt, but in such event Spectradyne agrees to effect such 31 repair or replacement at Spectradyne's actual cost. 4. Grant of Licenses: Term. (a) The date when installation of the Equipment shall be completed and the System shall be completely operational is herein referred to as the "Term Commencement Date"; provided, however, such Term Commencement Date shall not be prior to the opening date of the Hotel, as designated by the Hotel general manager. (b) Hyatt hereby grants to Spectradyne, for a term commencing on the Term Commencement Date and terminating on June 30, 2000, without further action or notice of any kind by either Hyatt or Spectradyne, an exclusive license (the "License,,) which is contingent upon Spectradyne's continued ability to meet it's obligations as set forth in this Agreement and the National Agreement to supply to the Hotel the service of telecasting, in closed-circuit, pay per view movies over the MATV to television receivers located in the guest rooms of the Hotel and supply the Hotel with Interactive Services. Upon approval of Hyatt, Spectradyne may telecast various other programs, such as local travelogue films, conventions and trade shows at a mutually satisfactory fee arrangement. (c) In the event that during the term hereof, Hyatt and Spectradyne shall agree to replace the Transmission Equipment as provided in Section 2 hereof with new Transmission Equipment, then such replacement shall be completed in a timely manner on a schedule as agreed upon between Hyatt and Spectradyne. (d) Spectradyne shall have the exclusive right to provide Spectravision and Interactive Services in the Hotel during the term hereof subject to the Default provisions of the of this Agreement and the National Agreement. The Interactive Services to be provided hereunder shall interface with all Hotel guest room safes and bars, unless such safes or bars are provided by vendors other than those used by Hyatt Hotels as of August 27, 1993. In such event, Spectradyne shall use its best efforts to make its Interactive Services compatibly interface with the Hotel's safes and bars. Further, the other Interactive Services shall be available to the Hotel in the following languages: English, ________, ________, ________, ________, (to be determined by the Hotel). Spectradyne and Hyatt shall agree to cooperate to ensure that such telecasting services do not interfere with the operation, of either Party's Transmission Equipment or such other services, as the case may be; provided, however, Hyatt may, at Hyatt's sole cost, desire that certain similar or other services (including, but not limited to, other interactive services) be available at the Hotel, such as but not limited to, video cassette players to deliver programming that does not compete with the Spectravision Service (video recorders being specifically prohibited). Spectradyne is hereby granted the non-exclusive right to bid to provide such desired services. 32 (e) Upon the early termination of this Agreement (other than pursuant to a default by Hyatt under Section 16 hereof), Hyatt may give notice no later than thirty (30) days following such termination, at Hyatt's option to either, (i) purchase and/or obtain Spectradyne's interest in or right to use all or any portion of the existing Equipment, as determined solely by Hyatt, for an amount mutually agreed to be the fair market value of such equipment and/or interest or right therein, except for any Equipment not owned by Spectradyne or Equipment which Spectradyne cannot convey any interest in or right to use. If, however, Hyatt and Spectradyne are unable to determine the fair market value of such Equipment and/or interest or right therein, such Equipment shall remain at the Hotel as set forth Section 4(e)(ii) below. In the event Hyatt elects to purchase such Equipment and/or interest or right therein, Spectradyne shall deliver to Hyatt free and clear title to such Equipment along with the Bill of Sale upon receipt of payment of the agreed upon amount; or, (ii) require Spectradyne to keep and maintain all Equipment provided to the Hotel pursuant to a Hyatt Spectramax Agreement including the license for the use of the on-site software required to operate the Equipment or provide the Interactive Services at the Hotel for a total rental, maintenance, license and service fee in the amount of *** per guest room per month for a term not to exceed thirty-six (36) months; and, (iii) the parties agree that in the event Hyatt exercises its option to keep the Equipment in the Hotel pursuant to Section 4(e)(ii) above, Hyatt' agrees not to use the Equipment to show in room pay-per-view movies and such other video programming. (iv) However, Hyatt may elect to offer guest pay movies and such other video programming through the rented Spectradyne Equipment and Spectradyne shall be the exclusive provider of those guest pay movies over the rented systems, and Spectradyne shall continue to pay Hyatt the fee specified in Section 10 below. If Hyatt fails to exercise the option set forth in this section 4(e)(iv) upon termination of the rental period pursuant to Section 4(e)(ii), Spectradyne may, following written notice, elect to remove the Equipment. (f) In the event Hyatt elects to either purchase all or any portion of the Equipment and/or the interest, or rights therein, or rent the Equipment from Spectradyne as described in Section 4(e) above, Spectradyne agrees to license to Hyatt, for Hyatt's use, at no additional cost to Hyatt, the on-site software and any and all upgrades thereto, which are necessary to operate the Equipment or provide the Interactive Services for a period not to exceed thirty-six (36) months. After the end of the initial thirty-six (36) months, if the parties have not previously 33 terminated the Agreement, it shall automatically renew for continuous ninety (90) day terms, until such time as one party provides the other party with ninety (90) days, prior written notice of intent to terminate. Spectradyne warrants and represents that it owns free and clear title to all such on-site software required to provide Interactive Services and to operate the Equipment. (g) This Agreement shall automatically terminate upon the expiration or earlier termination of the National Agreement. (h) In the event that Hyatt shall for any reason cease to be manager or operator of the Hotel, either party shall have the right to terminate this Agreement as of the date of such cessation of management or operations. The cancelling party shall provide the non-cancelling party with at least thirty (30) days prior written notice of such termination. (i) This Agreement may be suspended, at Hyatt's option, upon thirty (30) days prior written notice in the event the Hotel or any portion thereof is closed for renovation. In the event Hyatt chooses to suspend this Agreement, all applicable fees shall abate during such renovations and shall resume on the date when the Hotel or sections thereof reopen to the public. 5. Ownership of Equipment, MATV and TV Sets. (a) Title to the Equipment shall remain with Spectradyne and/or its partners or suppliers except as provided for otherwise below. (b) Title to the MATV and the TV Sets is and shall remain with the Hotel. It is agreed that all items which. encompass the MATV before and after the date of the completion of the upgrades thereto pursuant to the National Agreement are hereby deemed property of the Hotel. 6. standard for Selection of Movies. (a) Spectradyne shall supply, for projection through the System, Spectradyne's Guest Choice "A", on demand, in-room guest pay movie and entertainment service ("Guest Choice"), which shall provide a selection of up to two hundred (200) tapes or movies available to guests for viewing on demand. In addition, pursuant to the requirements described in the National Agreement, Spectradyne shall provide an advanced compressed digital means of providing on demand, in room guest pay movies and entertainment (the "New Technology"). For purposes of this Agreement, in connection with Guest Choice service, "on demand" shall mean that the system is capable of meeting a guest's request to view a particular selection within an average of three (3) minutes of initiation of such request. In connection with the New Technology service "on demand" shall mean that the system is capable of meeting a guest's request to view a particular selection virtually instantaneously. It is the intent of the 34 parties hereto that, except as otherwise provided below, Spectradyne shall have absolute control and discretion in the selection of movies to be exhibited at the hotels; provided, however, that Spectradyne shall provide (i) a method whereby a guest must reconfirm his movie or entertainment selection electronically before actually viewing the selection, (ii) a method whereby a guest may select and preview up to three (3) movies or other entertainment selections for up to five (5) minutes apiece without charge, and (iii) a method whereby a guest will be able to electronically restrict movies from being offered in his guest room by title, category, on a day-to-day basis or for the length of the guest's stay. (b) Notwithstanding the foregoing, at no time shall Spectradyne offer movies or entertainment which, in the versions as presented, have been rated "XI' by the Motion Picture Association of America. At periodic intervals, Hyatt may review the entertainment offered by Spectradyne. If, in the reasonable opinion of Hyatt, following such review, Hyatt is of the opinion that the materials which are available for viewing would offend the sensibilities of a substantial number of Hyatt's guests in a certain hotel, then the provisions of the National Agreement shall apply. (c) All movies shall be free of distortion and of a first class video quality. Any inferior video tapes or other videos shall be replaced immediately. (d) In supplying movies to the Hotel, Spectradyne will use its reasonable efforts not to violate any censorship rules or prohibitions applicable to the Hotel. To that end, Spectradyne shall inform Hyatt in writing of the movies proposed to be shown not later than seventy two (72) hours in advance of the scheduled projection. If any such movie is known by Hyatt to be in violation of the Hotel's censorship rules or otherwise prohibited by the Hotel, Hyatt will promptly inform Spectradyne of such fact and Spectradyne shall provide a substitution acceptable to Hyatt. Spectradyne understands and agrees that Hyatt may not be familiar with the contents of each movie scheduled for projection at the hotels; therefore, Hyatt reserves the right to reasonably veto any movie which violates such censorship rules or prohibitions at any time prior to or during its projection. (e) The Hotel agrees that the movies provided under this Agreement remain the property of Spectradyne. The Hotel shall (i) ensure that the movies are stored under the strictest reasonable security measures, and (ii) shall not allow anyone other than in-room guests and invitees to view the movies. The Hotel shall not allow any copying under any circumstances of the movies and shall not allow the movies to be taken from the premises. 7. Operation of System. 35 (a) Subject to applicable regulations of governmental authorities having jurisdiction, Hyatt shall at all times during the term hereof, make available appropriate MATV channels and the television receivers located in the Hotel guest rooms for the transmission of the movies. (b) Spectradyne shall (i) initially inspect and, if necessary, repair the MATV system to proper working condition to receive and broadcast the movies and such other video programming. Thereafter Spectradyne shall maintain the MATV in good operating condition in accordance with the requirements of the National Agreement, (ii) ensure that all guest room TV Sets are and remain connected to the MATV during the term hereof, (iii) supply in all guest rooms TV Sets capable of properly receiving and displaying in color the movies to be provided by Spectradyne and maintain such TV Sets (including all remote control units thereto) in good operating condition, and (iv) maintain proper tuning of such TV Sets for clear reception of the normal television programs. (c) Hotel shall, at no cost to Spectradyne, provide the electrical power necessary to operate the Equipment. The personnel of the Hotel, as agents of Spectradyne, shall be responsible for turning the System on and off daily, changing of video cassettes as required, placing program cards in the guest rooms and readjusting such TV Sets whenever guests have altered their clear reception. (d) Hyatt will grant to the representative of Spectradyne access to all such areas of the Hotel at such times as Spectradyne shall reasonably require in order to perform its obligations hereunder; provided, however, that Spectradyne in the exercise of its access rights and in performance of its obligations hereunder shall not unreasonably inconvenience the guests of the Hotel or unreasonably interfere with the operation of the Hotel. (e) In the event Spectradyne shall notify Hyatt that Spectradyne desires to use a microwave system for the transmission of movies in the Hotel, Hyatt shall, at no cost to Spectradyne, use reasonable effort to provide suitable space on the roof of the Hotel for the location of a microwave receiver and related equipment, provided, however, that all consents required to locate such receiver and equipment are obtained by Spectradyne. 8. Advertising and Promotion. Spectradyne shall supply to Hyatt, at no cost to Hyatt, suitable advertising and promotional material with respect to the movies available through the System, including placards and display cards describing the movies for the benefit of the Hotel guests. Hyatt shall display such advertising and promotional material at suitable locations in the Hotel, provided that Hyatt shall have the right, in its sole discretion, to refuse to display any items the contents or format of which is deemed offensive or not in the best interests of the Hotel. 36 9. Training of Hotel Personnel. Spectradyne shall, at no cost to Hyatt, provide proper training for the Hotel personnel during their respective working hours in the promotion of the use of the System by Hotel guests, the daily operation thereof and routine surveillance of Equipment. 10. Remuneration. (a) Hyatt shall, at no cost to Spectradyne, bill Hotel guests for viewing movies projected through the System at the rate(s) hereinafter provided. Billing shall be made on a daily basis in the same manner a's other Hotel charges are billed to guests. The "Gross Viewing Receipts" for any period shall mean the aggregate gross amount billed by Hyatt to Hotel guests during such period less (i) the amount of taxes, if any, chargeable to Hotel guests in connection with any viewing of movies, and (ii) any uncollectible charges theretofore billed to Hotel guests for viewing movies through the System which were previously reported to Spectradyne to the extent such charges are written off on Hyatt's books during such period. (b) Initially, the charge for each viewing of a movie shall be _______________ dollars ($_____) and the charge for each viewing of _______________ (such as exercise videos) shall be _______________ dollars ($_____). Such charge shall be subject to adjustment from time to time by written agreement between the parties hereto. In the event that either party shall desire to increase the charge for a viewing, such party shall give to the other party hereto notice (the "Adjustment Notice") specifying the proposed new charge and the proposed effective date thereof (and the date when such Adjustment Notice shall be given is herein referred to as the "Notice Date"). In the event that the parties shall fail, within sixty (60) days from the Notice Date, to execute an agreement setting forth the new charge and its effective date, this Agreement shall terminate upon the expiration of ninety (90) days from the Notice Date unless the parties hereto shall theretofore have executed an agreement in writing in which they agree to submit the matter to arbitration. (c) In consideration of all rights and privileges granted to Spectradyne hereunder, Spectradyne shall pay to Hyatt with respect to each month during the term hereof, the following formula: (i) in the event Gross Viewing Receipts for any month do not exceed *** per room, an amount equal to *** of the monthly Gross Viewing Receipts generated by the Hotel for such period (the "Commission Feel") and an amount equal to *** of the monthly Gross Viewing Receipts generated by the Hotel for such period as an advertising allowance (the "Advertising Allowance"), and (ii) in the event Gross Viewing Receipts for any month exceed *** per room, an additional amount equal to *** of the monthly Gross Viewing Receipts generated by the Hotel for such period in excess of *** per room, (the "Revenue Share"). The Advertising 37 Allowance may be used by Hyatt for any advertising purpose(s) Hyatt deems appropriate in its sole discretion and in no way obligates Hyatt to use the funds to recognize or promote Spectradyne, any of its services or Hyatt's relationship with Spectradyne. (d) on or before the tenth (10) day of each calendar month during the term hereof, Hyatt shall remit to Spectradyne a sum equal to the Gross Viewing Receipts plus applicable taxes collected from guests, on behalf of Spectradyne, for the preceding calendar month less Hyatt's Commission Fee, Advertising Allowance and Revenue Share for such month determined in accordance with subsection (c) of this Section 10, together with a statement showing the Gross Viewing Receipts plus applicable taxes collected from guests for such preceding calendar month. (e) All Interactive Services shall be provided by Spectradyne to the Hotel at no fee to Hyatt or the Hotel. (f) on behalf of Spectradyne, Hyatt shall collect applicable taxes from Hotel guests and remit same to Spectradyne for payment by Spectradyne to the applicable government or governmental agencies. It is the responsibility of Spectradyne to provide the Hotel with notification as to the applicability of which taxes are to be collected by the Hotel on behalf of Spectradyne, including any revisions thereof. In the event Spectradyne fails to pay any taxes when due, the Hotel shall have the right to remit such taxes to such agencies on behalf of Spectradyne and Spectradyne shall immediately reimburse the Hotel for payment of such taxes. (g) The books and records of the Hotel to the extent and only to the extent that they are pertinent to the Gross Viewing Receipts for any period included in the term hereof shall, during normal business hours and upon seven (7) days prior written notice to the Hotel, be open to inspection and audit by an authorized representative of Spectradyne. It is expressly understood that, with respect to the Gross Viewing Receipts during any calendar year, Spectradyne's rights to inspect and audit the books and records of the Hotel pertaining thereto shall not extend beyond two (2) years following the expiration of such calendar year. 11. Indemnification and Compliance with Laws. (a) Spectradyne shall, in addition to the following, indemnification requirements as set forth in the National Agreement. (b) Spectradyne shall timely secure, and continuously maintain in full force and effect during the term hereof, (i) all licenses, permits and approvals required by any governmental authority having jurisdiction in respect of the services to be performed by Spectradyne hereunder, and (ii) all necessary patents, copyrights, intellectual property rights, distribution 38 rights, music rights, licenses, releases, waivers, and all other necessary consents required of Spectradyne. Spectradyne hereby agrees to indemnify and hold harmless Hyatt and the owner of the Hotel and, at Spectradyne's expense, to defend Hyatt and the owner of the Hotel and each of their respective officers, directors, agents, and employees from and against any claims, demands, causes of action, loss, cost, and expense (including reasonable attorneys, fees) arising from or in connection with or based upon a real or alleged breach by Spectradyne of the foregoing provisions of this subsection, including without limiting the generality of the foregoing, any claims, demands, causes of action, loss, cost, and expense (including attorneys' fees) or fee based upon an alleged or actual infringement of any patent or copyright or an alleged unauthorized broadcast or use of any license. Hyatt shall promptly notify Spectradyne for any matter for which indemnity is sought under this paragraph and, in any event, prior to the incurrence of any expenditures under this Section. (c) Spectradyne hereby waives any and all claims against Hyatt and the owner of the Hotel and each of their respective officers, directors, agents and employees for any loss of or damage to the Equipment or any property of Spectradyne located in the Hotel except such as may be caused by the willful misconduct or gross negligence of Hyatt, its agents, its employees, or the employees of its agents (and in case of such willful act or negligence, Hyatt's liability shall be limited to the actual cost of the portion of the Equipment or other property lost, damaged, or destroyed). Spectradyne acknowledges that, except in the case of Hyatt's willful misconduct or negligence or that of its employees, the risk of loss with respect to the Equipment or any other property of Spectradyne in the Hotel is exclusively that of Spectradyne, and Spectradyne shall, at its expense, carry hazard insurance against such risk of loss. (d) The telecasting of the movies and the installation and maintenance of the Equipment by Spectradyne shall be in accordance with proper safety procedures and in conformity with all laws, rules, orders, regulations, and ordinances of the U.S. government and other governmental authorities having jurisdiction, and with the regulations of the Board of Fire Underwriters (or other similar body) applicable to the Hotel. (e) Spectradyne agrees that it is as fully responsible for the acts and omissions of its subcontractors and of persons either directly or indirectly employed by them as it is for the acts and omissions of persons directly employed by Spectradyne. Spectradyne agrees to bind every subcontractor by the terms of the this Agreement so far as is applicable to the subcontractor's work. However, nothing contained in the provision of this Agreement shall create any contractual relationship between Hyatt and any subcontractor. 12. Taxes. 39 Hyatt agrees to pay on behalf of Spectradyne any and all sales, use, ad valorem, admission, property tax, or amusement taxes, or other similar taxes, tariffs, or governmental levy of any form whatsoever in connection with the installation of the Spectravision Equipment. On the offering of the services that Spectradyne provides to the Hotel for Hotel's guests pursuant to this Agreement, nothing contained herein shall create a liability for the Hotel to collect any taxes assessed on the basis of such services provided by Spectradyne, except for those taxes that Hyatt collects on behalf of Spectradyne as set forth in this Agreement. 13. Insurance. (a) Spectradyne shall meet its insurance requirements as set forth in the National Agreement. (b) Spectradyne shall maintain at all times during the term hereof, at its sole cost and expense, adequate comprehensive general liability insurance in amounts to be agreed upon from time to time between Hyatt and Spectradyne against any liability (including attorney's fees) on account of or arising out of injuries to or the death of any person or damage to property occasioned by or in any way connected with the installation, maintenance, removal or replacement of the Equipment or the operation of the System. Such insurance shall name Hyatt and the owner of the Hotel and any other party reasonably requested by Hyatt as an additional insured and Spectradyne shall furnish Hyatt, from time to time, certificates of insurance evidencing compliance with the provisions of this subparagraph. 14. Force Majeure. Neither party hereto shall have any liability for the failure to perform or a delay in performing any of its obligations hereunder if such failure or delay is the result of any legal restriction, labor dispute, strike, boycott, flood, fire, public emergency, revolution, insurrection, riot, war, unavoidable mechanical failure, interruption in the supply of electrical power, or any cause beyond the control of such party whether similar or dissimilar to the causes hereinbefore enumerated except in any case an event which can be cured or mitigated by the payment of money; provided, however, that the failure of Spectradyne to deploy and install the New Technology on the schedule established and as required pursuant to Section 4 of the National Agreement shall under no circumstances be deemed a force majeure event. 15. Assignment. This Agreement may be assigned by Hyatt to any successor operator of the Hotel only upon the execution of a written agreement by that successor assuming the obligations of Hyatt under this Agreement. An assignment without such assumption of obligations will operate as a default under this Agreement. 40 This Agreement may not be assigned in whole or in part by Spectradyne without the prior written approval of Hyatt. 16. Corporate Room Rates. Whenever Hyatt's hotel facilities and services are used by directors, officers, employees, and guests of Spectradyne in furtherance of Hyatt's related business, such personnel shall not be required to pay more than Hyatt's corporate rates for their use of such hotel facilities and services. 17. Default. (a) In the event that Spectradyne fails, in any material way, to provide the services described in Section 3(d) above to Hyatt's sole satisfaction, at its sole option, upon three (3) days, notice and opportunity to cure, Hyatt may elect to have such service(s) performed by another vendor at the sole cost and expense of Spectradyne. All amounts owed by Spectradyne under this paragraph shall be deducted from amounts payable to Spectradyne by the applicable Hotel. Hyatt will provide Spectradyne, at Spectradyne's request, with copies of such amounts. (b) Subject to the terms of Section 19 of the National Agreement and except (i) as otherwise provided in (a) above, and (ii) for the reasons that constitute a force majeure as set forth herein, in the event that either party (the "defaulting party") shall fail to perform or comply with any material obligation under this Agreement, the failure shall constitute a default. The non-defaulting party shall notify the defaulting party in writing of the failure and default. In the event the default is not remedied to the satisfaction of the party having given such notice within forty five (45) days after receipt of notice, or if such default is of a nature that it cannot, with due diligence and in good faith be cured within forty five (45) days and such defaulting party fails to proceed promptly and with due diligence and in good faith to cure the same, the non-defaulting party may declare this Agreement terminated as of the one hundred and eightieth (180th) day following the delivery of the original notice. 18. General Provisions. (a) Notices. All notices to be given hereunder shall be given in writing and shall be deemed given when deposited in the U.S. Mail with postage prepaid. Notices intended for Hyatt shall be addressed to the Hotel at its above-stated address to the attention of the General Manager, with a copy to Hyatt at its above-stated address, attention: General Counsel. Either party hereto may change its address for notices by giving notice of change to the other party. (b) Applicable Law. This Agreement shall be governed in all 41 respects by the internal laws of the State of Illinois without regard to the external laws or federal laws pertaining to conflicts of laws. (c) Modification. This Agreement shall not be modified or amended except by an instrument in writing executed by the parties hereto. Both parties agree to execute any other documents reasonably necessary to accomplish the purposes of this Agreement. (d) Successors and Assigns. This Agreement shall apply to, and be binding upon, the parties hereto and their respective successors and permitted assigns. (e) No Joint Venture or Agency Created. Nothing in this Agreement shall be construed to create any joint venture or principal-agent relationship between Hyatt and Spectradyne. Neither party shall hold itself out in any manner which would indicate such a relationship with the other party. (f) Severability of Provisions. If any part or subpart of this Agreement is found or held to be invalid, that invalidity shall not affect the enforceability and binding nature of any other part of this Agreement. 19. Consents. The obligations of the parties hereto are conditioned upon the receipt of all necessary approvals, consents, and authorizations required by law or by contract. 20. Hyatt-Agent. Spectradyne recognizes that Hyatt Corporation, a Delaware corporation, is the sole agent of Hyatt with regard to the operation of the Hotel until Spectradyne shall receive written notice to the contrary from Hyatt, and Hyatt and Spectradyne agree that Hyatt may perform all obligations of the Hotel and exercise all rights on behalf of the Hotel hereunder. Spectradyne acknowledges and agrees that the Hotel's only authorized signatories are located at the Hotel's corporate offices at Chicago, Illinois. