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 JUNE 30, 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 August 1, 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 June 30, 1996 and December 31, 1995.........................2
Condensed Consolidated Statements of Operations
for the Three Months ended June 30, 1996 and 1995.................4
Condensed Consolidated Statements of Operations
for the Six Months ended June 30, 1996 and 1995...................5
Condensed Consolidated Statements of Cash Flows
for the Six Months ended June 30, 1996 and 1995...................6
Notes to the Condensed Consolidated Financial
Statements........................................................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................13
Part II. Other Information
Item 1. Legal Proceedings................................................18
Item 6. Exhibits and Reports on Form 8-K.................................18
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)
June 30, December 31,
1996 1995
----------- -------------
(unaudited)
ASSETS
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
--------- ---------
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
--------- ---------
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
========= =========
See Accompanying Notes to the Condensed Consolidated Financial Statements
2
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
June 30, December 31,
1996 1995
----------- -------------
(unaudited)
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 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 (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
3
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended
June 30,
-----------------------
1996 1995
-------- --------
Revenues:
Pay-Per-View $ 25,117 $ 27,026
Free-To-Guest 2,723 3,418
Other 1,016 1,629
----------- -----------
Total Revenues 28,856 32,073
Direct Costs:
Pay-Per-View 9,635 9,528
Free-To-Guest 2,880 2,840
Other 469 520
----------- -----------
Total Direct Costs 12,984 12,888
Depreciation and Amortization 10,044 9,946
Operating Expenses 9,357 10,292
Selling, General and Administrative Expense 3,847 5,127
Research and Development (net) 459 582
Exchange Gain (Loss) (11) 109
----------- -----------
Total Costs and Expenses
36,680 38,944
----------- -----------
Operating Loss (7,824) (6,871)
Non-Operating Loss (Income) 273 (139)
Interest Expense, net (Contractual interest
expense of $17,877 and $15,746 for the
three months ended June 30, 1996 and 1995,
respectively) 1,792 12,089
----------- -----------
Loss Before Reorganization Items and Income
Taxes (9,889) (18,821)
Reorganization Items 933 177
----------- -----------
Loss Before Income Taxes and Extraordinary
Item (10,822) (18,998)
Income Taxes
State and Foreign Provision 179 19
Deferred Benefit (242) (242)
----------- -----------
Total Income Tax Benefit (63) (223)
----------- -----------
Loss Before Extraordinary Item (10,759) (18,775)
Extraordinary Item
Loss from Debt Extinguishment 0 (915)
----------- -----------
Net Loss $ (10,759) $ (19,690)
=========== ===========
Loss Per Common Share $ (0.45) $ (0.82)
=========== ===========
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 OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)
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 0 (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
5
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 (3,651) (3,225)
leases -------- --------
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
6
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 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
7
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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 to OCV
shareholders 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.
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
8
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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
--------
6,958
Capital lease obligations 20,437
Accounts payable 11,952
EDS & 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.
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.
9
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
10
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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):
June 30, 1996
(Unaudited)
-----------------
ASSETS
Cash and Cash Equivalents $ 46
Accounts Receivable 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
---------
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
---------
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
=========
11
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
June 30, 1996
(Unaudited)
-----------------
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 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 (852,633)
Foreign Currency Translation Adjustment (715)
---------
Total Stockholders' Deficit (461,139)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 207,576
=========
12
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 June 30, 1996, the Company had total liabilities of approximately $647
million and total assets of $194 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 six months ended June 30, 1996 was $(4.6) million as compared to $(20.3)
million cash flow from operations for the six months ended June 30, 1995. Cash
and Cash Equivalents was $3.4 million at December 31, 1995 and $4.9 million at
June 30, 1996. During the six months ended June 30, 1996, the Company used
available cash of $3.4 million, cash generated from operations of $4.0 million
and net borrowings under the Foothill Loan in the amount of $11.2 million for
capital expenditures of $10.4 million, payment of other debt and capital leases
in the amount of $3.3 million.
The increase in accounts payable from December 31, 1995 to June 30, 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 $12.8 million and increases in capital
leases of $4.7 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%. Due to collateral
restrictions, the Company was only allowed to borrow up to $38.1 million at June
30, 1996 and had $149,000 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 to OCV shareholders 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 Creditors' Committee has approved the transaction with Ascent. The
transaction received Hart-Scott-Rodino Antitrust Improvements Acts clearance in
May 1996. However, the transaction is subject to Bankruptcy Court approval and
certain other conditions. 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.
