SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO ________________
COMMISSION FILE NUMBER: 1-9724
SPECTRAVISION, INC.
-------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2182004
- ------------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 NORTH PLANO ROAD, RICHARDSON, TEXAS 75081
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(214) 234-2721
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes X No
------ ------
Number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding at
Title of each Class May 9, 1996
-------------------------------------- --------------
Class A Common Stock, $0.001 Par Value 4,593,526
Class B Common Stock, $0.001 Par Value 19,390,379
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Position
as of March 31, 1996 and December 31, 1995................ 2
Condensed Consolidated Statements of Operations
for the Three Months ended March 31, 1996 and 1995........ 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 1996 and 1995........ 5
Notes to the Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................... 15
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1996 1995
----------- -------------
(unaudited)
ASSETS
Cash and Cash Equivalents $ 5,333 $ 3,438
Accounts Receivable (net of allowance for doubtful
accounts of $1,534 and $1,812 in 1996 and 1995,
respectively) 18,139 16,428
Debt Issuance Costs (net) 5,745 5,827
Prepaids and Other Assets 7,523 8,125
Video Systems
In Process Video Systems 13,750 11,329
Installed Video Systems 250,882 247,987
--------- ---------
264,632 259,316
Less Accumulated Depreciation and Amortization (163,451) (155,604)
--------- ---------
Total Video Systems 101,181 103,712
Building and Equipment
Building 4,300 4,300
Furniture, Fixtures and Other Equipment 8,059 8,002
--------- ---------
12,359 12,302
Less Accumulated Depreciation (6,389) (5,921)
--------- ---------
Total Building and Equipment 5,970 6,381
Land 2,559 2,559
Hotel Contracts (net) 46,753 47,403
Deferred Contract Concession Costs (net) 11,245 11,749
--------- ---------
TOTAL ASSETS $ 204,448 $ 205,622
========= =========
See Accompanying Notes to the Condensed Condolidated Financial Statements
2
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1996 1995
--------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable $ 11,140 $ 8,128
Accrued Liabilities
Compensation 1,518 2,112
Other 9,051 9,269
Deferred Income Taxes 5,186 5,467
Debt
Foothill Revolving Credit Facility 35,142 26,703
Capitalized Lease Obligations 2,979 1,964
--------- ---------
Total Debt 38,121 28,667
Liabilities Subject to Settlement Under
Reorganization 578,954 579,587
--------- ---------
Total Liabilities 643,970 633,230
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 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 (852,316) (840,289)
Foreign Currency Translation Adjustment 585 472
--------- ---------
Total Stockholders' Deficit (459,522) (447,608)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 204,448 $ 205,622
========= =========
See Accompanying Notes to the Condensed Consolidated Financial Statements
3
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
Three Months Ended
March 31,
---------------------------
1996 1995
----------- -----------
Revenues:
Pay-Per-View $ 25,265 $ 28,084
Free-To-Guest 2,766 3,458
Other 1,125 1,593
----------- -----------
Total Revenues 29,156 33,135
Direct Costs:
Pay-Per-View 10,539 9,628
Free-To-Guest 3,002 2,833
Other 563 535
----------- -----------
Total Direct Costs 14,104 12,996
Depreciation and Amortization 10,475 8,974
Operating Expenses 9,082 10,182
Selling, General and Administrative Expense 4,920 5,602
Research and Development (net) 529 601
Exchange Loss 7 145
----------- -----------
Total Costs and Expenses 39,117 38,500
----------- -----------
Operating Loss (9,961) (5,365)
Non-Operating (Income) (39) -
Interest Expense, net (Contractual interest expense of $17,098
for the three months ended March 31, 1996) 1,270 14,830
----------- -----------
Loss Before Reorganization Items and Income Taxes (11,192) (20,195)
Reorganization Items 894 -
----------- -----------
Loss Before Income Taxes (12,086) (20,195)
Income Taxes
State and Foreign Provision 316 1
Deferred Benefit (375) (242)
----------- -----------
Total Income Tax Benefit (59) (241)
----------- -----------
Net Loss $ (12,027) $ (19,954)
=========== ===========
Loss Per Common Share $ (0.50) $ (0.83)
=========== ===========
Average Common Shares Outstanding 23,983,905 23,983,905
See Accompanying Notes to the Condensed Consolidated Financial Statements
4
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
------------------------
1996 1995
-------- --------
Operating Activities:
Net loss $(12,027) $(19,954)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 10,475 8,974
Other non-cash items:
Conversion of non-cash interest to secondary notes - 12,429
Write off of assets 373 -
Deferred income tax benefit (375) (242)
Accretion of discount on senior notes - 4,816
Amortization of debt issuance cost 83 309
Exchange loss 7 145
Other items, net (75) -
Increase (decrease) in:
Accounts payable 3,012 (204)
Accrued interest - (2,051)
Other accrued liabilities (586) 4,887
Income taxes payable (226) -
Decrease (increase) in:
Accounts receivable (1,711) (1,688)
Prepaids and other assets (155) 260
Income tax receivable 211 -
-------- --------
Net cash provided by (used in) operating activities (994) 7,681
Investing Activities:
Cost of in-process systems and capital expenditures (4,048) (7,528)
Financing Activities:
Borrowing under Foothill revolving facility 30,299 -
Repayment of Foothill revolving facility (21,858) -
Repayment of other debt and capitalized leases (1,618) (1,303)
-------- --------
Net cash provided by (used in) financing activities 6,823 (1,303)
Effect of exchange rate changes on cash 113 (65)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 1,895 (1,215)
Cash and cash equivalents at beginning of period 3,438 1,317
-------- --------
Cash and cash equivalents at end of period $ 5,333 $ 102
======== ========
See Accompanying Notes to the Condensed Consolidated Financial Statements
5
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. GENERAL NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------
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.
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. The adoption of this statement did not have a material effect
on the Company's financial position or results of its operations.
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. 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 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
6
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
("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 shareholders
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 by Ascent 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 Creditors' Committee has approved the transaction with Ascent. However,
the transaction is subject to Bankruptcy Court approval, Hart-Scott-Rodino
Antitrust Improvements Acts clearance and certain other conditions. There can be
no assurance that such approvals will be obtained or that the transaction will
be consummated. 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'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.
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.
7
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
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 March 31, 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 4,157
Compensation 885
--------
7,453
Capital lease obligations 21,714
Accounts payable 11,144
EDS & EDS affiliated 44,477
--------
Total liabilities subject to settlement under reorganization $578,954
========
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 three months ended March 31, 1996 by approximately $.9 million
or $.04 per common share. The bankruptcy reorganization items consist of normal
bankruptcy, professional and miscellaneous charges.
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%. 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 March 31, 1996 the Company was not in compliance with the financial covenants
relating to its minimum revenue per room, its operating cash flow and its fixed
charges to cash flow ratio requirements. On May 10, 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 in 1996. Accordingly, in July, 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.
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.
8
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
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.
9
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
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):
March 31, 1996
(Unaudited)
--------------
ASSETS $ 76
15,400
Cash and Cash Equivalents 5,745
Accounts Receivable 6,647
Debt Issuance Costs (net)
Prepaids and Other Assets
Video Systems
In process Video Systems 9,339
Installed Video Systems 217,787
---------
227,126
Less Accumulated Depreciation and Amortization (139,332)
---------
Total Video Systems 87,794
Building and Equipment
Building 4,300
Furniture, Fixtures and Other Equipment 6,664
---------
10,964
Less Accumulated Depreciation (5,181)
---------
Total Building and Equipment 5,783
Land 2,559
Hotel Contracts (net) 46,753
Deferred Contract Concession Costs (net) 11,246
Investment In and Advances to Subsidiaries 34,992
---------
TOTAL ASSETS $ 216,995
=========
10
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
March 31, 1996
(Unaudited)
--------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable $ 10,855
Accrued Liabilities 9,882
Deferred Income Taxes 4,972
Debt
Foothill Revolving Credit Facility 35,142
Capitalized Lease Obligations 2,602
--------
Total Debt 37,744
Liabilities Subject to Settlement Under Reorganization 578,954
Intercompany Payables 5,255
---------
Total Liabilities 647,662
Contingent Value Rights Subject to Settlement Under Reorganization 20,000
Stockholders' Deficit
Class A Common Stock 5
Class B Common Stock 19
Additional Paid In Capital 392,185
Retained Deficit (841,989)
Foreign Currency Translation Adjustment (887)
---------
Total Stockholders' Deficit (450,667)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 216,995
=========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On the Petition Date, SpectraVision, together with Newco, Spectradyne,
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 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.