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, by their officers hereunto duly authorized on the date first hereinabove set forth. HYATT CORPORATION, as agent of ______________________________ d/b/a ________________________ By: __________________________ Printed Name: ________________ Title: _______________________ 42 SPECTRADYNE, INC., a Texas Corporation By: __________________________ Printed Name: ________________ Title: _______________________ 43 EXHIBIT C AMENDED AND RESTATED SPECTRAVISION AND INTERACTIVE SERVICES NATIONAL AGREEMENT NEW TECHNOLOGY SPECIFICATIONS AND PERFORMANCE CHARACTERISTICS Spectradyne "New Technology" Services shall be provided with the following performance characteristics: 1. Both Phase I and Phase II movies will be-delivered to the viewer at 360 lines of resolution or better, with color clarity and definition superior to the current Spectravision VHS product. 2. Transmission of movie signals will be equal to or greater than 16 frames per second to provide !,flicker free,, video images. 3. Phase I will provide a minimum of 8 movie channels, Phase II will provide no fewer than 20 full length video programs available for viewing at random start times simultaneously by all hotel guests requesting the same selection. MASTER ANTENNA SYSTEM MINIMUM SPECIFICATIONS Spectradyne shall upgrade the Hotels MATV system to the following standards: All electrical equipment will be U.L. listed or built to U.L. specifications, and meet all FCC radiation requirements. All installations shall be made in accordance with national and local electrical codes. Standard for signal strength measurement shall be a calibrated field strength meter. The minimum acceptable specifications are detailed below. The MATV will be upgraded to provide the transmission standards necessary to carry the signals required by the New Technology services at broadcast quality standards. There will be no visible degradation of picture quality from the MATV system input point to any MATV system output point on the system. I. Head-End Specifications 1. Single channel processors with AGC and aural carrier reduction will be used to process each off-air signal. Preamplifiers will be used where necessary to achieve an input carrier level of sufficient amplitude to be within the range of the AGC in the channel processor. a. The output of individual strip amplifiers, modulators or channel processors will be combined using a methodology which 44 will provide a minimum of thirty (30) Db of isolation port to port. b. Items providing less than thirty (30) Db of isolation will not be used in the head-end environment to combine signals. 2. A Broadband Amplifier having a bandwidth of 5-450 MHZ, or greater, and equipped with Sub-Split Return will be used to amplify the combined output. The amplifier will be designed for two-way compatibility using sub-split return. The forward direction designed for 54 to 450 MHz or greater and the return designed for 5.75 to 35.75 MHz. The forward direction is to include both gain and tilt controls. 3. Visual carrier to spurious signal response shall be greater than 50db. Cross modulations shall be greater than 5ldb. 4. Visual/aural carrier ratio on any channel, will be 15 dBMv +/- 2 dBMv. 5. Amplitude response within any single T.V. channel (visual carrier to aural carrier) will be flat (+/- 2 dB) 6. UHF to VHF converters will be completely solid-state with a self-contained power supply. Input and output impedance shall be 75 ohms. The frequency of the output will be crystal controlled and will be within +/- .005% of the desired output frequency. 7. The VHF to VHF Convertors will be completely solid-state with a self-contained power supply. Input and output impedance shall be 75 ohms. The frequency of the output will be crystal controlled and within +/- .005% of the desired output frequency. 8. Antennas will be selected and installed so as to produce the best picture obtainable. Any local government permits required for the antenna installation will be obtained prior to actual installation of the antennas. Antennas and masts will be constructed and installed so as to withstand 100 mph winds. All Antennas used will have an adapted impedance of 75 Ohms and weather boots will be used to protect all outdoor antenna connections. When antennas are providing the signal source for "off-the-air" channels, Picture quality will be equal to or better than the picture quality available from local cable TV sources, as appropriate or applicable. At minimum, ABC, NBC, CBS, PES, and local UHF channels will be available from the MATV. Closed caption service at the TV must be provided for each of the three principal network channels, given programming availability as 45 provided by network sources. 9. Metal Cabinets designed for E1A 19" rack mounted equipment will be used to enclose the head-end active equipment. Suitable 115V AC power outlets will be installed in the cabinet for the equipment powering, including two additional outlets for maintenance equipment. 10. Pads, cable, and other miscellaneous equipment will be supplied and installed to make an operating head-end that meets all of the specifications as outlined. All cable used in the head-end equipment rack will be of Tri or Quad Shield design and will provide a minimum of 100 percent shielding from radiation and signal ingress or such other cable as to meet MATV standards of performance established herein. Distribution System Specification 1. Frequency Response of the system (excluding amplifiers) will pass 5 MHz to 450 MHz. Amplitude response for this spectrum will be +/- 4 dB with respect to the line represented by normal cable tilt. The system will be designed as two-way capable, i.e., subsplit return. 2. Visual Carrier Level in each room will be no.less than 2 dbMV on any single channel of the system. a. The maximum allowable variance between any two adjacent channels will be 2 dBMv. b. The maximum allowable variance between any two non-adjacent channels will be 12 dBMv @ 450 MHy or 3db per 100 MHy of band width. 3. Room to Room Isolation will be greater than 30 dB. Isolation values of all devices separating any two given rooms will be used for the purpose of this calculation as well as the structural return loss of all interconnecting cabling. 4. Visual carrier-to-noise ratio on any channel (4 MHz bandwidth) will be at least 42 dB at any T.V. outlet. a. The visual carrier to coherent noise ratio (intermodulation) will be greater than 46 dB. 5. Reflections ingressing MATV distribution system, which may cause ghosts and shadows within the system, will be more than 40 dB below the respective picture carrier. 6. Taps, splatters, and other passive equipment will be of the totally shielded type, using a sealed metal or aluminum case, so as to minimize radiation and ingress. All connections will be "F" type connectors. 46 a. Taps used will be designed to pass 5 MHz to 450 MHz, or greater b. Splitters will be designed to pass 5 MHz to 450 MHz, or greater C. Where the last tap on the riser is not a terminated tap, 75 ohm terminations will be used to terminate the end of all riser lines at the through port output. 7. Coaxial cable shall be of 75 ohm impedance with a return loss of 20 dB minimum from 5 MHz to 450 MHz. Cable construction will be solid copper or copper-clad steel center conductor and cellular polyethylene dielectric. Cables will be provided with two shields. The first shield shall consist of .002 inch double aluminum coated mylar or polypropylene tape with 1/811 overlap, bonded to the dielectric. The second shield shall be a minimum 60% coverage braid consisting of 34 AWG aluminum or tinned copper wire. The jacket shall be non-contaminating low temperature polyvinyl chloride or Teflon. Where ambient signal levels, as.measured with a half wave dipole, exceed 15 dB a cable having an effective shielding of 67 percent or greater will be utilized outside of all conduits. a. Cable Sizes used in the system can be either the same as RG-6 or RG-11. The RG-11 size is used for longer trunk lines and the RG-6 size is used for shorter feeder lines. Where conservation of signal is of prime importance in elimination of additional amplifiers, in cascaded systems, a cable having a diameter of .500 inches may be used, or such other configurations meeting performance standards stipulated herein. b. RG-11 size cable will have a nominal loss per 100 feet of .96 dB at 55 MHz, 1.9 dB at 211 MHz, 2.75 dB at 450 MHz. c. RG-6 size cable shall have a nominal loss per 100 feet of 1.6 dB at 55 MHz, 3.05 dB at 211 MHz, 4.4 dB at 450 MHz. d. .500 cable will have a maximum loss per 100 feet of .56 dB at 55 MHz, 1.09 dB at 211 MHz, 1.63 dB at 450 MHz. e. Coaxial cable runs will be continuous lengths and no splices shall be permitted in any conduit run. Cables shall be installed without sharp bends or physical distortion. f. Sweep testing of each reel of coaxial cable will be performed over the 5-450 MHz range by the cable manufacturer, as per cable industry standards for transmission and structural return loss and be so certified in writing by the cable manufacturer. 8. Coaxial Cable Connectors will be used to connect to equipment as required. Connectors will be solderless, 75 ohm impedance and be designed for the specific type of cable used. RG-6 connectors will be one piece construction having an integral ferrule 47 requiring a "HEX" type crimp for proper installation on the cable. RG-11 connectors will use the cables center conductor as the connector's center pin. All connections will be made using crimp tools of a design consistent with the connectors construction and intended use. 9. Amplifiers, Pads, Cable, and other miscellaneous equipment will be supplied and installed to make an operating distribution system that meets all of the specifications as outlined. III. Supplemental Distribution System Systems requiring line extender amplifiers will be designed to the same standards as the primary distribution system. Where more than two amplifiers are in cascade the third and fourth amplifiers will have their maximum full gain derated by a minimum of three dB. Further doubling of the cascade will result in additional gain reductions, of three dB, each time the cascade is doubled. 48 EXHIBIT D AMENDED AND RESTATED SPECTRAVISION AND INTERACTIVE SERVICES NATIONAL AGREEMENT TELEVISION SPECIFICATIONS Televisions provided by Spectradyne under this contract shall have at minimum the following features: 1. 20 or 25 inch screens, at Hyatt's option 2. "Smart Plug" compatibility with the Spectradyne system 3. Closed Caption 4. Stereo sound S. Channel labeling 6. Sleeptimer 7. Clone Programming 8. Non-volatile memory 9. 100+ Channel Capacity 10. Remote interface connector 11. TV's will be capable of no fewer than 360 scan lines of resolution The General Electric Model #20GH2SO twenty inch set and the General Electric Model #25GH350 twenty-five inch set meet the technical standard of this specification, however, Hyatt reserves the right to select the appropriate color, appearance, and decor of any set prior to their purchase and installation. All television sets will be equipped with SpectraMates and full function remote controls with the following minimum features: 1. Separate "Pay TV" buttons 2. one button access to free "Pay TV" movie previews, descriptions or schedules as appropriate to product (MOVIE) configurations. 3. one button access for hotel information services 4. Channel recall 5. Numeric channel control keypad as well as channel up and down buttons 6. Volume up and down buttons 7. Mute button Spectradyne remote control model RHHH-1 meets the technical standard of this specification. EX-10.3 5 AMENDED AND RESTATED SPECTRAMAX NATIONAL AGREEMENT 1 EXHIBIT 10.3 NOTE: THIS DOCUMENT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933. PORTIONS OF THIS DOCUMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN REDACTED AND ARE MARKED HEREIN BY "***". SUCH REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE COMMISSION PURSUANT TO THE CONFIDENTIAL TREATMENT REQUEST. AMENDED AND RESTATED SPECTRAMAX NATIONAL AGREEMENT THIS AMENDED AND RESTATED NATIONAL AGREEMENT (hereinafter I referred to as "National Agreement") made this 31st day of August, 1993, but effective as of July 1, 1993, by and between Hyatt Corporation, a Delaware corporation, on its own behalf and on behalf of its subsidiaries and affiliates (hereinafter called "Hyatt") and Spectradyne, Inc., a Texas corporation (hereinafter called "Spectradyne"). WITNESSETH: WHEREAS, Hyatt, located at 200 W. Madison Street, Chicago, Illinois 60606, operates the Hyatt hotels set forth on Exhibit A attached hereto and made a part hereof; WHEREAS, Spectradyne, located at 1501 N. Plano Road, P. 0. Box 830775, Richardson, Texas 75083-0075, provides its Spectramax service, as hereinafter described, to certain of Hyatt hotels pursuant to that certain Spectramax National Agreement dated July 26, 1989, but effective as of July 1, 1989 (the "Original National Agreement") and under separate Hyatt Spectramax agreements (the "Original Individual Agreements") made pursuant thereto (all such hotels and all other Hyatt hotels who utilize Spectradyne in the future are hereinafter individually called a "Hotel" and collectively called the "Hotels"); and WHEREAS, the parties wish to amend and restate all of their rights and obligations under the Original National Agreement pursuant to this National Agreement; NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby accepted and acknowledged, the parties hereto hereby agree as follows: 1. National Agreement. It is understood and agreed between the parties that the provisions of this National Agreement shall be included in and considered a part of the Individual Hyatt Spectramax Agreements (as further defined in Section 4(a) of this National Agreement) as if the provisions of this National Agreement were incorporated therein. In the event any of the provisions of this National Agreement are inconsistent with any of the provisions of any Individual Hyatt Spectramax Agreements, the provisions of this 2 National Agreement shall prevail. 2. Term. (a) This National Agreement shall be for a seven (7) year term commencing on July 1, 1993 ("Commencement Date") and expiring June 30, 2000 ("Expiration Date") unless terminated earlier in accordance with the provisions of this National Agreement. (b) The provisions of this National Agreement notwithstanding, any Individual Hyatt Spectramax Agreement may be suspended, at Hyatt's option, upon thirty (30) days prior written notice, in the event a Hotel or any material portion thereof is closed for renovation. In the event Hyatt chooses to suspend the Individual Hyatt Spectramax Agreement, any applicable fees shall abate during such renovations and shall resume on the date when such Hotel or sections thereof reopen to the public. (c) The provisions of this National Agreement notwithstanding, either party may cancel any Individual Hyatt Spectramax Agreement in the event Hyatt ceases to manage a Hotel as of the date of such cessation. The cancelling party shall provide the non-cancelling party with at least thirty (30) days prior written notice of such cancellation. (d) This National Agreement and the Individual Hyatt Spectramax Agreements are subject to early termination in accordance with the provisions of Section 16 herein and Section 13 of the Individual Hyatt Spectramax Agreements. (e) Except for the reasons that constitute a force majeure as set forth in Section 15 of this National Agreement which would not be grounds for termination hereunder, this National Agreement may be cancelled by Hyatt upon the early termination of that certain Amended and Restated Spectravision and Interactive Services National Agreement of even date herewith between Hyatt and Spectradyne (the "Spectravision National Agreement"). 3. Spectramax. (a) Spectramax is a registered trademark of Spectradyne. Spectramax services (commonly known as "free-to-guest") are multichannel, satellite-delivered, closed-circuit television services, including, but not limited to, satellite channels licensed by Spectradyne, all of which are delivered to Hotel guests over the Hotel master antenna television system ("MATVII) using an earth station and related equipment. The earth station and related equipment are provided by Spectradyne. (b) Spectramax services shall be provided in the manner described throughout this National Agreement and the Individual Hyatt Spectramax Agreements. (c) Spectradyne shall provide each Hotel, at the Hotel's option, 3 with a minimum of five (5) satellite channels as set forth in the respective Individual Hyatt Spectramax Agreements. Such satellite channels shall include Home Box Office ("HBO"), Entertainment and Sports Programming Network ("ESPN"), Cable Network News ("CNN") or CNN-Headline ("CNN-HI") Edition, the Disney Channel ("Disney") or Nickelodeon, and Turner Network Television ("TNT") or WTBS, Channel 17, Atlanta Superstation ("WTBS") or other equivalent services as agreed to by the parties. (d) During the terms of the Individual Hyatt Spectramax Agreements, Hyatt shall have the option to add or delete satellite channels licensed by Spectradyne upon ninety (90) days, prior written notice to Spectradyne. If Hyatt elects to add satellite channels licensed by Spectradyne in addition to those set forth in Section 3(c) above, such additional satellite channels shall be delivered to interested Hotels for a fee to be agreed upon between Hyatt and Spectradyne. It is understood and agreed that, from time to time, Hyatt may desire to receive a satellite channel not described in Section 3(c) above. In such instance, Spectradyne, at its sole cost and expense, shall use all commercially reasonable efforts to obtain the rights to such additional satellite channel and transmit same to the interested Hotels, for a fee to be agreed upon between Hyatt and Spectradyne. 4. Individual Hyatt Spectramax Agreements. (a) A number of Hotels have entered into individual Hyatt Spectramax agreements with Spectradyne to provide Spectramax services at such Hotels. These Original Individual Agreements along with all individual Hyatt Spectramax agreements to be executed pursuant to Section 4(b) hereof, shall be the "Individual Hyatt Spectramax Agreements" referenced in this National Agreement and shall be subject to and governed by the terms of this National Agreement. (b) Each Hyatt Hotel which is not already a party to an Original Individual Agreement desiring to retain Spectradyne to provide its Spectramax services shall enter into an Individual Hyatt Spectramax Agreement substantially in the form set forth as Exhibit B attached hereto and made a part hereof. (c) The term of each Individual Hyatt Spectramax Agreement shall be conterminous with the term of this National Agreement. In no event shall the Spectramax free-to-guest satellite services in any Hotel have a term less than Spectravision guest-pay movie services in that same Hotel. (d) Under no circumstances shall the term of any Individual Hyatt Spectramax Agreement automatically renew. (e) Spectradyne agrees that any Hotel set forth on Exhibit A is 4 eligible for Spectramax services and the other benefits hereunder. Hyatt may, from time to time, add or delete Hyatt Hotels from Exhibit A. Any Hyatt Hotel desiring to hire Spectradyne to provide Spectramax must enter into an Individual Hyatt Spectramax Agreement which shall expire on the Expiration Date regardless of its commencement date. Hyatt shall use all commercially reasonable efforts to ensure that Hyatt hotels enter into Individual License Agreements. 5. Installation of Equipment. (a) Spectradyne has heretofore furnished and installed the earth station or microwave system and related equipment (collectively, the "Equipment") necessary to provide Spectramax service at many of the Hotels. (b) With respect to new Hyatt Hotels, Spectradyne shall furnish and install the Equipment in accordance with the provisions of the Individual Hyatt Spectramax Agreement. (c) During the term of this National Agreement, title to the Equipment described herein is and shall remain with Spectradyne. (d) Upon the expiration or earlier termination of this Agreement or any Individual Hyatt Spectramax Agreement (other than pursuant to a default by Hyatt under Section 16 hereof), Hyatt may give notice no later than thirty (30) days following such termination, at Hyatt's option to either: (i) have the Hotels purchase and/or obtain Spectradyne's interest in or right to use all or any portion of the existing Equipment, as determined solely by Hyatt, for an amount mutually agreed to be the fair market value of such Equipment and/or interest or right therein, except for any Equipment not owned by Spectradyne or Equipment which Spectradyne cannot convey any interest in or right to use. If, however, Hyatt and Spectradyne are unable to determine the fair market value of such Equipment and/or interest or right therein, such Equipment shall remain at the Hotel(s) as set forth in Section 5(d)(ii) below. In the event that Hyatt elects to have the Hotels purchase such Equipment and/or interest or right therein, Spectradyne shall deliver to such Hotels free and clear title to such Equipment along with a Bill of Sale upon receipt of payment of the agreed upon amount; or, (ii) require Spectradyne to keep and maintain all such Equipment provided to the Hotels pursuant to the Spectravision National Agreement, including the license for the use of the on-site software required to operate the Equipment, or provide the Interactive Services at the Hotel(s) for a total rental, maintenance, license and service fee chargeable to the Hotels in the amount of *** per guest room per month for a term not to exceed thirty-six (36) months. 5 (e) The provisions of this Section 5(d) are also contained in Section 6 (h) of the Spectravision National Agreement. It is understood and agreed that the rental, license, maintenance and service fee described herein includes rental of and maintenance and service to the Spectravision and Interactive Services Equipment as well as the Spectramax Equipment and any software necessary to operate either the Spectravision or Spectramax systems. 6. Hub Site. From time to time, Spectradyne may request that a Hotel serve as a "hub site" from which Spectradyne may provide its Spectramax service to third parties. As compensation as a "hub site" the Hotel shall receive a monthly fee equal to ***. In the event Spectradyne requests the Hotel to serve as a "hub site", Hyatt will use its best efforts to enter into a rider to its Individual Hyatt Spectramax Agreement, substantially in the form attached hereto and made a part hereof as Exhibit C. 7. Maintenance. (a) Equipment, MATV Systems and TV Sets. Spectradyne, at its sole cost and expense, shall service, repair, replace and maintain the Equipment, the MATV-systems of the Hotels, and TV Sets (including the remote controls thereto) provided by Spectradyne pursuant to Spectravision National Agreement, in good working condition. Spectradyne agrees to replace all lost remote control units and/or those. TV Sets and remote control units broken beyond repair. All costs associated with such service, repairs, replacement and maintenance shall be borne by Spectradyne, except for repairs required due to the willful misconduct or gross negligence of Hyatt and its agents. Such repairs shall be made by Spectradyne at its cost and reimbursed by Hyatt. (b) Service. In addition to providing Hyatt automated diagnostic and repair services, Spectradyne shall at all times during the term hereof maintain or cause to be maintained a sufficient staff of trained technicians meeting the requirements of Section 9 below who shall be available to perform such service, repairs, replacement and maintenance on the Equipment, the MATV and the TV Sets (including the remote controls thereto). Spectradyne shall continue to maintain a "live" person service desk reachable twenty-four (24) hours a day, seven (7) days a week by phone and shall provide a guaranteed response time of four (4) hours on any service calls. 8. Fee. (a) During the term of this National Agreement, all Spectramax services (including a minimum of five (5) satellite channels 6 including HBO, ESPN, CNN or CNN-H, Disney or Nickelodeon, and TNT or WTBS) shall be provided to the Hotels at no cost to Hyatt or the Hotels. Any additional satellite channels licensed by Spectradyne which Hyatt elects to add to the Spectramax services shall be provided to interested Hotels for a fee to be agreed upon between Hyatt and Spectradyne. (b) Spectradyne warrants and represents that the value provided to Hyatt Hotels hereunder is the best or better value provided by Spectradyne to any comparable hotel company's hotels; and, in particular, is the best or better value provided by Spectradyne to hotels operated by Marriott Corporation and Hilton Hotels Corporation. Comparable hotels are defined as those hotels with like Spectradyne equipment and substantially similar satellite channels, room counts, and quest occupancy rates. In the event that at any time during the term of this Agreement, Spectradyne shall offer a better combined value to any comparable hotel than the value which is provided to Hyatt, the value provided to Hyatt Hotels under this Agreement shall be automatically increased to the same level, In no event shall Marriott and Hilton hotels be considered non-comparable hotels. For purposes of this paragraph "value" shall mean the value of (i) all fees, allowances and revenues, (ii) all Equipment including television sets and remote control units, (iii) all software, software licenses and/or other intellectual property rights, (iv) all services including installation, maintenance, repair and replacement, and (v) all cost savings or other benefits provided to the hotels, their parent companies or affiliates. 9. Personnel. Spectradyne shall provide or cause to be provided adequate personnel and any subcontractors, as approved by Hyatt, to permit the timely completion of all work. All such personnel shall be trained and supervised in accordance with accepted industry practices and shall conform to the reasonable rules and regulations of Hyatt established from time to time by Hyatt for the conduct of, and in relation to, the employees of the contractors of the Hotels when such employees are on Hotel premises. Spectradyne's employees, subcontractors or agents shall be neat in appearance and wear badges identifying them as employees or representatives of Spectradyne. 10. Equipment and Material. Spectradyne shall provide and maintain adequate equipment to permit timely completion of all operations and shall use materials which are in conformance with existing federal, state, and local laws and ordinances. 11. Licenses or Permits. If any governmental license or permit shall be required of Spectradyne for the proper and lawful conduct of Spectradyne's 7 business or other activity carried on, in or at any Hotel, or if a failure to procure such a license or permit might or would in any way affect the operations of any Hotel, then Spectradyne, at its expense, shall duly procure and thereafter maintain such license or permit and submit the same to inspection by Hyatt. Spectradyne, at its sole cost and expense, shall at all times comply with the requirements of each such license or permit. Spectradyne shall, at its sole cost and expense, secure and maintain in full force and effect during the term of this Amended and Restated National Agreement and every Individual Hyatt Spectramax Agreement, all necessary patents, copyrights, distribution rights, music rights, licenses, intellectual property rights, releases, waivers and all other necessary consents of third parties required of Spectradyne to meet its obligations as set forth in this National Agreement. 12. Compliance with Laws. Spectradyne agrees, at its own expense, to comply promptly with all requirements of any federal, state and local laws and ordinances. 13. Insurance. Spectradyne shall carry and maintain workers' compensation insurance in statutory amounts, comprehensive general liability insurance endorsed to include products and completed operations and contractual liability in a minimum amount of $1,000,000 combined single limit, and automobile liability insurance in a minimum amount of $1,000,000 combined single limit. All such policies (except workers I compensation) or certificates of insurance shall specifically state: "Hyatt Corporation, its affiliates and subsidiaries and the owners of Hyatt hotels are named as additional insureds under the above polices; such insurance shall be primary and not contributory with Hyatt's insurance. Each policy shall provide that it may not be canceled or changed without at least ten (10) days prior written notice to Hyatt. Spectradyne shall furnish to Hyatt a certificate of insurance evidencing such coverage prior to the commencement of services hereunder and shall continue to provide Hyatt with subsequent certificates of insurance evidencing uninterrupted compliance with this insurance requirement until the termination of this National Agreement. Spectradyne shall provide Hyatt with certified copies of the policies required herein upon Hyatt's request. 14. Indemnification. Spectradyne shall defend, indemnify and hold harmless Hyatt Corporation, its affiliates and subsidiaries and the owners of 8 Hyatt Hotels and each of their respective officers, directors, agents and employees from and against any and all actions, costs, claims, losses, expenses and/or damages, including reasonable attorneys' fees, arising out of or in any way relating to or incidental to the performance of the services to be performed by Spectradyne hereunder or the presence of Spectradyne at the Hotels. Spectradyne shall further indemnify Hyatt Corporation, its affiliates and subsidiaries and the owners of Hyatt Hotels and each of their respective officers, directors, agents and employees from and against any and all actions, costs, claims, losses, expenses and/or damages, including reasonable attorneys, fees, for or arising out of any bodily injuries to or the death of any of Spectradyne's employees working at the Hotel, however caused or occasioned, excepting the willful misconduct or gross negligence of Hyatt. Further, Spectradyne shall defend, indemnify and hold harmless Hyatt Corporation, its subsidiaries, affiliates and the owners of Hyatt Hotels, and each of their respective officers directors, agents and employees from and against any claims, demands, causes of action, loss, cost and expense (including reasonable attorneys, fees) arising out of or in connection with or based upon a real or alleged breach by Spectradyne of the provisions of this National Agreement pertaining to Spectradyne's intellectual property rights, including, but not limited to, those provisions set forth in Sections 5(d)(i) and 5(d)(ii) above, and any claims, demands, causes of action, loss, cost, expense, (including reasonable attorneys' fees) or fee based upon an alleged or actual infringement of any patent or copyright or an alleged unauthorized broadcast or use of any license as set forth in Section 11 above. Hyatt shall promptly notify Spectradyne for any matter for which indemnity is sought under this section and, in any event, prior to the incurrence of any expenditures under this section. Spectradyne agrees that it is as fully responsible for the acts and omissions of its subcontractors and of persons either directly or indirectly employed by them as it is for the acts and omissions of persons directly employed by Spectradyne. Spectradyne agrees to bind every subcontractor by the terms of this National Agreement so far as is applicable to the subcontractor's work. However, nothing contained in the provision of this National Agreement shall create any contractual relationship between Hyatt and any subcontractor. 15. Force Majeure. Neither party shall have any liability for the failure to perform or a delay in performing any of its obligations under this National Agreement if that failure or delay is the result of any legal restriction, labor dispute, strike, boycott, flood, fire, public emergency, revolution, insurrection, riot, war, unavoidable mechanical failure, electricity interruption or any other cause beyond the control of either party whether similar or 9 dissimilar to the causes enumerated herein except in any case any event which can be cured or mitigated by the payment of money: provided, however, that the failure of Spectradyne to deploy and install the New Technology on the schedule established and as required pursuant to Section 4 of the Spectravision National Agreement shall under no circumstances be deemed a force majeure event. 16. Default. (a) In the event that Spectradyne fails, in any material way, to provide the services described in Section 7 above, to Hyatt's sole satisfaction, Hyatt or any Hotel, at,its sole option, upon three (3) days' notice to Spectradyne and opportunity to cure, may elect to have such service(s) performed by another vendor at the sole cost and expense of Spectradyne. All amounts owed by Spectradyne under this paragraph shall be deducted from amounts payable to Spectradyne by the applicable Hotel. (b) Except (i) as otherwise provided in paragraph (a) above, and (ii) for reasons that constitute force majeure as set forth in Section 15 hereof, in the event either Hyatt or Spectradyne fails to perform or comply with any other material obligation under this National Agreement or the Amended Restated Spectravision National Agreement or any Individual Spectramax or Spectravision Agreement, that failure shall constitute a default. The non-defaulting party shall notify the defaulting party in writing of the failure and default. In the event the default is not remedied to the satisfaction of the party having given such notice within forty five (45) days after the receipt of notice, or if such default is of a nature that it cannot with due diligence and in good faith, be cured within forty five (45) days and such defaulting party fails to proceed promptly and with due diligence and in good faith to cure the same, then non-defaulting party may declare this National Agreement or the Amended and Restated National Spectravision Agreement or any or all of the Individual Spectramax or Spectravision Agreements, as appropriate, terminated as of the one hundred eightieth (180) day following delivery of the original notice. In the event that this National Agreement or the Amended Restated Spectravision Agreement is terminated pursuant to this Section 16, all the Individual Spectramax and Spectravision Agreements shall automatically terminate on the same terms without further action or notice of any kind by Hyatt. 17. Test Sites. Spectradyne understands and agrees that from time to time, during the term of this Amended and Restated National Agreement and the Individual Hyatt Spectramax Agreements, Hyatt may use certain of the Hotels as test sites side-by-side with existing and operating Spectradyne equipment for the purpose of investigating and evaluating the services offered by other companies which provide services which are the same as or similar to the services 10 provided by Spectradyne, so long as such testing causes no damages to Spectradyne nor uses its Equipment. Any such test shall not exceed a period of ninety (90) days. Hyatt shall not be deemed to be in default of this National Agreement or the Individual Hyatt Spectramax Agreements in the event any testing is conducted at a Hotel serviced by Spectradyne. 18. Advertising. Hyatt may, in its sole discretion and without obligation, allow Spectradyne to include third party advertising at the appropriate insertion spots in the ESPN, CNN or CNN-H programming or in other selected services delivered by Spectradyne to the Hotels. 19. Independent Contractor. Spectradyne is an independent contractor and all persons employed to furnish services hereunder are employees or agents of Spectradyne and not of Hyatt. 20. Notices. All notices, requests, demands and other communications hereunder shall be in writing and delivered or mailed, with postage prepaid, to the party intended at its address as hereinbefore set forth. 21. Binding. This National Agreement shall inure to and bind the successors, assigns and representatives of the parties, providing, however, this National Agreement may not be assigned by Spectradyne without the prior written consent of Hyatt. Spectradyne shall not have the right to subcontract its obligations as set forth herein to third parties without the prior written approval of Hyatt. 22. Governing Law. This National Agreement is subject to and governed by the internal laws of the State of Illinois without regard to the external laws or federal laws pertaining to conflicts of laws. 23. Entire Agreement. This National Agreement contains the entire agreement between the parties hereto; no representations, inducements, promises or agreements, oral or other, between the parties not embodied herein, shall be of any force or effect. 24. Amendment to Agreement. This National Agreement may be amended only by a written instrument signed by the parties hereto. 11 25. Legal Fees. In the event any legal action is taken by either party against the other party to enforce any of the terms and conditions of this National Agreement, it is agreed that the unsuccessful party to such actions shall pay to the prevailing patty therein all court costs, reasonable attorneys' fees and other professional fees and expenses incurred by the prevailing party. 26. Heading. The headings used in this National Agreement are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this National Agreement nor the intent of any provision thereof. 27. Hyatt - Agent. Spectradyne acknowledges that Hyatt acts as the agent of the owners of the Hotels and any action or obligation to be performed or carried out by any Hotel hereunder shall be performed by Hyatt solely in its capacity as agent for the owner of such Hotel. Accordingly, Spectradyne acknowledges that Hyatt's obligations in this Agreement in respect of matters relating to Hotels are obligations of Hyatt as agent only. IN WITNESS WHEREOF, the parties hereto have executed this National Agreement as of the day and year first above written. HYATT CORPORATION, on its own behalf an on behalf of its subsidiaries and affiliates By: /s/ Peter D. Connolly Printed Name: Peter D. Connolly Title: Vice President Hyatt Corporation SPECTRADYNE, Inc., a Texas Corporation By: /s/ Albert D. Jerome Printed Name: Albert D. Jerome Title: President and Chief Executive Officer 12 Exhibits to Spectramax National Agreement Exhibit Description A Amended and Restated List of Hyatt Hotels B Form of Individual Hyatt Spectramax Agreement C "Hub Site" Agreement 13 EXHIBIT A AMENDED AND RESTATED LIST OF HYATT HOTELS Hyatt Regency Albuquerque 330 Tijeras NW Albuquerque, NM 87102 Hyatt Arlington 1325 Wilson Blvd. Arlington, VA 22209 Hyatt Regency Atlanta 265 Peachtree St., NE Atlanta, GA 30303 Hyatt Regency Austin 208 Barton Springs Austin, TX 78704 Hyatt Regency Beaver Creek 136 East Thomas Place Avon, CO 81620 Hyatt Regency Bethesda One Bethesda Metro Center Bethesda, MD 20814 Hyatt Regency Cambridge 575 Memorial Drive Cambridge, MA 02139 Hyatt Regency Cerromar Beach Dorado, Puerto Rico 00646 Hyatt Cherry Hill 2349 West Marlton Pike Cherry Hill, NY 08002 Hyatt Regency Cincinnati 151 West 5th Street Cincinnati, OH 45202 Hyatt Regency Coral Gables 50 Alhambra Plaza Coral Gables, FL 33134 Hyatt Regency Alicante 100 Plaza Alicante Harbor & Chapman Blvd. Garden Grove, CA 92640 Hyatt Regency Aruba 14 L.G. Smith Blvd. 85 Palm Beach, Aruba Hyatt Regency Baltimore 300 Light Street Baltimore, MD 21202 Hyatt Regency Bellevue 900 Bellevue Way, N. E. Bellevue, WA 98004 Hyatt Regency Buffalo Two Fountain Plaza Buffalo, NY 14202 Hyatt on Capitol Square 75 East State Street Columbus, OH 43215 Hyatt Charlotte 5501 Carnegie Charlotte, NC 28209 Hyatt Regency Chicago 151 East Wacker Drive Chicago, Illinois 60601 Hyatt Regency Crown Center 2345 McGee Street Kansas City, MO 64108 Hyatt Regency Columbus 350 North High Street Columbus, OH 43215 Hyatt Regency Crystal City 2799 Jefferson Davis Hwy. Arlington, VA 22202 Hyatt Regency Dallas 300 Reunion Boulevard Dallas, TX 75207 Hyatt Deerfield 1750 Lake Cook Road Deerfield, IL 60015 Hyatt Dorado Beach Dorado, P.R. 00646 Hyatt Fair Lakes 12777 Fair Lakes Circle Fairfax, VA 22033 15 Hyatt Regency Grand Cypress One Grand Cypress Blvd. Orlando, FL 32836 Hyatt Regency Greenwich 1800 East Putnam Avenue Old Greenwich, CT 06870 Hyatt Regency Hill Country Resort 9800 Resort Drive San Antonio, TX 78251 Hyatt Regency Houston 1200 Louisiana Street Houston, TX 77002 Hyatt Regency Irvine 17900 Jamboree Boulevard Irvine, CA 92714 Hyatt Regency Kauai 1571 Poipu Road Koloa, HI 96756 Hyatt Regency DFW Airport International Pkway. DFW Airport, TX 75261 Hyatt Regency Dearborn Fairlane Town Center Dearborn, MI 48126 Hyatt Regency Denver 1750 Welton Street Denver, CO 80202 Hyatt Dulles 2300 Dulles Corner Blvd. Herndon, VA 22070 Hyatt at Fisherman's Wharf 555 N. Point Street San Francisco, CA 94133 Hyatt Grand Champions Resort 44-600 Indian Wells Ln. Indian Wells, CA 92210 Hyatt Regency Greenville 220 North Main Street Greenville, SC 29601 Harborside Hyatt Conference Center & Hotel 101 Harborside Drive 16 Boston, MA 92128 Hyatt Regency Hilton Head at Palmetto Dunes P.O. Box 6167 Hilton Head, SC 29938 Hyatt Regency Indianapolis One South Capitol Avenue Indianapolis, IN 46204 Hyatt Islandia 1441 Quivira Road San Diego, CA 92109 Hyatt Key West 601 Front Street Key West, FL 33040 Hyatt Regency Knoxville 500 Hill Avenue, SE Knoxville, TN 37901 Hyatt Regency Lake Tahoe Resort & Casino 111 Country Club Drive Incline Village, NV 89450 Hyatt Lisle 1400 Corporetum Drive Lisle, IL 60532 Hyatt Regency Long Beach 200 South Pine Avenue Long Beach, CA 90802 Hyatt Regency Los Angeles 711 South Hope Street Los Angeles, CA 90017 Hyatt Regency Maui 200 Nohea Kai Drive Lahaina, Maui Hawaii 96761-1990 Hyatt Regency Milwaukee 333 West Kilbourn Avenue Milwaukee, WI 53203 Hyatt Regency Monterey One Old Golf Course Road Monterey, CA 93940 Hyatt Regency New Orleans Poydras Plaza & Loyola Avenue New Orleans, LA 70140 17 Hyatt Newporter 1107 Jamboree Road Newport Beach, CA 92660 Hyatt Regency Oak Brook 1909 Spring Road Oak Brook, IL 60521 Hyatt Regency LaJolla 3777 LaJolla Village Drive San Diego, CA 92122 Hyatt Regency Lexington 400 West Vine Street Lexington, KY 40507 The Lodge Ronald Lane Oak Brook, IL 60521 Hyatt at Los Angeles Airport 6225 West Century Boulevard Los Angeles, CA 90045 Hyatt Regency Louisville 320 West Jefferson Louisville, KY 40202 Hyatt Regency Miami 400 SE Second Avenue Miami, FL 33131 Hyatt Regency Minneapolis 1300 Nicollet Mall Minneapolis, MN 55403 Hyatt Regency New Brunswick Two Albany Street New Brunswick, NJ 08901 Grand Hyatt New York Park Avenue at Grand Central New York, NY 10017 Hyatt Regency O'Hare 9300 West Bryn Mawr Rosemont, IL 60018 Hyatt Orlando 6375 West Irlo Bronson Memorial Highway Kissimee, FL 32741 Hyatt Regency Orlando 18 International Airport 9300 Airport Boulevard Orlando, FL 32827 Park Hyatt Chicago 800 North Michigan Avenue Chicago, IL 60611 Hyatt Regency Phoenix 122 North Second Street Phoenix, AX 85004 Hyatt Regency Pittsburgh 112 Washington Place Pittsburgh, PA 15219 Hyatt Regency Reston 1800 President Street Reston, VA 22090 Hyatt Regency Rochester 125 East Main Street Rochester, NY 14604 Hyatt Rickeys 4219 El Camino Real Palo Alto, California 94306-4493 Hyatt Regency San Antonio 123 Losoya San Antonio, TX 78205 Hyatt Regency San Francisco Airport San Diego, CA 92101 Burlingame, CA 94010 Hyatt Regency San Francisco 5 Embarcadero Center San Francisco, CA 94111 Hyatt Regency Sarasota 1000 Boulevard of the Arts Sarsota, FL 33577 Park Hyatt San Francisco At Embarcadero Center 333 Battery Street San Francisco, CA 94111 Park Hyatt Washington 1201 24th Street NW Washington, D.C. 20037 Hyatt on Printers Row 19 500 South Dearborn Chicago, IL 60605 Hyatt Regency Princeton 102 Carnegie Center Princeton, NJ 08540 Hyatt Richmond 6223 Broad Street Richmond, VA 23230 Hyatt Regency Sacramento 1209 "L" Street Sacramento, CA 95814 Hyatt Regency San Diego One Market Place San Diego, CA 92101 Grand Hyatt San Francisco 345 Stockton Street San Francisco, CA 94108 Hyatt San Jose 1740 North First Street San Jose, CA 95112 Hyatt Regency Savannah Two West Bay Street Savannah, GA 31401 Hyatt Regency Scottsdale 7500 East Doubletree Ranch Road Scottsdale, AZ 85258 Hyatt Regency St. Louis at Union Square One St. Louis Union Square St. Louis, MO 63103 Hyatt Regency Suites Perimeter Northwest 2999 Windy Hill Road Marietta, GA 30067 Hyatt on Sunset 8401 Sunset Boulevard West Hollywood, CA 90069 Hyatt Regency Vancouver 655 Burrard Street Vancouver, B.C. Canada V6C 2R7 Grand Hyatt Washington 20 1000 H Street NW Washington, DC 20001 Hyatt Westlake Plaza 880 South Westlake Boulevard Westlake Village, CA 91361 Hyatt Regency St. John P.O. Box 8310 Great Cruz Bay, St. John US Virgin Islands 00830 Hyatt Regency Suites Palm Springs 285 North Palm Canyon Drive Palm Springs, CA 92262 Hyatt Regency Tech Center 7800 E. Tufts Avenue Denver, Colorado 80237 Hyatt Regency Tampa Two Tampa City Center Tampa, FL 33602 Hyatt Regency Waikiki 2424 Kalakaua Avenue Honolulu, Oahu HI, 96815 Hyatt Regency Washington 400 New Jersey Avenue, NW Washington, D. C. 20001 Hyatt Regency Westshore 6200 Courtnery Campbell Cswy. Tampa, FL 33607 Hyatt Regency Woodfield 1800 East Golf Roa Shaumburg, Illinois 60173 21 EXHIBIT B HYATT SPECTRAMAX AGREEMENT BY THIS AGREEMENT made this _____ day of __________, 199__, between HYATT CORPORATION, as agent of ________________________ with offices at 200 West Madison Street, Chicago, Illinois 60606 ("Hyatt") and SPECTRADYNE, INC., a Texas corporation, with offices at 1501 North Plano Road, Richardson, Texas 75083 ("Spectradyne") the parties hereby RECITE AND AGREE as follows: RECITALS A. Spectramax is a registered trademark of Spectradyne. Spectramax Services (commonly known as "free-to-guest") are multi-channel, satellite-delivered, closed-circuit television services including, but not limited to satellite channels licensed by Spectradyne, all of which are delivered to hotel guests over the hotel master antenna television system ("MATV") using an earth station and related equipment provided by Spectradyne. B. Hyatt is the operator of that certain hotel known as the _______________ (the "Hotel") located at ___________________. C. The parties desire to enter into an agreement whereby Spectradyne will provide to the Hotel upon the terms herein provided, Spectramax Services. AGREEMENT In consideration of their respective covenants, the parties hereto mutually agree as follows: 1. Amended and Restated National Agreement. This Agreement is subject to and governed by the terms and conditions of that certain Amended and Restated Spectramax National Agreement effective July 1, 1993, between Hyatt Corporation on its own behalf and on behalf of its subsidiaries and affiliates and Spectradyne, Inc. (the "National Agreement"). Capitalized terms which are contained in this Agreement shall have the same definition and meaning as provided for under the Amended and Restated Spectramax National Agreement (hereinafter referred to as "National Agreement") unless specifically defined differently herein. In the event any of the provisions of this Agreement conflict with the provisions of the National Agreement, the provisions of the National Agreement shall prevail. 2. Spectramax Programming. (a) Spectradyne will provide the Hotel, at the Hotel's option, with a minimum of five (5) satellite channels ("Satellite Channels"). Such Satellite Channels shall include the following or any other agreed upon Satellite Channels designated by the 22 parties: (1) Home Box Office (HBO) (2) The Disney Channel (Disney) or Nickelodeon (3) Either Cable Network News (CNN) or CNN-Headline Edition (CNN-H), (4) Entertainment and Sports Programming Network (ESPN), and (5) Either Turner Network Television (TNT), or WTBS, Channel 17, Atlanta Superstation (WTBS). Hyatt, at its sole option, may choose any five (5) of the eight (8) Satellite Channels listed above. (b) All Satellite Channels shall be made available on Spectramax to Hotel guest rooms at no extra charge to Hotel guests. All Satellite Channels except HBO and Disney shall also be available on Spectramax on other television sets served by the Hotel MATV, including those in public areas. HBO and Disney shall be available on an uninterruptible basis, and the Hotel agrees to make no public announcement or advertisement that states Hotel has the right to take HBO or Disney off the air or the right to interrupt such service. Hotel recognizes that ESPN reserves the right to require that ESPN programming be blacked out during certain designated events. Spectradyne shall notify the Hotel at least twenty-four (24) hours in advance of any event required to be blacked out by ESPN. Hyatt agrees to blackout ESPN on its premises for the blackout period required by ESPN and recognizes that its failure to comply with any such blackout requirement may result in the termination of ESPN programming at the Hotel. (c) Throughout the life of this Agreement, Hyatt has the option to add or delete Satellite Channels licensed by Spectradyne upon ninety (90) days, prior written notice to Spectradyne. If Hyatt elects to add Satellite Channels in addition to those set forth in (a) above, such additional Satellite Channels shall be delivered to interested Hotels for a fee to be agreed upon between Hyatt and Spectradyne.It is understood and agreed that, from time to time, Hyatt may desire to receive a satellite channel not currently licensed by Spectradyne above. In such instance, Spectradyne, at its sole cost and expense, shall use all commercially reasonable efforts to obtain the rights to such additional satellite channel and transmit same to the Hotel for a fee to be agreed upon between Hyatt and Spectradyne. 3. Fees and Payment Terms. During the term of this Agreement all Spectramax Services including the Satellite Channels described in 2(a) above shall be provided to the Hotel at *** to Hyatt or the Hotel. Any additional Satellite Channels licensed by Spectradyne which Hyatt elects to add to the Spectramax Service shall be provided to the Hotel for a fee to be agreed upon between Hyatt and Spectradyne. 4. Term. 23 (a) This Agreement shall be for a term commencing on _____________ ("Commencement Date") and expiring on June 30, 2000. (b) In the event that Hyatt shall for any reason cease to be manager or operator of the Hotel, either party shall have the right to terminate this Agreement as of the date of such cessation of management or operations. The cancelling party shall provide the non-cancelling party with at least thirty (30) days prior written notice of such termination. (c) This Agreement may be suspended, at Hyatt's option, upon thirty (30) days prior written notice in the event the Hotel or any portion thereof is closed for renovation. In the event Hyatt chooses to suspend this Agreement, any applicable fees shall abate during such renovations and shall resume on the date when the Hotel or sections thereof reopen to the public. (d) This Agreement shall automatically terminate upon the expiration or earlier termination of the National Agreement. 5. Installation of Equipment. (a) The Hotel is equipped with a master antenna system (herein collectively called the "MATV") which is a network of cables, wall taps, antennas and specially designed radio frequency signal processing components, which receive, process, amplify and distribute video and audio TV and FM signals from a central location to a multiplicity of televisions within a building or group of buildings. Title to the MATV is and shall remain with the Hotel. Heretofore, from time to time, Spectradyne has made repairs to and replacements of the Hotel's MATV. It is understood and agreed that, before and after the completion date of any upgrade made to the MATV by Spectradyne as required below or pursuant to the Amended and Restated Spectravision and Interactive Services National Agreement effective July 1, 1993 (the "Spectravision National Agreement"), all equipment which encompasses the MATV is hereby considered property of the Hotel. (b) Upon receipt of this Agreement, Spectradyne will make recommendations to Hyatt as to the best Spectramax earth station and equipment or microwave system locations at the Hotel, and as to any changes necessary in the Hotel MATV. Hyatt will allow Spectradyne personnel reasonable access to all areas of the Hotel for a pre-installation survey. In the event Spectradyne determines to use a microwave system, Spectradyne shall furnish and install a microwave link instead of an Earth Station. There shall be no charge to Hyatt for roof mount installation. (c) Upon receipt of Spectradyne's notice of the location of a sufficient and suitable frequency coordinated approved site for the earth station, Hyatt shall use its best efforts to make such frequency coordinated approved site available to Spectradyne, as soon as possible thereafter. Hyatt shall then supply and pay for all electricity necessary to operate such earth station as well as 24 the other equipment if the earth station is placed on the ground, Spectradyne, at its sole cost and expense, shall construct a concrete pad with bolts built to the specifications of the manufacturer of the earth station. Such specifications shall be supplied by Spectradyne a t its sole cost and expense. If the earth station is located on the roof, the roof shall be reinforced to Hyatt's and Spectradyne's engineering specifications at the sole expense of Spectradyne. In addition, Spectradyne will provide security fencing and trenching from the concrete pad to the exterior wall or other site on the property, and the necessary conduit required to run electrical wiring from the concrete pad to the exterior wall or other site. If Hyatt shall be unable to make such frequency coordinated approved site available, Hyatt shall use its best efforts to make available another approved site that is acceptable Spectradyne. (d) The site of the Spectramax station shall be marked and mutually approved in writing on a plot plan of the Hotel supplied to Spectradyne by Hyatt (and set forth on Exhibit A attached hereto and made a part hereof). The installation shall commence as soon as possible after Spectradyne receives Hyatt's authorization to proceed. At its sole cost and expense, Spectradyne shall furnish and install all Spectramax equipment and cables necessary to deliver Spectramax services in guest rooms of the Hotel. This installation shall be at the sole expense of Spectradyne except as described in subsections (c) and (g). (e) Hotel shall obtain, at Spectradyne's cost, any required zoning clearances, variances, or local permits. (f) Spectradyne shall effect the installation in a workmanlike and efficient manner without reasonable interference with the operation of the Hotel. (g) Hyatt shall provide complimentary guest rooms at the Hotel for Spectradyne personnel during the installation of such Earth Station and during any maintenance visits for such Earth Station. 6. Operation. (a) Spectradyne shall obtain any necessary licenses for the rights to exhibit in the Hotel those Satellite Channels specified above. Hyatt shall comply with the rules of Spectradyne's licenses for the Satellite Channels. (b) In the event Spectradyne discontinues its relationship with any Satellite Channel Spectradyne will notify Hyatt in writing no less than thirty (30) days in advance of any discontinuation. Spectradyne will make its best efforts to provide a substitute Channel. In the event Spectradyne is unable to provide a substitute Channel, subject to Section 12 hereof, such failure shall, at Hyatt's option, constitute a default as defined hereunder and shall be subject to the provisions contained in Section 13 below. 25 (c) In the event any Satellite Channel publishes a programming guide, Spectradyne shall provide Hotel with a quantity of guides on a monthly basis equal to one hundred fifty percent (150%) of the guest rooms in the Hotel at no cost to Hyatt. Hyatt may, in its sole discretion, which shall not be arbitrarily withheld, distribute such materials in its guest rooms and may distribute any lobby promotional materials supplied by Spectradyne. Additional in-room guides may be purchased from Spectradyne for *** a piece; provided, however, Hyatt is not required to purchase in-room guides from Spectradyne. If Spectradyne's cost for such guides increases, the rate for additional guides will be raised to the extent of such increase. 7. Maintenance. (a) Spectradyne, at its sole cost and expense, shall maintain the Spectramax equipment and the MATV in good working condition. Spectradyne agrees to maintain a good quality signal to the MATV comparable to the broadcast reception for all Spectravision Services provided to the Hotel, Pursuant to the Spectravision National Agreement. (b) Hyatt shall not remove the SpectrAmax equipment or permit it to be removed from the Hotel and shall not abuse, tamper with, or attempt to operate the Equipment. Hyatt agrees to permit Spectradyne reasonable access to the Hotel to inspect, repair, or observe and adjust the Equipment; provided, however, that Spectradyne in the exercise of its access rights and in performance of its obligations hereunder shall not unreasonably inconvenience the guests of the Hotel or unreasonably interfere with the operation of the Hotel. (c) Any repairs or replacements made necessary by the willful misconduct or grossly negligent act of Hyatt, its employees, contractors, or agents shall be done by Spectradyne at Hyatt's cost. Hyatt agrees to immediately reimburse Spectradyne for such repair costs. 8. Rights of the Parties. (a) Except as set forth in the National Agreement, notwithstanding the fact that parts of the Spectramax equipment may be affixed to the Hotel, the Equipment shall not become real property of Hyatt or a Hotel fixture and shall remain the property of Spectradyne, except as set forth in Section 5 hereinabove. Hyatt acknowledges that the Equipment and its operation are proprietary to Spectradyne and Hyatt will use reasonable efforts to see that access to the Spectramax equipment is restricted to those persons authorized by Spectradyne. (b) Nothing in this Agreement shall be construed to grant to Hyatt any ownership interest in the copyrights, patents, licenses, or trademarks owned or licensed by Spectradyne or to grant the Hotel the right to redistribute SpectramAx programming outside the 26 Hotel. (c) Except as set forth in the National Agreement, at the termination of this Agreement in any manner, Spectradyne shall have the right, at its sole risk and expense, to remove the Spectramax equipment in a neat and workmanlike manner within ninety (90) days after such termination. Any equipment remaining at the Hotel after such ninetieth (90th) day shall become property of the Hotel. (d) Spectradyne shall, at its sole expense, repair any damage to the Hotel caused by the installation, removal, repair, servicing, or replacement of the Spectramax equipment, normal wear and tear excepted. 