At March 31, 1996, the Company had total liabilities of approximately $644.0
million and total assets of $204.4 million. The Company's cash flow from
operations before reorganization expenses (earnings before interest, taxes,
depreciation, amortization, reorganization expenses and other non-cash items)
for the three months ended March 31, 1996 was $.6 million as compared to $3.8
million cash flow from operations for the three months ended March 31, 1995.
Cash and Cash Equivalents was $3.4 million at December 31, 1995 and $5.3 million
at March 31, 1996. During the three months ended March 31, 1996, the Company
used available cash of $3.4 million and net borrowings under the Foothill Loan
in the amount of $8.4 million for capital expenditures of $4.0 million, payment
of other debt and capital leases in the amount of $1.6 million and to fund
operating activities of $.9 million.
The increase in accounts payable from December 31, 1995 to March 31, 1996 is
primarily due to an agreement reached with EDS to defer the payment of certain
of their invoices until later in 1996. Changes in Video Systems since December
31, 1995 include capital purchases of $4.0 million and increases in capital
leases of $1.8 million offset by the write-off of assets of $.4 million.
On June 9, 1995, Spectradyne entered into the Foothill Loan which 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%. At March 31, 1996,
the Company had $4.9 million available under the Foothill Loan.
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 in which Ascent would acquire the assets and certain of the liabilities
of the Company. Ascent intends to combine its 85 percent-owned subsidiary, OCV
with the Company's assets and certain of its liabilities to form a Newco which
will be 72.5 percent-owned by Ascent and the current minority shareholders 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 by Ascent 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 Creditors' Committee has approved the transaction with Ascent. However,
the transaction is subject to Bankruptcy Court approval, Hart-Scott-Rodino
Antitrust Improvements Acts clearance and certain other conditions. There can be
no assurance that such approvals will be obtained or that the transaction will
be consummated. 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'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.
12
At March 31, 1996 the Company was not in compliance with certain of its
financial covenants under the Foothill Loan. On May 10, 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 July,
Foothill Capital Corporation could elect to terminate the Foothill Loan, demand
immediate payment of all outstanding balances and foreclose on the Company's
assets securing the Foothill Loan 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.
The Company's 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.
RESULTS OF OPERATIONS
The following discussion and analysis addresses the results of operations for
the three month periods ended March 31, 1996 (the "1996 First Quarter") and
March 31, 1995 (the "1995 First Quarter").
The Company's operations consist primarily of its pay-per-view and free-to-
guest services through its ownership of Spectradyne and the Company's other
operating subsidiaries. The following table sets forth certain information
regarding the Company's pay-per-view customer base and certain statistical data
affecting pay-per-view revenues.
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
Hotels Served at March 31 1,767 2,236
Rooms Served at March 31 526,152 619,615
Average Rooms Served During the Period 529,943 619,996
Average Price per View $ 8.04 $ 7.73
Revenue per Equipped Room per Day $ 0.53 $ 0.51
FIRST QUARTER ENDED MARCH 31, 1996 COMPARED
TO FIRST QUARTER ENDED MARCH 31,1995
Total revenues decreased to $29.2 million in the 1996 First Quarter from
$33.1 million in the 1995 First Quarter, a decrease of $3.9 million or 11.8%.