9. Taxes. Hyatt agrees to pay on behalf of Spectradyne any and all sales, use, ad valorem, admission, property tax, or amusement taxes, or other similar taxes, tariffs, or governmental levy of any form whatsoever in connection with the installation of the Spectramax Equipment. On the offering of the services that Spectradyne provides to the Hotel for Hotel's guests pursuant to this Agreement, nothing contained herein shall create a liability for the Hotel to collect any taxes assessed on the basis of such services provided by Spectradyne, except for those taxes that Hyatt collects on behalf of Spectradyne as set forth in this Agreement. 10. Insurance. Spectradyne shall meet its insurance requirements as set forth in the National Agreement. 11. Indemnification. Spectradyne shall defend, indemnify and hold harmless Hyatt and the owner of the Hotel and each of their respective officers, directors, agents and employees from and against any and all actions, costs, claims, losses, expenses and/or damages, including reasonable attorney's fees, arising out of or in any way relating to or incidental to the performance of the services to be performed by Spectradyne hereunder or the presence of Spectradyne at the Hotels. Spectradyne shall,further indemnify Hyatt and the owner of the Hotel and each of their respective officers, directors, agents and employees from and against any and all actions, costs, claims, losses, expenses and/or damages, including reasonable attorneys, fees, for or arising out of any bodily injuries to or the death of any of Spectradyne's employees working at the Hotel, however caused or occasioned, excepting the willful misconduct or gross negligence of Hyatt. Further, Spectradyne shall defend, indemnify and hold harmless Hyatt and the owner of the Hotel and each of their respective 27 officers, directors, agents and employees from and against any claims, demands, causes of action, loss, cost and expense (including reasonable attorneys' fees) arising out of or in connection with or based upon a real or alleged breach by Spectradyne of the provisions hereof, and any claims, demands, causes of action, loss, cost, expense (including attorneys, fees) or fee based upon an alleged or actual infringement of any patent or copyright or an alleged unauthorized broadcast or use of any license. Hyatt shall promptly notify Spectradyne for any matter for which indemnity is sought under this section and, in any event, prior to the incurrence of any expenditures under this section. Spectradyne agrees that it is as fully responsible for the acts and omissions of its subcontractors and of persons either directly or indirectly employed by them as it is for the acts and omissions of persons directly employed by Spectradyne. Spectradyne agrees to bind every subcontractor by the terms of this Agreement so far as is applicable to the subcontractor's work. However, nothing contained in the provision of this Agreement shall create any contractual relationship between Hyatt and any subcontractor. 12. Force Majeure. Neither party shall have any liability for the failure to perform or a delay in performing any of its obligations under this Agreement if that failure or delay is the result of any legal restriction, labor dispute, strike, boycott, flood, fire, public emergency, revolution, insurrection, riot, war, unavoidable mechanical failure, electricity interruption or any other cause beyond the control of either party whether similar or dissimilar to the causes enumerated here except in any case any event which can be cured or mitigated by the payment of money; provided, however, that the failure of Spectradyne to deploy and install the New Technology on the schedule established and as required pursuant to Section 4 of the Amended and Restated Spectravision and Interactive Services National Agreement, shall under no circumstances be deemed a force majeure event. 13. Default. (a) In the event that Spectradyne fails, in any material way, to provide the services described in Section 7(a) above, to Hyatt's sole satisfaction, at its sole option, upon three (3) days, notice and opportunity to cure, Hyatt may elect to have such service(s) performed by another vendor at the sole cost and expense of Spectradyne. All amounts owed by Spectradyne under this paragraph shall be deducted from amounts payable to Spectradyne by the Hotel. (b) Subject to the terms of Section 16 of the National Agreement and except (i) as otherwise provided in (a) above, and (ii) for the reasons that constitute a force majeure as set forth herein, in the event that either party (the "defaulting party") shall fail 28 to perform or comply with any material obligation under this Agreement, the failure shall constitute a default. The non-defaulting party shall notify the defaulting party in writing of the failure and default. If the default is not remedied to the satisfaction of the party having given such notice within forty five (45) days after the receipt of notice, or if such default is of a nature that it cannot, with due diligence and in good faith be cured within forty five (45) days and such defaulting party fails to proceed promptly and with due diligence and in good faith to cure the same, the non-defaulting party may declare this Agreement terminated as of the one hundred and eightieth (180th) day following the delivery of the original notice. 14. Corporate Room Rates. Whenever Hyatt's Hotel facilities and services are used by directors, officers, employees and guests of Spectradyne in furtherance of Hyatt related business except as set forth in Section 5(g) hereinabove, such personnel shall not be required to pay more than Hyatt's corporate rates for their use of such Hotel facilities and services. 15. General Provisions. (a) Notices. All notices to be given hereunder shall be given in writing and shall be deemed given when deposited in the U. S. Mail with postage prepaid. Notices intended for Hyatt shall be addressed to the Hotel at its above-stated address to the attention of the General Manager, with a copy to the corporate offices of Hyatt at its above-stated address, attention: General Counsel. Either party hereto may change its address for notices by giving notice of change to the other party. Emergency notices concerning blackout requirements for Spectramax programming or any other matter may be by telephone, or telegraph or in person. Authorizations required by any provision of this Agreement shall be in writing and include Hyatt's approval of the earth station site and authority to commence installation as well as any other consent reasonably necessary to accomplish the purposes of this Agreement. Spectradyne acknowledges and agrees that the Hotel's only authorized signatories are located at Hyatt's corporate offices at Chicago, Illinois. (b) Assignment. This Agreement may be assigned by Hyatt to any successor operator of the Hotel only upon the execution of a written agreement by that successor assuming the obligations of Hyatt under this Agreement. An assignment without such assumption of obligations will operate as a default under this Agreement. This Agreement may not be assigned in whole or in part by Spectradyne without the prior written approval of Hyatt. (c) Applicable Law. This Agreement shall be governed in all 29 respects by the internal laws of the State of Illinois without regard to the external laws or federal laws pertaining to conflicts of laws. (d) Modification. This Agreement and any provision of the attached exhibits shall not be modified or amended except by an instrument in writing executed by the parties hereto. Both parties agree to execute any other documents reasonably necessary to accomplish the purposes of this Agreement. (e) No Joint Venture or Agency Created. Nothing in this Agreement shall be construed to create any joint venture or principal-agent relationship between Hyatt and Spectradyne. Neither party shall hold itself out in any manner which would indicate such a relationship with the other party. (f) Successors and Assigns. This Agreement shall apply to, and be binding upon, the parties hereto and their respective successors and permitted assigns. (g) Exhibit A (The Diagram) is made a part of this Agreement. (h) Hyatt-Agent. Spectradyne recognizes that Hyatt Corporation, a Delaware corporation, is the sole agent of Hotel with regard to the operation of Hotel until Spectradyne shall receive written notice to the contrary from Hyatt, and Hyatt and Spectradyne agree that Hyatt may perform all obligations of Hotel and exercise all rights on behalf of Hotel hereunder. (i) Severability of Provisions. If any part or subpart of this Agreement is found or held to be invalid, that invalidity shall not affect the enforceability and binding nature of any other part of this Agreement. (j) Consents. The obligations of the parties hereto are conditioned upon the receipt of all necessary approvals, consents, and authorizations required by law or by contract. IN WITNESS WHEREOF the parties have executed this Agreement, by duly authorized signatories, on the date set forth by their signatures. SPECTRADYNE, Inc., HYATT CORPORATION, as agent of a Texas Corporation By: __________________________ By: __________________________ Title: _______________________ Title: _______________________ Dated: _______________________ Dated: _______________________ 30 EXHIBIT C EARTH STATION HUB SITE Rider to Hyatt Spectramax Agreement THIS RIDER TO HYATT SPECTRAMAX AGREEMENT, is made this _____ day of __________, 19__, but effective as of ____________, 19__ by and between __________________________ hereinafter called "Hyatt") and Spectradyne, Inc. (hereinafter called "Spectradyne"). WITNESSETH: WHEREAS, Hyatt and Spectradyne entered into that certain Hyatt Spectramax Agreement effective as of ____________, 19__, providing for Spectradyne to provide its Spectramax service at the _____________________ hotel ("Hotel"); and WHEREAS, Hyatt and Spectradyne desire to amend the Agreement effective as of _______________________ in order for Spectradyne to use the Hotel as an Earth Station,Hub Site for the purpose of providing Spectramax service to third parties. NOW THEREFORE, the parties hereto amend the Agreement by this instrument as follows: 1. The term of this Rider shall commence on ____________, 19__ and expire on June 30, 2000. This Rider is subject to early termination in accordance with the provisions of the National Agreement and the Hyatt Spectramax Agreement. Upon expiration or earlier termination of the Agreement, Hyatt may determine to allow Spectradyne to maintain its Earth Station Hub Site at the Hotel. In such event, the parties hereto shall enter in to a mutually agreeable agreement under which the Hotel shall serve as an Earth Station Hub Site. 2. Spectradyne shall, at its sole cost and expense, install the Earth Station which shall become a fixed position dish which cannot be used for teleconferencing. 3. During the above term and any extensions thereof, Spectradyne will have the right to redistribute the signals from the Earth Station to other hotels. Upon Hyatt's approval, which shall not be unreasonably withheld, Spectradyne will have the right to add various antennas on the roof of the Hotel premises as required for operation of the Earth Station at no cost whatsoever to the Hotel. 4. Title to the Earth Station and related equipment and antennas shall remain with Spectradyne. Spectradyne assumes all risk of loss of or damage to the Earth Station and related equipment and antennas. 5. In consideration of allowing the Hotel to serve as an Earth 31 Station Hub Site, Spectradyne shall pay the Hotel a fee equal to *** per month. Except as herein expressly set forth in this Rider, the Hyatt Spectramax Agreement shall remain in full force and effect, subject to its terms and conditions. IN WITNESS WHEREOF the parties hereto have executed this Rider to Hyatt Spectramax Agreement as of the day and year first above written. HYATT CORPORATION, as agent of ______________________________ d/b/a ________________________ By: __________________________ Title: _______________________ Date: ________________________ SPECTRADYNE, Inc., a Texas corporation By: __________________________ Title: _______________________ Date: ________________________ EX-10.4 6 ON COMMAND VIDEO AGREEMENT 1 EXHIBIT 10.4 NOTE: THIS DOCUMENT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933. PORTIONS OF THIS DOCUMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN REDACTED AND ARE MARKED HEREIN BY "***". SUCH REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE COMMISSION PURSUANT TO THE CONFIDENTIAL TREATMENT REQUEST. Hilton Hotels Corporation ON COMMAND VIDEO Agreement This Agreement between on Command Video Corporation, ("OCV") and Hilton Hotels Corporation ("Hilton"), sets forth the terms for installation of video services and all other material & services as described more fully herein. Hilton operates the Hotels listed in Exhibit B ("Hotel") for the lodging of customers in separate, private rooms and parlors which are customarily available for overnight sleeping accommodation ("Rooms"). WHEREAS, Hilton desires to make available to its guests the opportunity to view pre-recorded entertainment programs ("Programs") and broadcast television channels conveniently in the privacy of their own Rooms at its Hotels using an ON COMMAND VIDEO System provided by OCV; Now, THEREFORE, the parties do hereby AGREE AS FOLLOWS: 1. ON COMMAND VIDEO SYSTEM. As used herein, the term "System" shall mean the video entertainment system designed by OCV, whereby guests in a specified number of separate rooms at the Hotel may remotely access, at will, a specified number of prerecorded Program selections (such as movies), as well as the standard network or broadcast television channels or other programming services ("Channels") that are available in the Hotel, for display on television receiving sets ("TVs") in the guests' private rooms. The System includes a specified number of pre-recorded Program selections; a remote control unit for the TV in each room; an OCV communications module attached to or integrated into each guest room TV; an adequate number of video playing devices; and all necessary electronic, computer and switching equipment, software, printers or other devices necessary to provide for video entertainment or for Interactive Services as defined herein, not including TVs. OCV shall install the System at no cost to Hotel. OCV shall supply the necessary reception, descrambling, and remodulation equipment to supply ESPN, CNN, and HBO to each room at no charge. The System does not include necessary power, electrical wiring, connections, or cooling facilities, which are to be provided by Hotel pursuant to usual and customary standards for a full service Hilton Hotel except as provided herein. However, OCV will provide engineering and specifications for necessary signal wiring and distribution, and will perform installation for any additional wiring which is necessary, as part of the System, such engineering specifications 2 and wiring LO be provided at no cost to Hotel. OCV shall supply each Hotel with new, closed caption, "smart plug", network-affiliation displayed 20 inch TVs. OCV shall supply one TV for every old or existing Hotel Room TV replaced. OCV shall also supply extra TVs up to a limit of ten (10) TVs or two percent (2%) of the total number of replaced or purchased TVs, whichever is greater. The TV package provided by OCV shall include replacement swivel mounts (Hotel to receive cash credit if these are not required), installation/labor costs, and remote controls plus 10% spares for all guest rooms. In the event Hotel wishes to obtain 25 inch TVs in lieu of the 20 inch they will forfeit *** for each such TV from their revenue share. In the event Hotel already has "smart plug" TVs, OCV, shall make payment to Hotel of *** for each room TV, net of tax, and assume title to that TV. OCV shall be responsible for all maintenance of TVs during the term of this agreement at no cost to the Hotel. OCV shall be responsible for all costs and all maintenance of TVs during the Lien of this agreement. Any value which may be gained from liquidation of the existing Hotel TVs which are replaced by OCV shall belong to OCV, net of sales tax, and the replacement TV's shall belong to the hotel at the conclusion of the term. 2. SYSTEM TERM. (a) OCV shall design, construct and provide to Hotel a System and related materials for operation in each of the Hotel's guest Rooms as set forth below with access to a multitude of prerecorded Program selections in accordance with section 4 hereof, as well as the Channels, for a term beginning on the Term Commencement Date (as defined in Section 7) and ending on the seventh anniversary of the Term Commencement Date (the "Term"). On the third anniversary of the term commence date, Hilton and OCV shall review all other available hotel video systems. In the event they agree a superior technology exists, OCV shall make the equivalent technology available to Hilton on terms acceptable to Hilton. If they don't agree, a 3rd party industry consultant may be retained by either party at their expense, to determine if a superior technology exists. If any such 3rd party consultant determines that superior technology does exist, OCV shall make the equivalent technology available to Hilton on terms acceptable to Hilton. If OCV does not provide such technology within 90 days, OCV shall be in default. In the event that OCV releases new products or services to another hotel or company, or makes the same or similar services available at more attractive terms and conditions than such products and services are offered herein, OCV agrees to immediately make such products and services or terms and 3 conditions available to hotel on the same or better terms and conditions. At the end of the initial Term of this Agreement, unless OCV is notified by Hilton in writing to the contrary thirty (30) days prior to the Term expiration date, this Agreement shall be extended on a month-to-month basis. In the event of such extension, this Agreement including all revisions or extensions in effect shall remain in force on a month-to-month basis unless terminated by Hilton for any reason with thirty (30) days written notice. 3. FEE AND PAYMENT TERMS. (a) Based upon daily information reported by the System monitoring unit to be provided and installed by OCV at no cost to Hotel, Hotel shall charge Hotel guests on a per use basis for access to the System an amount (the "Rental Fee") based on a reasonable pricing schedule as established from time to time by OCV. OCV shall use its best efforts to maximize revenue through the use of the OCV system. Hilton may, in its sole discretion, adjust the Rental Fee as to any guest of the Hotel in conjunction with a controversy with such guest in which case the "Rental Fee" shall mean the Rental Fee for such guest as so adjusted. OCV understands and agrees that Hotel shall generally refund the Rental Fee to the guest in the event the guest disputes the charge. (b) In addition to the Rental Fee, Hotel shall collect from guests any applicable taxes levied thereon and shall pay those taxes to the appropriate government agencies. (c) Hotel shall within 14 days of the end of each month remit to OCV an amount equal to *** of the adjusted Rental Fee for the prior month and shall retain an amount equal to *** of such adjusted Rental Fee as their fee. (d) Rental Fees due OCV shall be held in trust for OCV and shall remain the property of OCV. (e) OCV shall provide Hilton Hotels ESPN, CNN and HBO, at no charge during the duration of the term. Those hotels who can not take advantage of this free programming, shall receive a monthly payment of *** per room per month from the time the OCV system is installed until such time that they can receive this benefit. (f) The books and records of the Hotel pertinent to the Rental Fee for any month in the Term of this Agreement shall be open to inspection and audit by an authorized representative of OCV upon reasonable advance written notice to and the approval of the Hilton. OCV shall have the tight to inspect and audit such books for the two preceding years during which OCV was under contract. OCV must bring any claim resulting from such audit within ninety 4 (90) days of such audit. OCV's light to inspect and audit the books and records of the Hotel shall not extend beyond three months from the expiration or termination of this Agreement. (g) The System monitoring unit shall generate an accurate record ("Access Record") of the access to the System by any guests, including a record of the access charges for each individual guest's bill or Room account. OCV shall be responsible for all costs associated with the programming of the computer within the System monitoring unit to enable it to provide the aforesaid data. Hotel and OCV agree that the Access Record shall be held in strictest confidence by the personnel of OCV and Hotel; and that OCV shall make available to Hilton information sufficient to ensure proper billing of guests and other information or System usage reports as Hotel may reasonably request to track System usage. OCV may review and use the Access Record for such purposes as OCV may reasonably deem appropriate, except that OCV shall not disclose any such information to third parties. In the event of any such disclosure by OCV, OCV shall indemnify and hold harmless Hilton and Hotel from all claims, loss, damages or actions arising from such disclosure. (h) OCV agrees to provide a data communications link which shall include equipment, software, and cabling sufficient to connect the Hotel's property management computer to the System for the purpose of posting Rental Fee charges to guest folios. OCV agrees that there shall be no cost to the Hotel for this link or for development, testing or maintenance of the link. (i) OCV shall be responsible for all personal property taxes on all System equipment as well as Hotel TVs. 4. PROGRAM SELECTIONS. (a) OCV agrees not to broadcast on the System or cause to be presented in the Hotel any commercial or marketing message, information, or service promoting OCV or any other entity, service, or product without the prior written consent o Hi ton. (b) Hotel has the tight to use *** up to three (3) percent of the System video cassette players but not less than six players and other System components as may be necessary to present Programs or other material that Hotel may desire to make available to its guests on a free-to-the guest basis. OCV shall assist Hotel in making these offerings easily available to the guest through the System menus or as part of the regular channel line-up or by some other means. Both parties agree that the System shall carry without charge to Hotel, Programs or messages accessed without charge to the guest 5 including but not limited to free-to-the-guest programming services or network TV programming; bulletin board or reader board messages; airline or airport information; video and/or audio feeds from the Hotel, convention centers, or other sources; hotel or local service information; and promotional or sales messages for Hotel or Hilton Corporation products, services, or brands subject to Hiltons approval. Except as otherwise stated in this agreement program costs shall be the responsibility of ***. The cost of generation of a "barker" screen and other Hilton specific screens and Hilton's Logo shall be born by ***. (c) Program titles to be made available on the System shall be selected by OCV following guidelines mutually agreed upon between OCV and Hilton; provided, however, that the Hotel or Hilton may, in its sole discretion veto any number of titles(s) which it finds to be inappropriate for guests of the hotel and OCV shall provide a replacement acceptable to Hotel and Hilton. If the exercise of such veto authority by Hotel or Hilton reduces revenues per occupied room generated by the system to a level (for the top *** of Hilton rooms) 20% below the revenues per occupied room in other similar full service non Hilton hotels served by OCV for a period exceeding one year, OCV shall have the right to terminate this agreement sixty days after written notification to Hilton of OCV's intention to terminate. Hilton and OCV shall review and revise from time to time, the "Standards and Practices" and shall mutually agree on their content as a general guide to adult programming. OCV assumes full responsibility and shall hold Hilton harmless against any and all claims as a result of the showing of adult programming. OCV agrees that less than 20% of the Program titles shown on the System at any time will be Adult non-rated titles. (d) OCV agrees to allow Hotel to use the System as a means to charge guests for other services or Program offerings during the Term. Such offerings may include but shall not be limited to video programming such as special events, sporting events, teleconferences, network programming, or video tapes. Other offerings may include informational services or messages. The content and format of these offering and the manner in which they are provided shall be mutually agreed upon by Hotel and OCV and approved by Hilton. With Hilton's approval OCV shall be entitled to a mutually agreed upon revenue generated by the System from Programs or services for which the guest or a third party such as an advertiser or broker is directly charged a fee. OCV shall have *** share of any revenue generated through the advertising, promotion, or sales of Hotel or Hilton products or services. 5. OWNERSHIP OF THE SYSTEM. (a) The parties agree that the System, which consists of the 6 racks and control boxes only, which are provided by OCV are the sole and exclusive property of OCV. The then existing TVs shall belong to Hotel at the completion of the term. The parties further agree that the ultimate control and ownership of the Hotel MATV system in general and regulation of the programming, presentation, and services it provides to guests resides with Hotel. The MATV system ("MATV") is a network of cables, wall Laps, antennas and specially designed radio frequency signal processing components, which receive, process, amplify and distribute video and audio TV and FM signals from a central location Lo a multiplicity of TVs within a building or group of buildings. (b) Hotel shall allow authorized personnel of OCV to have access to the System in order to conduct routine maintenance, observation and monitoring of the System, to ensure suitable operating conditions and to implement improvements in the System. OCV access to System shall be in accordance with procedures agreed to by Hotel. (c) If, during the Term, OCV desires to change any System component or software to improve service or to take advantage of technological advancements, OCV shall, in writing, describe to Hotel the plans and specifications for the installation thereof at ***. No changes to the System shall be made by OCV without written approval from Hilton. Such changes approved by Hotel shall be made without disruption of Hotel TVs or MATV service and with minimum interruption of System service and guest inconvenience. (d) Hotel shall use reasonable efforts to protect the safety and security of the System and all related property of OCV at all times while the System is installed at the Hotel, and shall be liable for any damage to the System resulting from gross negligence on its part. Hotel shall use reasonable efforts to prevent any vandalism, theft, or damage of or to any of the equipment supplied by OCV. Any System components, software, or video tapes that are lost, stolen, vandalized, or damaged, unless through gross negligence by Hotel, are the responsibility of OCV. 6. HOTEL FACILITIES; INSURANCE. (a) During the Term, Hotel shall provide and make reasonable efforts to maintain a TV in each designated Room; signal wiring and connections; electrical power and sockets; cooling facilities; and a location for all equipment comprising the System (collectively, the "Hotel Facilities"); all in accordance with written specifications provided by OCV and agreed to by Hotel. (b) Hotel shall obtain and maintain, at its sole cost and expense throughout the term of this Agreement, insurance policies reasonably acceptable to OCV and Hotel. Said policies protecting 7 the System and related equipment supplied by OCV shall provide comprehensive public liability insurance with limits of at least $2,000,000. A certificate of insurance evidencing such insurance shall be delivered to OCV if requested. (c) OCV shall obtain and maintain, at its sole cost and expense throughout the term of this Agreement, insurance policies reasonably acceptable to OCV and Hotel. Said policies shall provide comprehensive public liability insurance with limits of at least $2,000,000. A certificate of insurance evidencing such insurance shall be delivered to Hotel if requested. Such insurance shall name Hotel and Hotel Operator as additional insured. (d) OCV shall obtain and maintain, at its sole cost and expense throughout the term of this Agreement, Workman's Compensation Insurance policies sufficient to cover any and all claims made by OCV employees, agents, or subcontractors. Hotel or Hotel Operator shall not be responsible for any such claims. 7. INSTALLATION. (a) Hotel shall provide such access as OCV reasonably may request to enable OCV to complete installation of the System, including providing all Hotel Facilities as set forth in the specifications and in reasonable time to allow OCV to complete installation. Such installation shall not exceed six months from execution of this agreement. OCV shall test the System to ensure functionality from the beginning of the Term, which shall begin on the date upon which OCV and Hotel agree installation to be complete and the System to be functional (the "Term Commencement Date") which agreement shall be attached hereto as Exhibit A, when completed. (b) OCV agrees to bear any costs associated with installing or maintaining the System that Hotel would not have experienced if the OCV System were not installed in the Hotel. These costs shall include but shall not be limited to purchasing, installing, and maintaining: all cables required by the OCV System or used to connect the OCV System to other Hotel systems such as the MATV system or property management computer, telephone service to the System, the OCV communications module attached to or integrated into each guest room TV including TVs replaced during the Term, modifications to the Hotel's MATV system and changes required Lo Room wall taps. OCV shall establish a budget for such MATV upgrade of *** per room. In the event the upgrade costs exceed this budget, the overage will come from Hotels portion of the revenue share. OCV guarantees that the equipment installed and/or the connections to the existing TV antenna or cable system, amplifiers and receivers will not impair in any way the ordinary reception of broadcast programs or other services on the cable system. 8 Installation and removal shall be of the highest quality workmanship and in accordance With the terms and conditions of this Agreement OCV agrees to coordinate with the Hotel any installation, repair, maintenance, replacement, or removal so as not to disrupt or inconvenience the Hotel's guests or employees or the daily Hotel operations and so as to initiate and complete those tasks as expeditiously as possible. (c) At the time of installation, OCV shall move or reassign any channels in the Hotel's MATV system, with Hiltons approval, whose frequencies conflict with the OCV System. If required by Hotel's or Hilton's licensing agreements with individual networks or channels, OCV shall trap or filter out any channels so moved so they cannot be viewed on any public or lobby TV and shall ensure optimum signal levels for each channel so moved and the elimination of any possible channel interference. (d) All equipment installed, provided, or modified by OCV, its agents, or subcontractors shall be listed by the Underwriters Laboratory, Inc. or shall be built to their standards. OCV represents and warrants that all design, equipment, and installation shall be in strict compliance with the National Electrical Code Handbook as published by the National Fire Protection Association and as amended periodically, Federal Communications Commission requirements, and local or other governing codes. 8. OPERATION AND MAINTENANCE OF THE SYSTEM. (a) Hotel shall, for day-to-day operations and at no cost to OCV, use reasonable efforts to notify OCV by telephone of any failure of the System or the System's functions in any given Room or as to any given Program. For the purpose of such notification, Hotel staff shall call the following telephone number: (800) 915-7147 or the then current number, which shall be attended twenty-four hours a day seven days a week by OCV staff having the capability of expeditiously dispatching OCV service personnel to the Hotel. (b) Any repairs or replacements to any equipment supplied by OCV made necessary by any grossly negligent or willful act by Hotel or any of its employees, contractors, servants, agents or others (not to include guests) authorized by Hotel, shall be undertaken by OCV at Hotel's expense. All other repairs shall be performed at OCV's expense. (c) Hotel shall use reasonable efforts to ensure that no unauthorized person tampers with or attempts to make repairs to any equipment supplied by OCV under the terms of this Agreement. Should an emergency arise, Hotel agrees to use reasonable efforts to contact OCV by telephone and thereupon any repairs then authorized may be carried out in accordance with the directions so given by OCV. Any costs of such repair other than a reasonable amount of the labor and time of Hotel staff shall be 9 borne by OCV. (d) OCV shall provide promptly all maintenance, repairs and replacement of materials and equipment necessary to ensure satisfactory operation of the System, including a high signal quality, throughout the Term as defined in 8g. Upon being notified by Hotel that a repair or service is required at the Hotel, OCV shall immediately dispatch repair representatives and it shall be incumbent on OCV to ensure that these representatives arrive at the Hotel within twelve (12) hours of the time OCV Is notified of the service requirement unless such representatives are delayed in transit by strikes, natural disasters, extremely adverse weather conditions or similar causes. Upon arrival at the Hotel, OCV's service representatives shall immediately undertake necessary repairs to return the entire System to the performance standards required under this Agreement and said repair services shall be completed within forty-eight (48) hours of the time OCV is initially notified of the System breakdown unless by reason of fire, accident, natural disaster, or similar cause, the Hotel or the System has been substantially destroyed. In the event repairs are not effected within 48 hours, OCV shall be liable to the hotel for the lost commissions (***) the hotel would have received if the rooms were operable from the time of the failure based upon the average daily revenue for the previous three months plus all other remedies at law or equity. (e) AU maintenance and technical assistance shall be provided by OCV free of charge except as provided in Section 8(b) or occasioned by a breach by Hotel of Hotel's obligations under Section 6(a). (f) Hotel staff shall be responsible for swapping inoperable guest room TVs with spares maintained in inventory at the Hotel for situations in which a single TV has failed. OCV shall be responsible for diagnosing and repairing failures involving groups of TVs. OCV shall contract with a TV service or maintenance organization acceptable to Hotel for TV manufacturer's warranty repair or other TV repair work at OCV's expense. At no time will the Hotel be without a working spare or OCV shall be in default. (g) OCV shall install, operate, and maintain the System and any other existing equipment, video service, or MATV components used in the Hotel in accordance with the following technical specifications. 1. In no case shall the signal levels measured exceed the maximum output rating for the headend or modulators) employed. 10 2. The level difference between channel picture carriers shall not exceed 2 dB for adjacent channels nor 12 dB between the strongest and weakest channel normally carried. 3. The spurious signal level shall be at least 50 dB below the video carrier level. Cross modulations shall be less than 51 dB. 4. Visual/aural carrier ratio on any channel will be 22 dB (+/- 2 dB.) 5. Amplitude response within any channel (visual carrier to aural carrier) will be flat (+/-2 dB.) 6. The nominal signal level for every channel delivered at the point at which the MATV channels (Free-To-Guest, Pay-Movies, Information Channels) are combined shall be 48 dBmV (+/-3 dBmV). 7. Pay movie or other channels provided by OCV shall have a signal-to-noise ratio of at least 50 dB or higher. 8. Equipment installed and/or the connections to the existing MATV system, amplifiers and receivers will not impair in any way the ordinary reception or transmission of broadcast programs or other services on the MATV. 9. All equipment, connections, cables, and passive devices will be designed and installed so as to minimize radiation and ingress. 10. Signal Strength from room outlet to TV must be 0 to 10 dbmv. 9. SPECIAL REPRESENTATIONS OF HOTEL. Hotel agrees, confirms and covenants that: (a) Unless otherwise authorized by Program copyright holder or licensor, Programs provided by OCV shall be exhibited in the Rooms only, and not in public areas (including lobbies, hallways, restaurants, bars, meeting rooms, etc.) of the Hotel; and shall not be exhibited other than in accordance with this Agreement or by any other means of transmission of any kind whatsoever. Hotel shall not modify the System or means of transmission unless so authorized by OCV. (b) Equipment comprising part of the System shall not be removed by Hotel for any purpose except in the case of any emergency where such removal is reasonably necessary and Hotel uses reasonable efforts to notify OCV of such removal by telephone. (c) Hotel shall notify OCV as soon as is reasonably possible and upon Hotel's actual notice of any unauthorized use, access, theft, damage, or malfunction of or to the System or any other equipment of OCV. 11 (d) Program video cassettes shall be kept under lock and key provided by OCV and shall not be accessible to unauthorized Hotel staff without OCV's prior consent. There shall be no unauthorized use, exhibition or viewing of any cassette by any person other than on the System on the terms set forth herein. Hotel shall use reasonable efforts to prevent any person under its control from duplicating or making alterations of any kind to cassettes. Hotel shall report promptly to OCV any unauthorized use of the cassettes in the event that Hotel becomes aware of such use. Hotel shall provide space in the Hotel for the placement of the System. OCV understands that this space is also used daily by the Hotel staff. (e) Subject to space being available, Hotel agrees to provide OCV's employees with complimentary rooms at the Hotel during site surveys and initial installation, up to twelve (12) room nights (including site surveys). Thereafter, those OCV employees required to provide maintenance and repair services to the Hotel System shall receive complimentary overnight accommodations on a space available basis. Such complimentary guest rooms shall not exceed one (1) room per day nor shall Hotel provide such rooms for a period longer than two (2) days during repair stay. 10. PUBLICITY REGARDING THE SYSTEM. The Hotel may in its sole discretion adequately publicize the existence of the System and access to the Programs for use by guests. If OCV shall develop and provide to Hotel in-room or other advertising materials to encourage use of the System by guests of the Hotel, Hotel shall cause those materials to be placed in the Rooms or elsewhere at the Hotel, as applicable, provided that Hotel, at its sole discretion, may refuse to display such materials which it finds to be unsuitable. 11. TRAINING AND CONSULTATION. OCV shall provide a training course for as many employees of the Hotel as the Hotel deems desirable, on the use and operation of the System. Such training shall be available at installation or as requested by Hotel. Personnel of OCV shall be available for reasonable telephone consultation to provide further assistance to Hotel personnel regarding use and operation of the System. 12. CONFIDENTIALITY. The parties agree that the functions and components of the System, facts regarding the equipment and materials related thereto, the manner of operation thereof and the terms of the Agreement, and Rental Fees payable hereunder, all constitute proprietary information of OCV and that all guest information constitutes proprietary information to Hotel. Such proprietary guest information shall include but shall not be limited to guest names or other personal guest information, hotel occupancy information or guest billing information not related to usage of 12 the OCV System. Hotel shall use reasonable efforts to prevent any third party from having access to the System other than Hotel's personnel as may be reasonably necessary to enable Hotel to maintain the Hotel Facilities and otherwise as expressly permitted by OCV in writing. OCV shall not permit any third party to have access to any proprietary or guest information obtained from Hotel or Hotel Operator. 13. EXCLUSIVE VIDEO ENTERTAINMENT SYSTEM. As part of the consideration to OCV for Hilton's installation of the System, Hilton agrees that the System shall be the sole and exclusive guest room pay-per-view video entertainment system provided by the Hilton to guests during the rental Term. 14. DEFAULT: FORCE MAJEURE. (a) If Hotel should breach or become in default of performance of any material term or condition contained in this Agreement, and should fail to begin efforts to cure, correct or remedy such breach or default within thirty (30) days after receipt of a written notice thereof specifying the nature of such default from OCV, OCV may exercise any or all of the following remedies: (1) cancel and terminate this Agreement and require Hotel to immediately make available to OCV the repossession of the System and all components thereof in which case OCV shall remove the System at OCV's expense as provided herein; (2) obtain injunctive and other equitable relief; and (3) obtain such damages and other rights and remedies as OCV may have at law or equity. (b) If OCV should breach or default in the performance of any obligation or covenant in this Agreement, which default shall continue for thirty (30) days after Hilton has given OCV written notice thereof, specifying the nature of such default, then Hilton may exercise any or all o the following remedies: (1) cancel and terminate this Agreement by written notice Lo OCV in which case OCV shall remove the System at OCV's expense as provided herein; (2) obtain injunctive and other equitable relief; and (3) obtain such damages and remedies as Hotel may have at law or equity. The TVs become the property of the Hotel at no charge. (c) In the event performance by either party is prevented due to weather, acts of God, strikes, or labor disputes, ("Force Majeure") for a period not to exceed thirty (30) days during any twelve (12) month period, such failure of performance shall not be deemed default hereunder. (d) In the event of default by Hotel, Hotel shall have the right to purchase the TVs in their property by paying OCV a price based on straight line depreciation over a seven year life starting at the actual cash price not more than *** on day one, and ending at 13 *** on day 2,555. If the TVs were purchased by OCV from the Hotel for ***: the depreciation start shall be ***. 15. OCV INDEMNITY AND REPRESENTATIONS (a) OCV shall hold harmless, indemnify and defend Hotel, Hotel Operator, its employees, owners, officers, subsidiaries or affiliates from and against all claims, actions, suits, damages, proceedings or liability arising out of or in connection with OCV's obligations under this Agreement, the System and related products including, but not limited to, attorney's fees, except for claims, actions, suits or liability resulting solely from the willful misconduct or gross negligence of Hotel, its servants, agents, employees or subcontractors. (b) Hotel shall hold harmless, indemnify and defend OCV, its employees, owners, officers, subsidiaries or affiliates from and against all claims, actions, suits, damages, proceedings or liability, costs and expenses arising out of or in connection with any breach or claimed breach of Hotel's obligation under this Agreement and solely out of willful misconduct or gross negligence of Hotel, its servants, agents or employees. (c) OCV agrees to defend or, at its option, to settle and Hotel agrees that OCV shall have the right to defend or, at OCV's option, to settle at OCV's expense, any indemnified claim, suit or proceeding brought against Hotel or Hotel Operator, its employees, owners, officers, subsidiaries or affiliates including, but not limited to, patent, copyright, publicity or privacy, trademark, unfair competition, the viewing of program material and the content thereof, infringement and the alleged misuse of the system, the system hardware or software, or any product or any part thereof, supplied by OCV to Hotels or its affiliates under this Agreement except that Hilton shall be told not less frequently than monthly about the proceedings and have the right to reject any Settlement which, in Hilton's sole discretion, negatively impacts the Company in any way including, but not limited to, Hiltons right to the benefit of this contract, reputation, licenses, etc. Nothing in this section in any way relieves OCV of its obligations to provide the System and related products. Without limitation, OCV specifically agrees that this indemnity covers the pending actions by Spectradyne against OCV, and OCV is fully responsible for that action. OCV agrees to pay, subject to the limitation hereinafter set forth, any damages, expenses, costs or final judgment entered against Hotel or Hotel Operator, its employees, owners, officers, subsidiaries or affiliates, in any such suit or proceeding brought against Hotel or Hotel Operator, its employees, owners, officers, subsidiaries or affiliates. Hotel agrees to notify OCV in writing of any such claim, suit or proceeding, to the extent that Hotel knows of such claim, suit or proceeding within 180 days of Hotel's first actual knowledge of 14 the claim, suit or proceeding, and at OCV's expense, Hotel will give OCV reasonable, proper and full information and assistance to settle or to defend any such claim, suit or proceeding. (d) If the system, any related product or any part thereof, furnished by OCV to Hotel or its affiliates becomes or its affiliates becomes or, in the opinion of OCV, may become the subject of any claim, suit or proceeding described in this Section 15, or in the event of an adjudication that such product or part infringes or violates any United States patent or copyright or other claimed right, or if the use, lease or sale of such product or part is enjoined, OCV may, so long as there is no interruption of service, at its option and expense: (1) procure for Hotel the light under such patent or copyright to use, lease or sell, as appropriate, such product or part, or (2) replace, modify or remove such product or part. If Hotel determines, in its sole discretion, that such replacement, modification or removal of the product or part has a significant negative impact on the overall functioning of the System or satisfaction of Hotel guests, Hotel has the right to terminate this Agreement thirty (30) days after giving written notification to OCV of Hotel's intention to terminate. This right is in addition to all other legal remedies including but not limited to equitable relief and damages. In the event of such termination, OCV agrees to return the Hotel and MATV System to their original, working condition within 30 days of termination, and to cooperate and facilitate the installation of any replacement system including, but not limited to, Spectradyne. OCV further agrees to return the Hotel and TV's to original condition with the minimum possible interruption of Hotel TV or MATV system services offered to guests and at OCV's expense. OCV shall give 30 days written notice to Hotel before removing any equipment. (e) OCV shall indemnify and hold harmless Hilton, its affiliated companies, participation hotels and their owners, and the foregoing indemnities respective officers, directors, employees and agents from all liabilities, claims, causes, damages and expenses incurred in connection with any claims against such indemnities arising out of or caused by Hilton's or the participating hotel's transmission in accordance with the Agreement of any programming services delivered by OCV which contains any libelous or slanderous material, or violates any copyright (other than music performance rights), right of privacy, or literary or dramatic right and for any special, indirect, incidental or consequential damages arising therefrom. (f) OCV shall secure and maintain (i) licenses, permits and approvals required by governmental authorities having jurisdiction over services to be performed by OCV and (ii) necessary patents, copyrights, distribution rights, licenses, releases, waivers and other necessary consents of third parties. OCV agrees to indemnify, hold harmless and defend Hotel Owner, its agents and employees from any claims or lawsuits arising from OCV's breach Of its obligations under this Agreement. 15 (g) All regulations or laws pertaining to censorship, importation or display of films as an in-hotel service or in general shall be complied with by OCV, and OCV shall be solely responsible on a continuing basis to secure, at OCV's expense, any and all permits and approvals respecting the Programs, copyrights, distribution rights, music rights, releases and any other approvals as may be necessary for the purposes of this Agreement. OCV further agrees to indemnify and hold Hotel and Hotel Operator harmless and blameless for and against any infringement, claims of any kind, royalties, violations and expenses associated therewith. (h) OCV represents and warrants that the System or any individual product or part thereof or use of the System, shall not infringe any United States or other patent or copyright, or any other intellectual property or proprietary rights. Without limitation, OCV specifically agrees LO indemnify, defend and hold harmless Hilton from any claim by Spectradyne arising from Hilton's use of OCV services or this Agreement. 16. INTERACTIVE SERVICES. (a) OCV shall make available to the Hotel upon election by the General Manager of the Hotel the interactive guest services applications (individually "Applications") underlined below ("Interactive Services") without charge. Folio Review allows the guest to summon and examine the current status of their hotel bills on the in-room TV screen at any time. If the Hotel desires, it may designate a certain period of the day in which guests can also initiate Checkout processing in the Hotel property management computer. A folio printer will create a copy of the guest bill which can either be retrieved by the guest upon departure or mailed to the guest. Video Messaging in allows the hotel guest to summon and read current messages on the in-room TV screen at any time. The Hotel shall be the exclusive contact with the guest for all guest inquiries about Video Messaging. Video Breakfast allows the Hotel guest to summon a specialized breakfast menu on the in-room TV screen and place an order for the next morning's room-service breakfast. Breakfast items are listed on the TV screen for the guest to select. Upon selection, the order is verified, with costs, before the order is printed on a dedicated OCV-owned printer in the kitchen. Multiple Language Support automatically selects an appropriate language based on information from the PMS or front desk terminal or the guest to allow all menus to appear in the language selected. Guest Survey allows guests to participate in survey as to their satisfaction with the hotels performance. 16 Housekeeping Status allows the hotel personnel to update the room status in the Computer. Bellstand Application allows the guest to summon assistance from the bellman. Guest Recognition provides the ability to customize menus and the look of the system based on identifying information provided by hotel staff or the PMS interface. Customized items should include menus presented, resources available/privileges, pricing, etc. Hotel Engineering proactively reports on potential problems in the system by providing diagnostic data daily. (b) OCV shall ensure that the System will not allow a guest to access any message, folio, pay movie, or checkout function or any other service other than those which are applicable to the room from which access is initiated. OCV shall provide filters, traps, or some other mechanism sufficient to prevent TVs not intended to provide System services or TVs in public areas from receiving images or information intended for another guest room TV. (c) OCV will use reasonable efforts to keep Interactive Services current with changes required to the Hotel's property management system. 17. SYSTEM REMOVAL (a) Upon expiration of this Agreement or its termination for whatever reason, OCV agrees to return the Hotel and its MATV system to their original, working condition excepting normal wear and tear in sufficient time, not to exceed six months, to provide for an orderly transition to a new vendor. OCV further agrees that System removal shall be conducted by OCV as expeditiously as possible with minimum or no interruption of Hotel TV or TV master antenna services offered to guests. System removal will be handled entirely at OCV's expense. (b) Upon termination of this Agreement, Hotel shall take all reasonable actions necessary to allow OCV to remove the System promptly. (c) In the event the safety of the System is threatened due to earthquake, flood, fire, strike, civil disruption or similar causes, OCV shall be entitled to enter upon the Hotel premises and to remove the System from danger upon reasonable notice to Hotel and without disruption to Hotel TVs, MATV system, the daily operations of the Hotel, or any other Hotel service. (d) OCV agrees to coordinate System removal with the Hotel so as not to disrupt or inconvenience the Hotel's guests or employees or the daily Hotel operations and so as to initiate and complete 17 System removal as expeditiously as possible. 18. GENERAL TERMS. (a) This Agreement shall be governed by the laws of the State of California and jurisdiction for any dispute shall be within the State of California. (b) Except as otherwise set forth herein, the provisions hereof shall be binding upon, and shall inure to the benefit of, the respective successors and assigns of the patties hereto; provided that no assignment of this Agreement shall be made without the express prior written consent of both parties, such consent not to be withheld unreasonably. (c) This Agreement may be modified or amended only by a written agreement signed by both parties. No waiver by either party of any breach or default hereunder shall be construed as a waiver of any precedent or subsequent breach or default. (d) This Agreement together with Exhibits A & B, sets forth the entire agreement and understanding of the Parties relating to the subject matter hereof, and merges and supersedes all prior discussions and understanding between the parties related thereto., whether written or oral. (e) As a material inducement to Hilton entering this agreement, Hilton, in Hiltons sole discretion may elect to apply the terms, conditions, and benefits of this agreement to its franchise properties during the term of this agreement, but shall have no obligation to do so. Hilton Hotels Corporation: On Command Video Corporation: By: /s/ Dennis Koci, VP-HCC By: Robert Snyder Date: 4/27/93 Date: 4/27/93 18 Exhibit A to Hilton Hotels ON COMMAND VIDEO Agreement On Command Video has completed the functional testing of the On Command Video System at the ________________ Hilton Hotel, and, On Command Video deems such installation to be complete and the System to be functional as of _______________ (Term Commencement Date). 19 Exhibit B HILTON HOTELS WESTERN REGION ANAHEIM 1576 ANCHORAGE 591 LOS ANGELES 900 MINNEAPOLIS 816 NEW ORLEANS 1602 PALACIO DEL RIO 482 PASADENA 291 PORTLAND 455 SAN DIEGO 343 SEATTLE 173 CHICAGO 1543 O'HARE 858 PALMER HOUSE 1639 SAN ANTONIO 387 EASTERN REGION ATLANTA AIRPORT 501 ATLANTA 1222 CAPITAL 541 FONTAINEBLEAU 1206 LOGAN 541 MCLEAN 458 MIAMI AIRPORT 500 PITTSBURGH 714 RYE TOWN 438 SHORT HILL 300 WASHINGTON 1123 NEW YORK 2042 WALDORF ASTORIA 1416 HAWAII/CALIF/ARIZONA HAWAIIAN 2542 LAX 1279 KONA 431 TURTLE BAY 485 OAKLAND 362 SF AIRPORT 527 SAN FRANCISCO 1890 NEVADA REGION RENO RESORT * 2001 SELECT HOTELS REGION ANAHEIM/ORANGE * 230 AUBURN HILLS * 224 BRENTWOOD * 203 N.O. AIRPORT 312 NOVI 236 OAKBROOK TER 212 20 PHOENIX * 226 SOUTHFIELD INN * 195 TARRYTOWN 236 VALENCIA INN 152 NEWARK AIRPORT 336 BEVERLY REGION BEVERLY HILTON 581 * To be covered by a mutually agreeable Agreement between Hilton Hotels Corporation and On Command Video Corporation EX-10.7C 7 LETTER AGREEMENT 1 EXHIBIT 10.7(c) LETTER AGREEMENT AUGUST 13, 1996 We agree as follows. 1. DECEMBER 8 LETTER AGREEMENT. This Agreement, together with the other agreements delivered in connection herewith, amend, replace and supersede in its entirety our Letter Agreement of December 8, 1995, as it has been amended to date. 2. JULY 1995 TRANSACTION. The number of shares of On Command Video Corporation ("OCV")common stock issued to Ascent Network Services, Inc., formerly known as COMSAT Video Enterprises, Inc.("CVE") pursuant to the Contribution Agreement dated August 1, 1995 (the "CONTRIBUTION AGREEMENT") (1,878,624 shares, as previously adjusted to reflect an inventory adjustment) will be immediately reduced to 1,408,036 by a cancellation of 470,588 shares, reflecting a share value for OCV at the time of $42.50 and a value of $59,841,526 for the contributed assets net of the inventory adjustment. 