Of the total revenues reported in the 1996 First Quarter, 86.7% were revenues
from pay-per-view, 9.6% were from free-to-guest, and 3.7% were from other
sources.
13
Pay-per-view revenues decreased to $25.3 million in the 1996 First Quarter
from $28.1 million in the 1995 First Quarter, a decrease of $2.8 million or
10.0%. 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 $3.9 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 the Company's voluntary termination of certain unprofitable
hotel contracts. These decreases were offset slightly by an increase in average
price per view from $7.73 during the 1995 First Quarter to $8.04 for the 1996
First Quarter contributing approximately $1.1 million to pay-per-view revenue.
This increase in average price per view is primarily due to the $1.00 price
increase the Company implemented on March 1, 1996 for substantially all of the
hotels located in the United States.
Free-to-guest revenues decreased to $2.8 million in the 1996 First Quarter
from $3.5 million in the 1995 First Quarter, a decrease of $.7 million or 20.0%.
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 $10.5 million in the 1996 First
Quarter from $9.6 million in the 1995 First Quarter, an increase of $.9 million
or 9.4%. As a percentage of pay-per-view revenues, pay-per-view direct costs
increased to 41.5% in the 1996 First Quarter from 34.3% in the 1995 First
Quarter. This percentage increase is primarily due to increased film licensing
fees and in room collateral costs. Film licensing costs were 15.8% of pay-per-
view revenues in the 1995 First Quarter as compared to 19.9% in the 1996 First
Quarter. The film license costs increased due to higher costs from vendors.
The in room collateral costs, which increased $.4 million or 81.2% increased due
to the introduction of the Entertainment Guide.
Free-to-guest direct costs increased to $3.0 million in the 1996 First
Quarter from $2.8 million in the 1995 First Quarter, an increase of $.2 million
or 7.1%. As a percentage of free-to-guest revenues, free-to-guest direct costs
increased to 107.1% in the 1996 First Quarter from 81.9% in the 1995 First
Quarter. 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.
Operating expenses decreased to $9.1 million in the 1996 First Quarter from
$10.2 million in the 1995 First Quarter, a decrease of approximately $1.1
million or 10.8%. 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.
Selling, general and administrative expenses decreased to $4.9 million in the
1996 First Quarter from $5.6 million in the 1995 First Quarter, a decrease of
$.7 million or 12.5%. 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 $1.3 million in the 1996 First Quarter
from $14.8 million in the 1995 First Quarter, a decrease of $13.5 million or
91.2%. The decrease is primarily due to the non-accrual of interest on debt
instruments subject to settlement under reorganization. The Company also
capitalized interest in the amount of $.1 million for the 1996 First Quarter as
compared to $1.0 million in the 1995 First Quarter. The Company's cash interest
for the 1996 First Quarter was $1.2 million compared to $.3 million for the 1995
First Quarter.
Reorganization items were $894,000 in the 1996 First Quarter and consisted of
normal bankruptcy, professional and other miscellaneous charges.
Net loss was $12.0 million for 1996 and $20.0 million for 1995. The
decrease in the net loss for the First Quarter of 1996 compared to 1995 was
primarily due to the decreased interest and operating expenses offset by
declining revenues and increases in direct costs, depreciation and amortization,
reorganization costs and taxes.
14
PART II
ITEM 1. LEGAL PROCEEDINGS
See references made in the Company's Form 10-K for 1995 for a
description of certain legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement for Transition of Field Services, Interim Payment
of Administrative Expenses, and Reservation of Rights
Agreement dated January 17, 1996 between SpectraVision, Inc.
And Electronic Data Systems Corporation and its
subsidiaries.
27 Financial Data Schedules for the three months ended
March 31, 1996
15
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRAVISION, INC.
May 14, 1996 /s/ RICHARD M. GOZIA
---------------------- ---------------------------------------------
(Date) RICHARD M. GOZIA
EXECUTIVE VICE PRESIDENT
(Chief Financial Officer and officer duly
authorized to sign on behalf of the
Registrant)
16