3. OPTION PRICE INCREASE DATE; EXTENSION. In consideration of the acknowledgement by Hilton Hotels Corporation ("HILTON") that Hilton has been given notice of (i) the issuances for cash of OCV Common Stock set forth on EXHIBIT A hereto and (ii) the issuance of OCV Common Stock in connection with the Contribution Agreement, Hilton hereby confirms, only with respect to such issuances, that Hilton has elected not to exercise its preemptive right set forth in Section 5.4 of the July 7, 1993 Purchase and Option Agreement between OCV and Hilton (as amended, the "PURCHASE AND OPTION AGREEMENT"). 4. FUTURE TRANSACTIONS BETWEEN OCV AND COMSAT AND ANY OF ITS AFFILIATES. Any material transactions in the future between OCV and CVE or any of its affiliates (or any successor direct or indirect majority shareholder of OCV) will be subject to the fiduciary duties of Ascent Entertainment Group, Inc. ("ASCENT") and CVE, or any such successor, as the direct and indirect majority shareholders of OCV, including, where necessary or appropriate, the advice of independent counsel and, to the extent the independent directors and independent counsel deem necessary or appropriate, independent financial experts. The parties agree that it is not necessary to retain independent counsel for OCV, other than Wilson, Sonsini, Goodrich & Rosati, and consent to the retention of Gary Wilson Partners ("WILSON") on behalf of Ascent and OCV, in connection with the recently announced transaction between SpectraVision and OCV (the "TRANSACTION"). The parties further agree that no independent financial experts other than Wilson should be retained to represent OCV separately with respect to such Transaction. The agreements in the preceding two sentences assume the absence of material conflicts of interest in the Transaction between OCV on the one hand and Ascent and its affiliates on the other hand, and that all material facts with respect to such conflicts and the Transaction have been disclosed to Hilton and OCV's Board of 2 Directors. The covenants set forth in this paragraph shall expire upon the sale or disposition by Hilton of all or substantially all of its shares of OCV common stock or securities into which they are converted. 5. LIQUIDITY. (a) RIGHT TO SELL. An investment banker selected by Hilton will, if Hilton requests and at Hilton's expense, be engaged to attempt to locate a buyer for Hilton's equity interests in OCV at fair market value (based on an enterprise theory of valuation). If Hilton so requests, all of the parties hereto agree to cooperate in respect of such sales efforts. The Right of First Refusal Agreement is terminated as to Hilton and any assignee of its rights; provided, however, that no sale may be made to any party that is a competitor of OCV in hotel video services. If Ascent directly or indirectly disposes of all or any portion of its interests in OCV to any person that is not an affiliate of OCV, Hilton will be afforded an opportunity to dispose of a pro rata portion of its position in OCV on the same terms. (b) SPECTRAVISION. Hilton has received the briefing paper and other materials supplied to the OCV Board of Directors in connection with an August 12, 1996 meeting, subsequently rescheduled to September 4, 1996 and, based upon such information, Hilton is favorably disposed to support the Transaction. Concurrently with the consummation of the Transaction (the "TRANSACTION CLOSING TIME"), unless Hilton's OCV shares (or the securities into which such shares are converted) (including the securities issuable upon exercise of Hilton's option, together the "HH SHARES") are registered under the Securities Exchange Act of 1934 (the "EXCHANGE ACT") and freely tradeable under applicable securities laws, Hilton will be granted, demand and piggyback registration rights no less favorable than as described on page 42 of On Command Corporation's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on August 16, 1996, to enable Hilton to register, at OCV's expense, the HH Shares for sale without restriction. Hilton agrees that if OCV Common Stock or securities into which it is converted is registered under the Exchange Act in connection with the Transaction and the HH Shares are freely tradeable, a "QUALIFYING OFFERING" under Section 2.2 of the Purchase and Option Agreement shall be deemed to have occurred as of the Transaction Closing Time and (i) all of OCV's obligations under Section 5 of the Purchase and Option Agreement shall terminate, and (ii) Hilton's option to purchase OCV Common Stock will terminate as of the Transaction Closing Time unless exercised by then, if Hilton has received the notice contemplated by Section 2.2. OCV acknowledges that Hilton's notice of exercise in the form attached as EXHIBIT C will comply (subject to Hilton making the payments thereunder) with the Purchase and Option Agreement. (c) PUT RIGHT. If in connection with the Transaction Hilton's option will terminate by virtue of the terms of the Purchase and Option Agreement, and Hilton exercises such option and purchases any or all of the shares of OCV Common Stock subject thereto (together with all securities into which such shares may be converted, the "OPTION SHARES"), Hilton and Ascent agree as follows. On or prior to the date 90 days after the Transaction Closing Time (the "HH NOTICE 2 3 DATE"), Hilton may give notice to Ascent requesting Ascent to purchase all, but not less than all, of the Option Shares which Hilton still owns at the HH Notice Date, and within five (5) business days after the HH Notice Date Ascent shall purchase all such Option Shares at an aggregate price equal to Hilton's purchase price of the Option Shares still owned by Hilton. Ascent represents and warrants that it has, and will keep readily available, sufficient funds (including borrowing capacity) to enable it to meet its obligations in this Section 5(c). Both parties agree to act in good faith with respect to the rights and obligations contained in the preceding sentences and not take any actions which could reasonably be expected to artificially affect the market for the securities subject to such rights and obligations; provided, however, that the foregoing shall not limit Hilton's actions in connection with (i) lawful sales of any securities it owns or (ii) other contracts with OCV. (d) OTHER LIQUIDITY OBLIGATIONS. If the Transaction is not consummated, Ascent and OCV will use their best efforts to provide Hilton and the other minority shareholders of OCV, in a voluntary transaction, with liquidity for their interests in OCV reflecting fair market value (based on an enterprise theory of valuation). Ascent and COMSAT Corporation ("COMSAT") shall support OCV's efforts, provided that such support shall not include any obligation on the part of either of them to purchase any such interests for their own accounts, or to agree to any actions on the part of OCV that could reasonably be expected to cause COMSAT to exceed any of the regulatory debt limitations imposed on COMSAT by the Federal Communications Commission (the "FCC"). 6. FEES AND EXPENSES. Hilton will immediately be paid $180,000 by OCV in reimbursement of Hilton's approximate fees and expenses incurred in connection with the matters culminating in the December 8, 1995 Letter Agreement and subsequent related matters leading to this Agreement. 7. MISCELLANEOUS PROVISIONS. This Agreement is specifically enforceable. This agreement is governed by California law, without regard to conflicts of law principles, but such election shall have no effect on the law governing other transactions with OCV. No presumption of construction will exist against the drafter of this Agreement, and the provisions of statutes or applicable principles of law to the contrary are waived. In any legal proceedings relating to this Agreement, the prevailing party will be entitled to recover, in addition to any other appropriate relief, legal fees and costs. The parties agree that for and in consideration of the covenants and obligations set forth in this Agreement, upon the completion of the adjustments and payments referred to in Sections 2 and 6, the parties shall enter into a Mutual Release in the form attached hereto as EXHIBIT B. Except as expressly set forth herein and in the Mutual Release (when it is executed), no party is waiving or releasing any right or remedy. Nothing in this Agreement shall be deemed to constitute a guaranty by COMSAT of the performance obligation of OCV, CVE or Ascent, but while it is directly or indirectly the controlling stockholder of Ascent or OCV it will support Ascent's and OCV's compliance with the terms hereof and take no actions that would prevent Ascent's or OCV's compliance, provided that such support shall not include any obligation 3 4 on the part of COMSAT to agree to any actions on the part of Ascent or OCV which could reasonably be expected to cause COMSAT to exceed any of the regulatory debt limitations imposed on COMSAT by the FCC. HILTON HOTELS CORPORATION ASCENT ENTERTAINMENT GROUP, INC. By:_________________________ By:____________________________ Name: Name: Title: Title: COMSAT CORPORATION ASCENT NETWORK SERVICES, INC. By:___________________________ By:_____________________________ Name: Name: Title: Title: ON COMMAND VIDEO CORPORATION By:_____________________________ Name: Title: 4 5 EXHIBIT A TO LETTER AGREEMENT COMMON STOCK ISSUANCES OCV TO CVE JULY 8, 1993 TO PRESENT December 1993 416,667 shares @ $30.00 per share March 1994 384,616 shares @ $32.50 per share June 1994 357,143 shares @ $35.00 per share July 1994 333,334 shares @ $37.50 per share
Exhibit A - 1 6 EXHIBIT B TO LETTER AGREEMENT MUTUAL RELEASE Hilton Hotels Corporation ("HILTON"), On Common Video Corporation ("OCV"), Ascent Entertainment Group, Inc. ("ASCENT"), Ascent Network Services, Inc. (formerly COMSAT Video Enterprises, Inc. "ANS") and COMSAT Corporation ("COMSAT"), for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, covenant and agree as follows: 1. RELEASE BY HILTON. Hilton, on behalf of itself and its affiliates, directors, officers, employees, successors and assigns, hereby fully releases and discharges each of OCV, Ascent, ANS and COMSAT, and their respective affiliates, directors, officers, employees, agents, and each of their respective successors and assigns, from and against any and all claims, demands, obligations, actions, liabilities, causes of action or damages of any kind or nature whatsoever, in law or in equity, arising at or prior to the date of this Mutual Release, based upon any act or omission or otherwise arising out of or related to the contribution of assets by ANS to OCV pursuant to the Contribution Agreement dated August 1, 1995 (the "CONTRIBUTION AGREEMENT"), the valuation of such assets, the issuance of common stock by OCV to ANS in connection with such contribution or pursuant to the purchases by ANS listed on EXHIBIT A hereto and the initial public offering by Ascent of its common stock in December 1995. 2. RELEASE BY OCV, ASCENT, ANS AND COMSAT. Each of OCV, Ascent, ANS and COMSAT, on behalf of themselves and their respective affiliates, directors, officers, employees, agents, and each of their respective successors and assigns, hereby fully releases and discharges Hilton, and its affiliates, directors, officers, employees, successors and assigns, from and against any and all claims, demands, obligations, actions, liabilities, causes of action or damages of every kind or nature whatsoever, in law or in equity, arising at or prior to the date of this Mutual Release, based upon any act or omission or otherwise arising out of or related to the contribution of assets by ANS to OCV pursuant to the Contribution Agreement, the valuation of such assets, the issuance of common stock by OCV to ANS in connection with such contribution or pursuant to the purchases by ANS listed on EXHIBIT A hereto, Hilton's assertion of its rights as a securityholder of OCV, and Hilton's challenges to the IPO. 3. AUGUST 13, 1996 AGREEMENT UNAFFECTED. This Mutual Release is not intended to release, nor does it release, Hilton, OCV, Ascent, ANS or COMSAT from any obligations or liabilities other than as set forth in Sections 1 and 2 above and, specifically, shall not constitute a release of: (a) any obligations they may owe to each other under the agreements among them dated as of August 13, 1996 (the "1996 AGREEMENTS"); (b) liabilities or claims for any breach of the 1996 Agreements; or (c) any rights or remedies they have under any other contracts or agreements between or among any of them. Exhibit B - 1 7 4. NO ADMISSION. It is specifically stated and understood that none of Hilton, OCV, Ascent, ANS or COMSAT hereby admit any liability or culpability of any nature, any and all such liability or culpability being expressly denied. IN WITNESS WHEREOF the undersigned duly authorized officers have executed this Mutual Release as of September __, 1996. HILTON HOTELS CORPORATION ASCENT ENTERTAINMENT GROUP, INC. _________________________ _______________________________ NAME: NAME: TITLE: TITLE: COMSAT CORPORATION ON COMMAND VIDEO CORPORATION _________________________ _______________________________ NAME: NAME: TITLE: TITLE: ASCENT NETWORK SERVICES, INC. ________________________________ NAME: TITLE: Exhibit B - 2 EX-10.8 8 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.8 EXECUTION COPY EMPLOYMENT AGREEMENT This AGREEMENT is made as of September 11, 1996, by and between On Command Corporation, a Delaware corporation ("NEWCO"), and Brian Steel, an individual (the "Executive"). WHEREAS, Ascent Entertainment Group, Inc., a Delaware corporation ("Ascent"), has entered into agreements with SpectraVision, Inc. ("SpectraVision") to combine (the "Combination") the assets and certain liabilities of SpectraVision with the assets of Ascent's majority owned subsidiary, On Command Video Corporation ("OCV"); WHEREAS, Ascent has created NEWCO as a holding company to own and operate the combined assets and businesses of SpectraVision and OCV; and WHEREAS, NEWCO desires to employ the Executive as Executive Vice President, Chief Operating Officer and Chief Financial Officer of NEWCO, and the Executive desires to accept such employment, on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, and intending to be legally bound hereby, NEWCO and the Executive agree as follows: 1. Employment; Duties. (a) Employment and Employment Period. NEWCO shall employ the Executive to serve as Executive Vice President, Chief Operating Officer and Chief Financial Officer of NEWCO for a period (the "Employment Period") commencing on September 11, 1996 (the "Effective Date") and continuing thereafter for a term of four years until the fourth anniversary of the Effective Date unless terminated in accordance with the provisions of this Agreement. In the event that Newco desires to extend the employment of the Executive, it must give written notice of such desire by the third anniversary of the Effective Date, and after such notice the parties shall enter into an exclusive negotiation period of not less than six months, unless otherwise mutually agreed upon by the parties in writing. Each 12 month period ending on the anniversary date of the Effective Date is sometimes referred to herein as a "year of the Employment Period." 2 Notwithstanding the foregoing, if the Combination has not been consummated by October 31, 1996 on terms reasonably similar to those set forth in the On Command Corporation Registration Statement on Form S-4 filed with the Securities and Exchange Commission on August 16, 1996, and if either party desires to terminate this Agreement as a result of the failure to so consummate the Combination, then the parties agree to negotiate in good faith an equitable basis for such termination in light of all of the circumstances then existing. (b) Offices, Duties and Responsibilities. Effective on the Effective Date, Executive shall be elected Executive Vice President, Chief Operating Officer and Chief Financial Officer of NEWCO. The Executive shall report directly and solely to the Chief Executive Officer and the Board of Directors of NEWCO (the "Board"); provided that so long as Robert M. Kavner is Chief Executive Officer and/or Chairman of the Board, the Executive shall report solely to Mr. Kavner and the Board. The Executive's offices initially shall be located at OCV's present headquarters. Throughout the Employment Period, NEWCO shall cause the Executive to be a member of the Board. The Executive shall have all duties and authority customarily accorded a chief operating officer and chief financial officer, including, without limitation, the lead responsibility with full autonomy, subject to the customary authority and direction of the Board (and the Chief Executive Officer), to direct and develop the operating capabilities and performance of NEWCO. The Executive shall be a member of any senior executive/management committees which may be established from time to time by the Board. The Executive shall not be required to perform services other than those comparable in scope, dignity and stature to those customarily performed by chief operating officers and chief financial officers of companies similar to NEWCO. (c) Devotion to Interests of NEWCO. During the Employment Period, the Executive shall render his business services solely in the performance of his duties hereunder. The Executive shall use his best efforts to promote the interests and welfare of NEWCO. Notwithstanding the foregoing, the Executive shall be entitled to undertake such outside activities (e.g., charitable, educational, personal interests, board of directors 2 3 membership, and so forth, that do not compete with the Business) as do not unreasonably or materially interfere with the performance of his duties hereunder as reasonably determined by the Board in consultation with the Executive. 2. Compensation and Fringe Benefits. (a) Base Compensation. NEWCO shall pay the Executive a base salary ("Base Salary") at the rate of $290,000 per year during the Employment Period with payments made in installments in accordance with NEWCO's regular practice for compensating executive personnel, provided that in no event shall such payments be made less frequently than twice per month. During the Employment Period, the Base Salary of the Executive, and the aggregate of Base Salary and target Annual Bonus (as defined in Section 2(b) below) of the Executive, shall be the highest base salary and target Annual Bonus of any executive or director of NEWCO, other than the Chief Executive Officer of NEWCO. The Base Salary for the Executive shall be reviewed for increases each year during the Employment Period commencing the second year of the Employment Period. Any Base Salary increases shall be approved by the Board in its sole discretion. (b) Bonus Compensation. The Executive will be eligible to receive bonuses ("Annual Bonus") during the Employment Period in accordance with the following parameters: (i) the target bonus for each fiscal year during the Employment Period shall be 70% of Base Salary for achieving 100% of the target level for the performance measures; and (ii) the performance measures, the relative weight to be accorded each performance measure and the amount of bonus payable in relation to the target bonus for achieving more or less than 100% of the target level for the performance measures shall be determined for each year during the Employment Period by the Compensation Committee after consultation with the Executive. As part of the consultation process set forth in the preceding sentence the Executive shall assist NEWCO's Chief Executive Officer in preparing, before the end of each fiscal year ending during the Employment Period, a business plan for NEWCO with respect to at least the following three year period. Each fiscal year the current business plan shall be considered by the Compensation 3 4 Committee as the basis for establishing the bonus standards for the Executive for such year with such reasonable modifications as the Compensation Committee may reasonably determine and which are consistent with this Agreement. In addition, in connection with awarding the bonus for any fiscal year, the Compensation Committee will consider whether the achievement of the standards established for that year have been materially affected by circumstances beyond the Executive's reasonable control, such as acquisitions, dispositions, or limitations on NEWCO's ability to raise or deploy adequate capital to accomplish the business plan approved by the Board. For the period from the Effective Date through December 31, 1996, the Executive shall receive an Annual Bonus to be determined in the sole discretion of the Compensation 3 Committee and which may be equal to 70% of Base Salary pro rated for the period during which the Executive is employed, but absent the standards described above will take into consideration achievement of reasonable goals and objectives for such period. During the final partial fiscal year of the Employment Period, the Annual Bonus shall be based on the standards set by the Compensation Committee for that fiscal year and pro rated for the period during which the Executive is employed. (c) Fringe Benefits. The Executive also shall be entitled to participate in group health, dental and disability insurance programs, and any group profit sharing, deferred compensation, supplemental life insurance or other benefit plans as are generally made available by NEWCO to the senior executives of NEWCO on a favored nations basis, which benefits shall be comparable, in the aggregate, to benefits available to senior executives at similarly situated companies, provided, however, for as long as Ascent owns at least 50% of the voting equity of NEWCO, such benefits shall not be greater in the aggregate than those available to the senior executives of Ascent, and specifically the President and Chief Executive Officer and Executive Vice President, Finance and Chief Operating Officer. Such benefits in all events shall include payment or reimbursement of (i) documented expenses reasonably incurred in connection with travel and entertainment related to NEWCO's business and affairs, (ii) documented expenses incurred in connection with the sale of the Executive's homes in the greater San Francisco area and in Bronxville, New York, the acquisition 4 5 of a different home in the greater San Francisco or San Jose areas and relocation of Executive and his family to their existing home in the greater San Francisco area and to a new home (including from their existing home in the greater San Francisco area) in the greater San Francisco or San Jose area (with such expenses to include, but not be limited to, closing costs, seller's broker's fees, interest costs associated with maintaining more than one residence while the other residences are in the process of being sold, title insurance, prepayment penalties and reasonable temporary living expenses, and any losses, without regard to such expenses, on such sales not to exceed in the aggregate $200,000)) with such similar documented expenses as described in this subsection (ii) to be paid in connection with any subsequent relocation of the Executive by NEWCO during the Employment Period, (iii) a monthly payment for or reimbursement of automobile and other transportation related expenses of $1,100 per month, (iv) documented expenses reasonably incurred, for a period of one year from the Effective Date or until the Executive has purchased and has occupied with Executive's family a new home in the greater San Francisco or San Jose area, whichever is earlier, in connection with (x) travel between Executive's existing homes in the greater San Francisco area and in Bronxville, New York and NEWCO's principal offices, and (y) local lodging expenses not otherwise accounted for in (i) above, and (v) Executive's reasonable legal fees and costs incurred in connection with the drafting, negotiation and execution of this Agreement. All benefits described in the foregoing (i), (ii), (iv) and (v) that are reportable as earned or unearned income will be "grossed up" by NEWCO in connection with federal and state tax obligations to provide Executive with appropriate net tax coverage, so that the benefits received by the Executive from the foregoing clauses (i), (ii), (iv) and (v) shall be net of income and employment taxes thereon. NEWCO reserves the right to modify or terminate from time to time the fringe benefits provided to the senior management group, provided that the fringe benefits provided to the Executive shall not be materially reduced on an overall basis during the Employment Period and provided further that the benefits provided in clauses (i) through (v) above shall not be reduced at all. Notwithstanding the foregoing, until such time as NEWCO shall implement group health, dental and disability insurance plans for 5 6 its executives, or for a period of one year following the Combination, whichever is less, Executive will be entitled to participate in the group health, dental, and disability insurance plans made available to the senior management group of OCV immediately prior to the Effective Date. (d) [Intentionally omitted] (e) Stock Options. NEWCO hereby grants to Executive as of the Effective Date options ("Options") to purchase 385,312 shares of NEWCO's common stock, par value $0.01 per share (the "Common Stock"). NEWCO will use its best efforts to register the shares of Common Stock underlying the Options by filing and exercising best efforts to make and keep effective for the entire period of exercise of the Options, a Registration Statement on the pertinent form within a reasonable period of time after the Combination. The Options shall be exercisable at the following per-share prices: (i) eighty percent (80%) of the Options (308,250 shares) shall be exercisable at a per-share price of $15.33 and (ii) twenty percent (20%) of the Options (77,062 shares) shall be exercisable at a per-share price of $17.63; provided, however, that if the average of the daily high and low bid prices of the Common Stock on the NASDAQ Stock Exchange for the twenty trading days following the third trading day after NEWCO's public release of financial results for the third quarter of 1996 is less than $17.63, then the exercise price shall be such average. The Options shall be exercisable by the Executive according to the following schedule: (i) with respect to 25% of the Option shares on or after the commencement of the second year of the Employment Period; (ii) with respect to an additional 25% of the Option shares on or after he commencement of the third year of the Employment Period; and (iii) with respect to an additional 50% of the Option shares on or after the commencement of the fourth year of the Employment Period. 6 7 Notwithstanding the foregoing, 100% of the Options shall immediately vest and become immediately exercisable, without any further action by the Executive, upon the occurrence of any "NEWCO change of control" or a "Change of Control Event," each as defined in Section 7(a) below, or upon the occurrence of any event that results in NEWCO's Common Stock no longer being traded on any of the New York Stock Exchange, American Stock Exchange or NASDAQ National Market System (including, without limitation, as a result of any "going private" transaction with Ascent). The Options, to the extent they remain unexercised, shall automatically and without further notice terminate and become of no further force and effect at the time of the earliest of the following to occur: (x) Three months after the date upon which a termination for cause by NEWCO (as provided in Section 5(b)) shall have become effective and final; or (y) Ten years after the Effective Date. The Options shall have anti-dilution provisions identical to those contained in the Warrant Agreement between NEWCO and the Warrant Agent related to the Warrants, except (i) for anti-dilution provisions, if any, related to sales of Common Stock of NEWCO to non-affiliates, and (ii) there shall be no adjustment for dividends or distributions of cash or assets unless the aggregate amount thereof exceeds 15% of the fair market value per share, rather than the 5% provided in the Warrant Agreement, and the Options shall additionally contain provisions permitting Executive's cashless exercise thereof by paying the exercise price through the delivery of Options valued at the difference between the exercise price of the Options delivered and the market value of the shares of Common Stock underlying such Options. The Options shall be represented by a stock option agreement between Executive and NEWCO containing only terms consistent in all material respects with the provisions of this Agreement, which stock option agreement shall be prepared by NEWCO and presented for Executive's review at least ten (10) business days prior to the Effective Date, shall otherwise qualify under Rule 16b-3 of the Securities and Exchange Commission, and may be included under a Stock Option Plan adopted 7 8 by NEWCO, which shall not alter the terms herein related to the option or the Option shares. In addition, if NEWCO adopts a stock option plan that in Executive's sole judgment provides for any term(s) more favorable to the grantee than any term(s) set forth above, Executive will be entitled to the benefit of such more favorable term(s) with respect to the Options, other than with respect to the vesting schedule thereof, but in no event will any term(s) applicable to the Options be less favorable to Executive than those set forth above. During the Employment Period, the Executive may be granted additional non-statutory stock options but only as determined by the Compensation Committee in its sole discretion, provided that the Executive acknowledges that he has been advised by NEWCO that it is NEWCO's current intention not to issue any additional options to the Executive during the three year period following the Effective Date. Notwithstanding any other provision of this Agreement except Section 5(b), the Compensation Committee may provide in its discretion that any stock options granted to the Executive which have not vested prior to his termination of employment shall continue to vest in accordance with their original terms as if the Executive's employment had not terminated. (f) Transition Loan. In order to facilitate the Executive's early transition from the Executive's current employment, Ascent will cause a $240,000 unsecured no interest loan (the "Transition Loan") to be made to the Executive on the Effective Date by NEWCO. The Transition Loan will be due and payable by the Executive on the first anniversary of the Effective Date; provided that if the Executive is still employed by Ascent, NEWCO, OCV or any of their successors or affiliates on such first anniversary date, or if the Executive's employment is terminated by NEWCO other than for "cause" prior to such date or is terminated by the Executive other than in connection with an Executive Election Event prior to such date, then the Transition Loan will be forgiven in its entirety. (g) Consulting Compensation. If the Executive is still employed by NEWCO on the date preceding the fourth anniversary of the Effective Date, and if by such date the Executive and NEWCO 9 9 have not executed a written agreement for an additional term of employment, then the Employment Period shall expire and, in addition to and without limitation of any rights of either party under this Agreement or otherwise, NEWCO shall retain the Executive as a non-exclusive consultant and, as compensation for such consulting services, shall pay the Executive an amount equal to twenty-five percent (25%) of his then current Base Salary for an additional period of twelve (12) months (the "Consulting Period"), and during the Consulting Period the Executive shall continue to receive Fringe Benefits (as defined below), and to vest in any employee stock options previously awarded to the Executive, but the Executive shall not be entitled to receive any Base Salary increases, bonuses, or further awards of stock options. Without limiting any of the Executive's other rights under this Agreement or otherwise, if the Executive is still employed by NEWCO on the date preceding the fourth anniversary of the Effective Date and is retained as a consultant and is entitled to the compensation and benefits set forth in the immediately preceding sentence, then such compensation and benefits shall constitute his sole compensation resulting from the expiration of this Agreement, and the Executive waives any claims to any additional compensation other than as a result of NEWCO's breach of this Agreement. (h) Performance-Based Compensation; Conflicting Provisions. The Executive acknowledges that NEWCO intends to administer this Agreement and to take actions so as to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") to ensure the Federal tax deductibility under that section of compensation paid to the Executive pursuant to performance-based compensation. Solely to the extent of any conflict between the provisions of this Agreement and the provisions of any agreement between Executive, on the one hand, and Ascent, NEWCO and/or any affiliated or related entity of either of them, on the other hand, relating to stock options (including the Options), life insurance, health insurance, any other employee equity participation, profit sharing or retirement plan, group health plan or other employee benefits (individually and collectively, together with the Ascent stock awards, referred to herein as the "Fringe Benefits"), the provisions of this Agreement will control. 9 10 3. Trade Secrets; Return of Documents and Property. (a) Executive acknowledges that during the course of his employment he will receive secret, confidential and proprietary information ("Trade Secrets") of NEWCO and of other companies with which NEWCO does business on a confidential basis and that Executive will create and develop Trade Secrets for the benefit of NEWCO. Trade Secrets shall include, without limitation, (a) literary, dramatic or other works, screenplays, stories, adaptations, scripts, treatments, formats, scenarios, characters, titles of any kind and any rights therein, "know-how," formulae, secret processes or machines, inventions, computer programs (including documentation of such programs) (collectively, "Technical Trade Secrets") and (b) matters of a business nature, such as customer data and proprietary information about costs, profits, markets and sales, custom databases, and other information of a similar nature to the extent not available to the public, and plans for future development (collectively, "Business Trade Secrets"). All Trade Secrets disclosed to or created by Executive shall be deemed to be the exclusive property of NEWCO (as the context may require). Executive acknowledges that Trade Secrets have economic value to NEWCO due to the fact that Trade Secrets are not generally known to the public or the trade and that the unauthorized use or disclosure of Trade Secrets is likely to be detrimental to the interests of NEWCO and its subsidiaries. During the Employment Period, Executive therefore agrees to hold in strict confidence and not to disclose to any third party any Trade Secret acquired or created or developed by Executive during the term of the Employment Period except (i) when Executive is required to use or disclose any Trade Secret in the proper course of the Executive's rendition of services to NEWCO hereunder, (ii) when such Trade Secret becomes public knowledge other than through a breach of this Agreement, or (iii) when Executive is required to disclose any Trade Secret pursuant to any valid court order in which the Executive is compelled to disclose such Trade Secret. The Executive shall notify NEWCO immediately of any such court order in order to enable NEWCO to contest such order's validity. For a period of two (2) years after the termination of the Employment Period for all Business Trade Secrets and for a period of five 10 11 (5) years after the termination of the Employment Period for all Technical Trade Secrets, the Executive shall not use or otherwise disclose Trade Secrets unless such information (x) becomes public knowledge or is generally known in any industry in which NEWCO conducts business among executives comparable to the Executive other than through a breach of this Agreement, (y) is disclosed to the Executive by a third party who is entitled to receive and disclose such Trade Secret, or (z) is required to be disclosed pursuant to any valid court order, in which case the Executive shall notify NEWCO immediately of any such court order in order to enable NEWCO to contest such order's validity. (b) Upon the effective date of notice of the Executive's or NEWCO's election to terminate this Agreement, or at any time upon the request of NEWCO, the Executive (or his heirs or personal representatives) shall deliver to NEWCO (i) all documents and materials containing or otherwise relating to Trade Secrets or other information relating to NEWCO's business and affairs, and (ii) all other documents, materials and other property belonging to NEWCO, which in either case are in the possession or under the control of the Executive (or his heirs or personal representatives). The Executive shall be entitled to keep his personal records relating to NEWCO's business and affairs except to the extent those contain documents or materials described in clause (i) or (ii) of the preceding sentence, in which case Executive may retain copies for his personal and confidential use. 4. Discoveries and Works. All discoveries and works made or conceived by the Executive during his employment by NEWCO pursuant to this Agreement, jointly or with others, that relate to NEWCO's activities ("Discoveries and Works") shall be owned by NEWCO, it being understood that the Discoveries and Works referred to in this paragraph are limited to those that are made, disclosed, reduced to tangible or written form or description, or are reduced to practice by the Executive in the course of his performing services for NEWCO. Discoveries and Works shall include, without limitation, literary, dramatic or other works, screenplays, stories, adaptations, scripts, treatments, formats, scenarios, characters, titles of any kind and any rights therein, other works of authorship, inventions, computer programs 11 12 (including documentation of such programs), technical improvements, processes and drawings. The Executive shall (i) promptly notify, make full disclosure to, and execute and deliver any documents reasonably requested by, NEWCO to evidence or better assure title to such Discoveries and Works in NEWCO, (ii) assist NEWCO in obtaining or maintaining for itself at its own expense United States and foreign copyrights, trade secret protection or other protection of any and all such Discoveries and Works, and (iii) promptly execute, whether during his employment by NEWCO or thereafter, all applications or other endorsements necessary or appropriate to maintain copyright and other rights for NEWCO and to protect their title thereto. Any Discoveries and Works which, within sixty days after the termination of the Executive's employment by NEWCO, are made, disclosed, reduced to a tangible or written form or description, or are reduced to practice by the Executive and which pertain to work performed by the Executive while with NEWCO shall, as between the Executive and NEWCO be presumed to have been made during the Executive's employment by NEWCO. 5. Termination. During the Employment Period, Executive's employment with NEWCO may be terminated only as follows: (a) By the Executive (an "Executive Election") at any time upon sixty (60) days advance written notice to NEWCO upon an "Executive Election Event" (as defined below). In such event or if the Executive's employment is terminated by NEWCO without "cause" (as defined below), there will be no forfeiture, penalty, reduction or other adverse effect upon any rights or interests relating to any Fringe Benefits, all of which will fully vest, to the extent not previously vested, immediately upon such termination becoming effective and final. Without limiting the foregoing, in the event of an Executive Election or if the Executive's employment is terminated without "cause," the Executive shall be entitled to receive the following benefits through the longer of (A) the remainder of the Employment Period as if this Agreement had remained in effect until the end of the Employment Period and (B) one year following the date of such termination (the "Duration Period"): (i) the Executive's then current Base Salary; (ii) an Annual Bonus equal to seventy percent (70%) of his then current Base Salary for each year 12 13 during the Duration Period; and (iii) all other benefits provided pursuant to Sections 2(c), (d) and (e) of this Agreement. The Executive shall have no obligation to seek other employment in the event of his termination pursuant to this paragraph (a), provided, however, that his compensation from any such employment obtained shall offset up to fifty percent (50%) of NEWCO's obligations under clauses (i) and (ii) above, but only after payments pursuant to clauses (i) and (ii) are made with respect to a one year period following termination. NEWCO shall have the option at any time during the Duration Period, after prior written notice to the Executive, to pay to the Executive in a lump sum the net present value, assuming a discount rate equivalent to the yield to maturity of United States Treasury Bonds maturing on the same date as the end of the Duration Period, of the amounts remaining under clauses (i) and (ii) of this paragraph (a), and the amount of such lump sum payment shall be reduced by compensation actually paid or payable to the Executive from other employment for the time period remaining on NEWCO's payment obligation under this Agreement at the time such payment is made on the basis set forth in the preceding sentence. If NEWCO pays such lump sum, NEWCO shall have no further compensation payment obligations under clauses (i) and (ii) above. The Executive shall have the right to instruct NEWCO to decrease any such payment or any other benefit due under this paragraph (a) to an amount not to exceed an amount to be designated by the Executive in writing for the purpose of providing that such payment (together with any other benefits provided to Executive) shall not constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"); provided, however, that NEWCO's agreement to decrease such payment shall not result in any liability from NEWCO to the Executive with respect to any excise tax under Section 4999 of the Code (or any similar state or local provision), or any penalties or interest with respect to such excise tax. NEWCO shall place an amount equivalent to its obligations owed to the Executive in connection with this Section 5(a) in an escrow account to be administered by an unrelated third party, or shall provide some other comparable form of security (e.g., an irrevocable letter of credit) for such obligations reasonably acceptable to the Executive. In all circumstances of termination under this Section 5(a), NEWCO shall 13 14 remain obligated under clause (iii) and all stock options (including the Option) will remain exercisable for the maximum period provided in each applicable grant. An "Executive Election Event" shall be any of the following: (I) any change in the reporting structure set forth in Section 1(b) above; (II) any requirement that the Executive perform material services of lesser stature than those typically performed by the chief operating officer or chief financial officer of comparably sized companies; (III) any reduction in Executive's title; (IV) a "Change of Control Event" (as defined in Section 7(a) below); provided that in such event, the 50% offset from subsequent employment set forth in the preceding paragraph shall be increased to 100% and such offset shall apply during the first year after termination as well; (V) any other material default of this Agreement which continues for ten (10) business days following NEWCO's receipt of written notice from the Executive specifying the manner in which NEWCO is in default of this Agreement; (VI) the Board's requiring Executive to be based at any office location other than the principal offices of NEWCO, or the relocation, without Executive's consent, of such principal offices to a location outside the greater San Francisco and San Jose areas prior to the second anniversary of the Effective Date; (VII) any purported termination of Executive's employment otherwise than as expressly permitted by the Agreement; (VIII) an action by the Board, without the prior written consent of the Executive, which results in NEWCO materially diminishing the scope or magnitude of those operations in which it is expected to engage immediately following the Combination; or (IX) within three (3) months after the termination of Robert Kavner as President and CEO of NEWCO by NEWCO without "cause", by reason of death or disability or the termination of such employment by Mr. Kavner in connection with an "Executive Election Event" (as defined in Mr. Kavner's Employment Agreement), the Executive and the Board shall have mutually agreed that such termination would be reasonably likely to have a materially detrimental effect on the condition, reputation or future prospects of NEWCO or its successor entity, the day-to-day circumstances of Executive's employment or the compensation payable to Executive hereunder; (provided that in the event of Mr. Kavner's death or disability (i) the Executive's 14 15 benefits shall not exceed the benefits, excluding insurance proceeds, to which he or his estate would be entitled upon termination for his own death or disability and (ii) the Executive's Option shall vest ratably upon such termination); if the Executive and the Board are unable to agree on such a determination, the Executive shall have the right to submit the matter to arbitration pursuant to Section 11 below, it being agreed that the arbitrator shall award the Executive costs and attorneys' fees under Section 11(c) if the Executive has submitted the matter to arbitration with a reasonable basis for doing so, even if the Executive is not the prevailing party therein. (b) By NEWCO at any time for "cause." For purposes of this Agreement, NEWCO shall have "cause" to terminate the Executive's employment hereunder upon (i) the continued and deliberate failure of the Executive to perform those material duties reasonably prescribed by the Board and in accordance with the terms of this Agreement (other than any such failure resulting from his incapacity due to physical or mental illness), which failure continues for ten (10) business days following the Executive's receipt of written notice from the Board specifying those duties which the Executive is so failing to perform, (ii) the engaging by the Executive in intentional serious misconduct that is materially and demonstrably injurious to NEWCO or its reputation, which misconduct, if it is reasonably capable of being cured, is not cured by the Executive within ten (10) business days following the Executive's receipt of written notice from the Board specifying the serious misconduct engaged in by the Executive, (iii) the conviction of the Executive of commission of a felony involving a crime of moral turpitude, whether or not such felony was committed in connection with NEWCO's business, or (iv) any material breach by the Executive of Section 8 hereof. If NEWCO shall terminate the Executive's employment for "cause," there will be no forfeiture, penalty, reduction or other adverse effect upon any vested rights or interests relating to any Fringe Benefits. In such event, NEWCO, in full satisfaction of all of NEWCO's obligations under this Agreement and in respect of the termination of the Executive's employment with NEWCO, shall pay the Executive his Base Salary, a prorated Annual Bonus and all other compensation, benefits and 15 16 reimbursement through the date of termination of his employment, provided that the Option and any other stock options granted to the Executive under the NEWCO option or any successor plan shall terminate three months after the date of termination of his employment for "cause". 6. Disability; Death. (a) If, prior to the expiration or termination of the Employment Period, the Executive shall be unable to perform substantially his duties by reason of disability or impairment of health for at least six consecutive calendar months, NEWCO shall have the right to terminate Executive's employment by giving sixty (60) days written notice to the Executive to that effect, but only if at the time such notice is given such disability or impairment is still continuing. Following the expiration of the notice period, (i) the Employment Period shall terminate with the payment of the Executive's Base Salary for the month in which notice is given and a prorated Annual Bonus through such month, (ii) there will be no forfeiture, penalty, reduction or other adverse effect upon any vested rights or interests relating to any Fringe Benefits and (iii) the Option shall vest in its entirety and shall remain exercisable for its full term as if the Executive had not become disabled, notwithstanding the limitations of Section 2(e) of this Agreement. In the event of a dispute as to whether the Executive is disabled within the meaning of this paragraph (a), or the duration of any disability, either party may request a medical examination of the Executive by a doctor appointed by the Chief of Staff of a hospital selected by mutual agreement of the parties, or as the parties may otherwise agree, and the written medical opinion of such doctor shall be conclusive and binding upon the parties as to whether the Executive has become disabled and the date when such disability arose. The cost of any such medical examinations shall be borne by NEWCO. (b) If, prior to the expiration or termination of the Employment Period, the Executive shall die, NEWCO shall pay to the Executive's estate his Base Salary and a prorated Annual Bonus through the end of the month in which the Executive's death occurred, at which time the Employment Period shall terminate 16 17 without further notice and there will be no forfeiture, penalty, reduction or other adverse effect upon any vested rights or interests relating to any Fringe Benefits; provided that upon the Executive's death the Option and any other stock options granted to the Executive under the NEWCO option plan or any successor plan shall become fully vested and shall terminate one year after the date of termination of his employment for death, notwithstanding the limitations of Section 2(e) of this Agreement. (c) Nothing contained in this Section 6 shall impair or otherwise affect any rights and interests of the Executive under any compensation plan or arrangement of NEWCO which may be adopted by the Board. 7. Change of Control. (a) If, prior to the termination of the Employment Period, there is a "Change of Control Event" (as hereinafter defined in this paragraph (a)), the Executive shall have the right to exercise his Executive Election in accordance with Section 5(a), but shall not have the right to give such notice in accordance with Section 5(a) in any event later than 120 days following such Change of Control Event. Prior to any "change of control" (as hereinafter defined in this paragraph (a)), and from time to time thereafter at the Executive's request upon relevant changed circumstances in the ownership or management of NEWCO, the Executive and the Board will mutually determine whether such "change of control" or changed circumstances would be reasonably likely to have a materially detrimental effect on the condition, reputation or future prospects of NEWCO or its successor entity, the day-to-day circumstances of the Executive's employment or the compensation payable to the Executive hereunder. An affirmative determination with respect to any of the foregoing by the Executive and the Board, or by an arbitrator as provided below, shall be referred to herein as a "Change of Control Event", it being agreed that the arbitrator shall award the Executive costs and attorneys' fees under Section 11(c) if the Executive has submitted the matter to arbitration with a reasonable basis for doing so, even if the Executive is not the prevailing party therein. If the Executive and the Board are unable to agree on 17 18 such determination, the Executive shall have the right: (i) to submit to arbitration pursuant to Section 11 below the determination of whether the "change of control" or changed circumstances would be reasonably likely to have any of the materially detrimental effects mentioned above, and an affirmative determination by the arbitrator shall constitute a "Change of Control Event"; (ii) to accept continued employment with NEWCO or its successor entity on the terms of this Agreement; or (iii) to terminate his employment by giving sixty (60) days written notice to NEWCO to that effect. If the Executive elects to terminate his employment pursuant to clause (iii) of this paragraph (a), following the expiration of the notice period provided therein, the Employment Period shall terminate with the payment of the Executive's Base Salary for the month in which notice is given. "Change of control" for purposes of this paragraph (a) shall mean either, any event as a result of which a single third party, or "group" as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended, other than Ascent or its affiliates owns more than fifty percent (50%) of the voting stock of NEWCO (a "NEWCO change of control"), or, any event as a result of which a single third party, or "group" (as defined above) other than COMSAT Corporation or its affiliates directly or indirectly owns more than fifty percent (50%) of Ascent. (b) In the event that NEWCO adopts any "change of control" provisions applicable to any NEWCO benefits plans, respectively, providing for the accelerated vesting and/or payment of any benefits for its senior management group, to the extent that such provisions give Executive greater rights than those provided in paragraph (a) above, such provisions shall apply to the Executive to the same extent as other NEWCO senior executives on a favored nations basis with respect to the benefits affected by such NEWCO provisions. 8. Non-Competition. (a) As an inducement for NEWCO to enter into this Agreement, the Executive agrees that for a period commencing as of the Effective Date and running through the earlier of (i) the end of the Employment Period if the Executive remains employed by 18 19 NEWCO for the entire Employment Period or (ii) one year following termination of the Executive's employment by NEWCO for "cause" as defined in Section 5(b) hereof, or by the Executive for any reason (other than an Executive Election Event or an event described in Section 7(a)(iii) above, in which case the provisions of this paragraph (a) shall not apply) (the "Non-Competition Period"), the Executive shall not, without the prior written consent of the Board, undertake employment or services for a company engaged in a business which is or has publicly announced its intention to become directly competitive with the business then being primarily conducted by NEWCO, with respect to any geographic area in which NEWCO then engages in such business, if the loyal and complete fulfillment of the duties of the competitive employment or services would call upon Executive to reveal, to make judgments on or otherwise to use Trade Secrets of NEWCO (as defined in Section 3 above) to which Executive had access by reason of his employment by NEWCO. (b) Non-Solicitation of Employees. During the Non-Competition Period, the Executive will not (for his own benefit or for the benefit of any person or entity other than NEWCO) solicit, or assist any person or entity other than NEWCO to solicit, any officer, director, executive or employee (other than an administrative or clerical employee) of NEWCO to leave his or her employment. (c) Reasonableness; Interpretation. The Executive acknowledges and agrees, solely for purposes of determining the enforceability of this Section 8 (and not for purposes of determining the amount of money damages or for any other reason), that (i) the markets served by NEWCO are national and international and are not dependent on the geographic location of executive personnel or the businesses by which they are employed; (ii) the length of the Non-Competition Period is linked to the term of the Employment Period and the severance benefit provided for in Section 5(a); and (iii) the above covenants are manifestly reasonable on their face, and the parties expressly agree that such restrictions have been designed to be reasonable and no greater than is required for the protection of NEWCO. In the event that the covenants in this Section 8 shall be determined by any court of competent jurisdiction in any action to be 19 20 unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, they shall be interpreted to extend only over the maximum period of time for which they may be enforceable, and/or over the maximum geographical area as to which they may be enforceable and/or to the maximum extent in all other respects as to which they may be enforceable, all as determined by such court in such action. (d) Investment. Nothing in this Agreement shall be deemed to prohibit the Executive from owning equity or debt investments in any corporation, partnership or other entity which is competitive with NEWCO, provided that such investments (i) are passive investments and constitute five percent (5%) or less of the outstanding equity securities of such an entity the equity securities of which are traded on a national securities exchange or other public market, or (ii) are approved by the Board. 9. Indemnification; Liability Insurance. The Executive shall be entitled to indemnification and coverage under NEWCO's liability insurance policy for directors and officers to the same extent as other directors and officers of NEWCO. During and after the term of employment, NEWCO hereby agrees to indemnify and hold Executive harmless against any and all claims arising from or in connection with his employment by or service to NEWCO to the full extent permitted by law and, in connection therewith, to advance the expenses of Executive incurred in defending against such claims subject to such limitations as may actually be required by law. 10. Enforcement; Joint and Several Liability. The Executive cknowledges that a breach of the covenants or provisions contained in Sections 3, 4 and 8 of this Agreement will cause irreparable damage to the Business and NEWCO, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the Executive agrees that if the Executive breaches or threatens to breach any of the covenants or provisions contained in Sections 3, 4 and 8 of this Agreement, in addition to any other remedy which may be available at law or in equity, NEWCO shall be entitled to seek specific performance and 20 21 injunctive relief. 11. Arbitration. (a) Subject to NEWCO's right to enforce Sections 3, 4 nd 8 hereof by an injunction issued by a court having jurisdiction (which right shall prevail over and supersede the provisions of this Section 11), any dispute relating to this Agreement, including the enforceability of this Section 11, arising between the Executive and NEWCO shall be settled by arbitration which shall be conducted in the greater San Francisco and San Jose, California area, or any other location where the Executive then resides at NEWCO's request, before a single arbitrator in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA"). Within 90 days after the Effective Date, the parties shall mutually agree upon three possible arbitrators, one of whom shall be selected by the AAA within 2 days after notice of a dispute to be arbitrated under this Section 11. The parties shall instruct the arbitrator to use his or her best efforts to conclude the arbitration within 60 days after notice of the dispute to AAA. (b) The award of any such arbitrator shall be final. Judgment upon such award may be entered by the prevailing party in any federal or state court sitting in the greater San Francisco and San Jose, California area or any other location where the Executive then resides at NEWCO's request. (c) Subject to Sections 7(a) and 5(a), the parties will bear their own costs associated with arbitration and will each pay one-half of the arbitration costs and fees of AAA; however, the arbitrator may in his sole discretion determine that the costs of the arbitration proceedings, including attorneys' fees, shall be paid entirely by one party to the arbitration if the arbitrator determines that the other party is the prevailing party in such arbitration. 12. Severability. Should any provision of this Agreement be determined o be unenforceable or prohibited by any applicable law, such provision shall be ineffective to the extent, and only to the extent, of such unenforceability or prohibition without invalidating the balance of such provision or any other provision 21 22 of this Agreement, and any such unenforceability or prohibition in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13. Assignment. The Executive's rights and obligations under this greement shall not be assignable by the Executive. NEWCO's rights and obligations under this Agreement shall not be assignable by NEWCO except as incident to the transfer, by merger or otherwise, of all or substantially all of the business of NEWCO. In the event of any such assignment by NEWCO, all rights of NEWCO hereunder shall inure to the benefit of the assignee. 14. Notices. All notices and other communications which are required or ay be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method, provided that in such case it shall also be sent by certified or registered mail, return receipt requested; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. Unless otherwise changed by notice, in each case notice shall be sent to: 22 23 If to Executive, addressed to: Brian Steel 387 Victoria Bay Alameda, CA 34502 With a copy to: Brian Steel 30 Northway Bronxville, N.Y. 10708 And to: Robert Adler, Esq. Munger, Tolles & Olson 355 South Grand Ave. 35th Floor Los Angeles, CA 90071 Telecopier No. (213)687-3702 If to NEWCO, addressed to, On Command Corporation c/o Ascent Entertainment Group, Inc. 1200 Seventeenth Street Denver, CO 80202 Attention: Charlie Lyons Telecopier No. (303) 595-0823 With a copy to: Ascent Entertainment Group, Inc. 1200 Seventeenth Street Denver, CO 80202 Attention: Arthur M. Aaron, Esq. Telecopier No. (303) 595-0823 23 24 15. Miscellaneous. This Agreement constitutes the entire agreement, and upersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. The validity, interpretation, performance and enforcement of the Agreement shall be governed by the laws of the State of California. The headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. /s/_______________________________ Brian Steel, Executive ON COMMAND CORPORATION By:___________________________ Title: 24 EX-10.9 9 EMPLOYMENT AND CONSULTING AGREEMENT-ROBERT SNYDER 1 EXHIBIT 10.9 EMPLOYMENT AND CONSULTING AGREEMENT THIS AGREEMENT is made on November 20, 1991, between ON COMMAND VIDEO CORPORATION, a California corporation ("Company"), and Robert Snyder ("Mr. Snyder"). RECITALS A. The Company is in the business of designing, manufacturing, installing, and operating hotel pay-per-view video selection and distribution systems allowing hotel guests to select from a large number of programs for viewing at any time they choose. B. Mr. Snyder has been employed by the Company on an "at-will" basis for a number of years in a number of capacities, most recently as President and Chief Operating Officer. C. Mr. Snyder desires to obtain increased compensation and the other covenants of OCV in this written Employment and Consulting Agreement, and to assure his continued engagement by the Company, first, as an employee of the Company, and second, as a provider of exclusive consulting services subsequent to his employment, in order to induce Comsat Video Enterprises, Inc., a Delaware corporation ("CVE"), to make a substantial equity investment in the Company pursuant to a Stock Purchase Agreement dated the date of this Agreement. D. OCV desires to secure the services and the other covenants of Mr. Snyder in this written Employment and Consulting Agreement, and to induce CVE's investment in OCV. NOW, THEREFORE, in consideration of the above premises, and the terms, covenants, and conditions set forth in this Agreement, the parties agree as follows: 1. Engagement as Employee and Consultant 1.1 The Company hereby employs Mr. Snyder and Mr. Snyder hereby accepts employment, upon the terms, covenants, and conditions contained in this Agreement. 1.2 The Company hereby engages the exclusive consulting services of Mr. Snyder, and Mr. Snyder hereby accepts an exclusive engagement as a consultant to the Company, upon the terms, covenants, and conditions contained in this Agreement. 2. Term 2.1 The term of Mr. Snyder's employment under this Agreement shall extend for five years from the date of this Agreement, unless Mr. Snyder is terminated as set forth in Paragraphs 10 or 11 (the "employment period"). On expiration of this five-year term, any continued employment shall be at will, 2 terminable by either party at any time, with or without cause, on notice to the other. 2.2 Mr. Snyder shall provide the consulting services contemplated by this Agreement from the date of termination of his employment for any reason whatsoever other than pursuant to Paragraph 10, until the expiration of seven years after the date of this Agreement (the "exclusive consulting period"). The parties agree that their undertakings to enter the exclusive consulting agreement are independent of the employment agreement except as to duration and shall be performed regardless of whether the termination of the employment is made with or without "good cause" as set forth in Paragraph 11. 3. Duties. 3.1 Mr. Snyder is hereby employed initially as President and Chief Operating Officer. During the employment period, Mr. Snyder's duties and responsibilities shall remain comparable to those performed by Mr. Snyder prior to this Agreement and shall include those as may be directed by the Board of Directors of the Company from time to time. Mr. Snyder will devote the time, energy and skill as a full-time employee as is necessary to perform the services required hereunder and to promote the Company's interests. 3.2 During the exclusive consulting period, Mr. Snyder shall serve as a consultant to the Company on an exclusive basis. During the exclusive consulting period, Mr. Snyder shall make himself available to the Company on reasonable notice as needed for up to one hundred hours per year for consultation on matters within his expertise. During the exclusive consulting period, Mr. Snyder shall have the status of an independent contractor. 4. Compensation 4.1 During the employment period, the Company shall pay to Mr. Snyder in installments to be paid monthly, a basic salary at the rate of One Hundred Thirty Thousand Dollars ($130,000) per year, subject to review by the Company's Board of Directors for possible increases on January 1 of each year starting with 1993. During the employment period, Mr. Snyder also shall be eligible to receive incentive bonus compensation based on Mr. Snyder's and the Company's performance in accordance with an incentive bonus program to be established by mutual agreement of Mr. Snyder and the Board of Directors. 4.2 During the exclusive consulting period, the Company shall pay to Mr. Snyder in installments to be paid monthly, a fixed fee of Twenty Thousand Dollars ($20,000) per year. 2 3 5. Expenses 5.1 During the employment period, the Company shall reimburse Mr. Snyder for all authorized traveling and entertainment expenses and other disbursements reasonably incurred by Mr. Snyder for or on behalf of the Company in the performance of his employment which are properly substantiated by Mr. Snyder and are in accordance with the expense policies adopted by the Board of Directors. 5.2 During the exclusive consulting period, the Company shall reimburse Mr. Snyder for expenses incurred on behalf of the Company to the extent authorized in advance in writing by the Company and properly substantiated by him. 6. Vacations 6.1 During the employment period, Mr. Snyder shall be entitled to have reasonable non-cumulative vacations in accordance with Company policies during each year which shall be at such times as shall be mutually agreed upon between Mr. Snyder and the Board of Directors of the Company. 6.2 Mr. Snyder shall not be entitled to vacation benefits during the exclusive consulting period. 7. Other Benefits 7.1 During the employment period, Mr. Snyder shall be eligible to participate in such "benefit plans" as may be in force from time to time throughout the Company, subject to the eligibility requirements applicable to said plans, including but not limited to savings and deferral plans, profit sharing plans, pension plans, group health and accident insurance and group life insurance, if any, as determined by the Company's Board of Directors. Nothing contained herein shall be construed as requiring the Company to provide such other benefit plans or any of them, nor does the Company represent that such shall be provided. If any such benefit plans are provided by the Company, the Company reserves the right to unilaterally cancel all or any one or more of them as provided in any document or agreement establishing such plans, and such cancellation shall in no way be construed as breach of this Agreement by the Company nor constitute an excuse for the failure of Mr. Snyder to continue to comply with the requirements hereof. 7.2 Mr. Snyder shall not be entitled to any such benefits during the exclusive consulting period. 8. Proprietary Information and Inventions; Confidentiality; Non-Solicitation; Non-Competition 8.1 General. The parties recognize and acknowledge the industry in which the Company is engaged is highly competitive 3 4 and fast-changing, and that the success and continued viability of the Company depends primarily on its ability continually to improve and develop its services and products so that it can offer services and products that are technologically equal to or superior to, and equally or better suited to the needs of particular markets, than those offered by the Company's competitors, many of whom have greater financial resources and larger sales organizations than it. To gain and maintain this competitive position, the Company intends that Mr. Snyder will obtain knowledge of trade secrets, developments, discoveries, inventions, ideas and theories acquired at the expense of the Company including through Mr. Snyder's own efforts. Mr. Snyder has been a key person to the Company and has an intimate knowledge and thorough understanding of this information of the Company, and the parties further recognize and agree that the Company has a legitimate interest in protecting this information for a limited period of time. The parties further recognize and agree that the only practicable way to protect this information is to restrict the activities of Mr. Snyder during the exclusive consulting period as well as during the employment period. The parties have, therefore, agreed upon the following covenants: 8.2 Proprietary Information and Inventions Agreement Remains in Effect. Mr. Snyder hereby reconfirms, and shall remain bound by, his obligations under the Proprietary Information and Inventions Agreement between the Company and Mr. Snyder dated December 31, 1987 a copy of which is attached as Exhibit A to this Agreement. 8.3 Exclusivity Covenant. Recognizing that the territory in which the Company conducts business through marketing and provision of its services and products (including businesses conducted by licensees pursuant to licenses granted by the Company such as the Exclusive License Agreement with CVE dated the date of this Agreement) is nationwide and worldwide in scope, and that competitors of the Company are located in various parts of the United States of America and in other countries, and compete with the Company in nationwide and worldwide markets, and that within this territory, the Company (including its licensees such as CVE) has achieved favorable identification through promotion and marketing efforts, it is mutually acknowledged that any restriction less than nationwide and worldwide in scope would be of little, if any, value to the Company. Mr. Snyder, therefore, agrees that throughout the exclusive consulting period, as well as the employment period, Mr. Snyder will not, except as otherwise provided herein, engage or participate, directly or indirectly, (whether as principal, agent, employee, employer, consultant, stockholder, partner, investor, lender, or in any other individual or representative capacity whatever) in the conduct or management of, or as an equity or debt investor in, any business competitive with that of the Company located anywhere within the United States or in any foreign country where the Company then conducts business as described above. Mr. Snyder expressly agrees that these covenants are reasonable as to 4 5 time, geographical area and otherwise and that they are no greater than is required for the protection of the Company. The Company will respond to written inquiry from Mr. Snyder as to whether or not a particular market or area is considered by the Company to be included within the territory restricted by this covenant. 8.4 "Competitive" Business Defined. For the purposes of this Agreement, a business shall be considered to be competitive with the business conducted by the Company if such business is engaged in designing, manufacturing, installing, maintaining, or operating services or products similar to: (a) any service or product currently provided by the Company (alone or through its licensees) as of the date of execution of this Agreement by all parties; (b) any service or product which evolves from or results from enhancements in the ordinary course during the exclusive consulting period, as well as the employment period, to the services or products currently provided by the Company (alone or through its licensees) as of the date of execution of this Agreement by all parties; or (3) any future service or product of the Company (or its licensees) as to which Mr. Snyder materially and substantially participates in the design, manufacture, installation, maintenance, or operation; provided, however, that in no event shall the services, products, or activities described Schedule 8.4 attached hereto and incorporated herein by reference as permitted activities, if any, be considered to be competitive under this Agreement. 8.5 Non-Solicitation Covenant. During the exclusive consulting period, as well as the employment period, Mr. Snyder will not solicit any officer, director, executive or employee of the Company (or of its licensees) to leave his or her employment nor will he call upon, solicit, divert or attempt to solicit or divert from the Company any of their customers or suppliers whose names he was aware of during the term of his employment or consulting with the Company. 8.6 Permitted Activities. Nothing in this Agreement shall be deemed to prohibit Mr. Snyder from calling upon or soliciting a customer or supplier of the Company (or its licensees) during the exclusive consulting period if such action relates solely to a business which is not competitive with the business conducted by the Company as described in subparagraph 8.3. Furthermore, nothing in this Agreement shall be deemed to prohibit Mr. Snyder during the employment period or during the exclusive consulting period from owning equity or debt investments in any corporation, partnership, or other business which is competitive with the Company, provided such investment is described in the attached Schedule 8.6 prior to execution by the parties, or (for investments made after the execution of this Agreement) (a) which are passive investments and constitute one percent (1%) or less of the outstanding equity securities of such an entity whose equity securities are traded with the general public on a 5 6 national securities exchange or other public market, or (b) which investments were previously approved in writing by the Company. 9. Restriction on Transfer or Encumbrance of Stock Mr. Snyder agrees during the term of his employment and consulting with the Company, not to sell, transfer, encumber, or otherwise relinquish or diminish his ownership interest in the shares of common stock of the Company held by him at the date of this Agreement, except for (a) sales of up to twenty percent (20%) of those shares held by Mr. Snyder at the date of this Agreement (assuming for the purposes of this Paragraph 9 only that all options to purchase common stock of the Company outstanding at the date of this Agreement have been exercised) in any single calendar year for purposes of covering extraordinary expenses of Mr. Snyder or his family (including but not limited to educational or medical expenses, or purchasing, remodeling, or furnishing his residence(s), etc.) which cannot be met readily from other resources available to him, and (b) sales of such additional shares as may be permitted by consent of the Board of Directors. Any sales shall be made in compliance with the Right of First Refusal Agreement among Mr. Snyder, CVE, and the Company dated the date of this Agreement. 10. Death, Disability This Agreement shall terminate in the event of the death of Mr. Snyder. In the event that Mr. Snyder shall become so disabled as to be incapable of performing his duties with the Company for six (6) consecutive months (determined as provided below), or is adjudged incompetent by a court of competent jurisdiction, the Company may terminate this Agreement effective on thirty (30) days' notice. Mr. Snyder's compensation and any benefits under this Agreement shall continue until such effective date of termination. The determination of whether Mr. Snyder has become so disabled as to be incapable of performing his duties shall be made by the Company's Board of Directors after seeking the advice of three physicians. The Board's determination shall be binding on all parties. 11. Termination of Employment for Cause; Constructive Termination 11.1 The five-year employment period provided in Paragraph 2 of this Agreement may be terminated by the vote of a majority of the Board of Directors of the Company on notice from the Company, with obligation only for compensation up to the date of termination, for willful malfeasance, material nonfeasance, gross neglect having a material, adverse effect on the Company, or material breach of paragraph 8, any of which shall constitute "good cause" for termination. 11.2 Mr. Snyder will be deemed to have been terminated by the Company other than for good cause if he resigns from the 6 7 Company upon the occurrence of any of the following ("constructive termination"): (1) a material reduction in salary or benefits, (2) a material reduction in responsibilities, or (3) a requirement to relocate, except for office relocations that would not increase Mr. Snyder's one-way commute distance by more than 35 miles. 11.3 As Mr. Snyder's sole and exclusive remedy for termination of employment other than for good cause, Mr. Snyder's consulting compensation for the years of the consulting term extending through December 31, 1996 shall be increased to the amount of his annual basic salary in effect at the time of the termination of his employment. 12. Remedies; Severability; Nonwaiver 12.1 Both parties understand and agree that a breach by Mr. Snyder of any of the terms, covenants, and conditions of this Agreement will cause irreparable damage to the Company which may not be adequately remedied solely by an action for damages, and Mr. Snyder expressly waives the defense that a remedy in damages will be adequate. Therefore, the Company shall be entitled to seek and obtain an injunction from any court of competent jurisdiction, restraining any further violation of this Agreement, in addition to any other available remedies. 12.2 If any agreement, covenant, or other provision of this Agreement is invalid, illegal or incapable of being enforced by reason of any rule or public policy, all other agreements, covenants, and provisions of this Agreement, shall, nevertheless, remain in full force and effect. If any of the rights and restrictions contained herein shall be deemed to be unenforceable by reason of the extent, duration or scope thereof, or otherwise, then the parties contemplate that the court making such determination shall reduce such extent, duration, scope, or other provisions hereof, and enforce such rights or restrictions in their reduced form for all purposes and manner contemplated hereby. 12.3 A party's election of any one or more remedies shall be cumulative and shall not constitute a waiver of the party's right to pursue other available remedies. Each party shall be entitled to offset against payments which it may owe to the other party amounts which may become due to that party from the other (including damages arising from breaches of obligations under this Agreement). 12.4 Any failure by the Company to enforce any provision of this Agreement shall not be construed as a waiver of such provision, or prevent the enforcement of each and every other provision of this Agreement. 7 8 13. Notice Any communication, notice, request, demand or other communication permitted or required to be given hereunder shall be in writing and shall be (i) delivered personally, or (ii) by registered or certified mail or courier, postage prepaid, return receipt requested, and addressed to Mr. Snyder at the last address reflected in the Company's records and to the Company at its principal office, in each case with copies to CVE c/o Robert J. Perry, Communications Satellite Corporation, 950 L'Enfant Plaza, S.W., Washington, D.C. 20024 and Michael F. McAllister, Comsat Video Enterprises, Inc., 22300 Comsat Drive, Clarksburg, MD 20871. If delivered personally or by courier, the day after a communication, notice, request, instruction or document is dispatched shall be the date on which such delivery is made, and, if delivered by mail, three days after the date on which such notice, communication, request, instruction or document is deposited in the mail shall be deemed the date of delivery. A party may change addresses for communications by prior written notice to the other party. 14. Further Acts 14.1 The parties to this Agreement agree to execute any further instruments and to perform any further acts reasonably necessary to carry out the provisions of this Agreement. 14.2 Return of Confidential Information and Company Property Mr. Snyder will return to the Company upon request or upon termination of his employment and consulting with the Company all keys, credit cards, equipment, computer diskettes and other data storage media, documents, and other tangible items, produced or used by Mr. Snyder or coming into his possession by or through his contact with the Company, and which are not his personal property. Mr. Snyder also shall return to Company any tangible items which contain proprietary or confidential information of the Company, including, but not limited to, the following types of information and other information of a similar nature: discoveries; ideas; concepts; software in various stages of development; designs, drawings; specifications; techniques; models; data; source code, object code or modules; documentation; diagrams; flow charts; research; development; processes; procedures; pending patents and inventions; trade secrets; "know-how"; marketing development plans, techniques, and materials; books and records and financial data including balance sheets and profit and loss statements; costs of materials; identities, preferences, and other information related to suppliers and customers; price lists and policies. 8 9 15. Binding Effect All rights and obligations under this Agreement shall inure to the benefit of and be binding upon the heirs, personal representatives, permitted assigns, and successors of the parties. 16. Entire Agreement This document contains the entire agreement of the parties with respect to its subject matter, and supersedes any and all agreements or understandings, whether written or oral, that may have been made between the parties prior to the date of execution. This Agreement may not be changed or terminated orally, and no change, termination or waiver of any of its provisions shall be valid, unless in writing and signed by the party against whom such claim, termination or waiver is sought to be enforced. 17. California Law This Agreement shall be governed and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this agreement this 20th day of November, 1991. ROBERT SNYDER ON COMMAND VIDEO CORPORATION /s/ Robert Snyder By: /s/ - -------------------------- -------------------------- 9 10 [ON COMMAND VIDEO LETTERHEAD] EMPLOYMENT and CONSULTING AGREEMENT MODIFICATION The date of the Employment and Consulting Agreements between On Command Video Corporation and Robert B. Fenwick and Robert Snyder is hereby changed to January 31, 1994 from November 20, 1991. /s/ CHARLES LYONS - ---------------------------- Charles Lyons for the Board of Directors On Command Video Corporation Dated: 3/3/94 ------ EX-23.2 10 CONSENT AND REPORT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 DELOITTE & TOUCHE LLP CONSENT AND REPORT ON SCHEDULE To the Board of Directors and Stockholders of On Command Video Corporation We consent to the use in this Amendment No. 3 to Registration Statement No. 333-10407 of On Command Corporation of our report dated September 19, 1996 related to the financial statements of On Command Video Corporation as of December 31, 1995 and 1994 and for the years then ended appearing in the Information Statement/Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Information Statement/Prospectus. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of On Command Video Corporation, listed in Item 21. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP San Jose, California October 3, 1996 EX-23.3 11 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.3 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 26, 1994, with respect to the financial statements of On Command Video Corporation included in Amendment No. 3 the On Command Corporation Registration Statement (Form S-4 No. 333-10407) and related Information Statement/Prospectus for the registration of On Command Corporation's common stock and warrants to purchase common stock of On Command Corporation. Our audit also included the financial statement schedule of On Command Video Corporation listed in Item 21. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP San Jose, California October 3, 1996 EX-23.4 12 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.4 REPORT ON SCHEDULE AND CONSENT OF KPMG PEAT MARWICK LLP The Board of Directors SpectraVision, Inc.: The audits referred to in our report dated March 1, 1996, except as to the second paragraph of Note 7, which is as of March 22, 1996, included the related financial statement schedule as of December 31, 1995, and for each of the years in the three-year period ended December 31, 1995, included in the registration statement. This financial statement schedule is the responsibility of SpectraVision, Inc.'s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Our report contains an explanatory paragraph that states that SpectraVision, Inc.'s filing under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court on June 8, 1995 and its expected noncompliance with certain covenants related to its debtor-in-possession financing raise substantial doubt about SpectraVision, Inc.'s ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP Dallas, Texas October 3, 1996 -----END PRIVACY-ENHANCED MESSAGE-----