13
At June 30, 1996, the Company was not in compliance with certain of its
financial covenants under the Foothill Loan. 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 Foothill Loan for
noncompliance with the Financial Covenants. Foothill could then 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 June 30, 1996 (the "1996 Second Quarter") and June
30, 1995 (the "1995 Second Quarter") and the six month periods ended June 30,
1996 (the "1996 Six Months") and June 30, 1995 (the "1995 Six Months").
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 End Six Months Ended
June 30, June 30,
------------ ------------
1996 1995 1996 1995
-------- -------- -------- --------
Hotels Served at June 30 1,641 2,184 1,641 2,184
Rooms Served at June 30 496,218 608,146 496,218 608,146
Average Rooms Served During the Period 499,341 604,295 516,163 612,149
Average Price per View $8.64 $7.77 $8.32 $7.75
Revenue per Equipped Room per Day $0.543 $0.49 $0.534 $0.50
14
Second Quarter Ended June 30, 1996 compared
to Second Quarter Ended June 30,1995
Total revenues decreased to $28.9 million in the 1996 Second Quarter from
$32.1 million in the 1995 Second Quarter, a decrease of $3.2 million or 10.0%.
Of the total revenues reported in the 1996 Second Quarter, 87.0% were revenues
from pay-per-view, 9.4% were from free-to-guest, and 3.6% were from other
sources.
Pay-per-view revenues decreased to $25.1 million in the 1996 Second Quarter
from $27.0 million in the 1995 Second Quarter, a decrease of $1.9 million or
7.6%. 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 $4.7 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 the Company's voluntary termination of certain unprofitable
hotel contracts. These decreases were somewhat offset by an increase in average
price per view from $7.77 during the 1995 Second Quarter to $8.64 for the 1996
Second Quarter contributing approximately $2.8 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 $2.7 million in the 1996 Second Quarter
from $3.4 million in the 1995 Second Quarter, a decrease of $.7 million or
20.6%. 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 $9.6 million in the 1996 Second
Quarter from $9.5 million in the 1995 Second Quarter, an increase of $.1 million
or 1.1%. As a percentage of pay-per-view revenues, pay-per-view direct costs
increased to 38.4% in the 1996 Second Quarter from 35.3% in the 1995 Second
Quarter. This percentage increase is primarily due to increased film licensing
fees and in room collateral costs. Film licensing costs were 16.2% of pay-per-
view revenues in the 1995 Second Quarter as compared to 18.2% in the 1996 Second
Quarter. The film license costs increased due to higher costs from vendors. The
in room collateral costs, which increased $.2 million or 36.7%, increased due to
the introduction of the Entertainment Guide.
Free-to-guest direct costs increased to $2.9 million in the 1996 Second
Quarter from $2.8 million in the 1995 Second Quarter, an increase of $.1 million
or 3.6%. As a percentage of free-to-guest revenues, free-to-guest direct costs
increased to 105.8% in the 1996 Second Quarter from 83.1% in the 1995 Second
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 $9.4 million in the 1996 Second Quarter from
$10.3 million in the 1995 Second Quarter, a decrease of approximately $.9
million or 8.7%. In 1995, operating expenses consisted 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. In 1996 the contracts with EDS were revised
transferring maintenance of hotel systems back to the Company. Operating
expenses declined due primarily to the elimination of the EDS contract.
Selling, general and administrative expenses decreased to $3.8 million in the
1996 Second Quarter from $5.1 million in the 1995 Second Quarter, an decrease of
$1.3 million or 25.5%. 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 $1.8 million in the 1996 Second Quarter
from $12.1 million in the 1995 Second Quarter, a decrease of $10.3 million or
85.1%. 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 Second Quarter as
compared to $0.8 million in the 1995 Second Quarter. The Company's cash
interest for the 1996 Second Quarter was $1.8 million compared to $.4 million
for the 1995 Second Quarter.
15
Reorganization items were $933,000 in the 1996 Second Quarter and consisted
of normal bankruptcy, professional and other miscellaneous charges.
Net loss was $10.8 million for the 1996 Second Quarter and $19.7 million for
the 1995 Second Quarter. The decrease in the net loss for the Second Quarter of
1996 compared to 1995 was primarily due to the decreased interest and operating
expenses offset by declining revenues and increased reorganization costs.
Six Months Ended June 30, 1996 compared
to Six Months Ended June 30,1995
Total revenues decreased to $58.0 million in the 1996 Six Months from $65.2
million in the 1995 Six Months, a decrease of $7.2 million or 11.0%. Of the
total revenues reported in the 1996 Six Months, 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 1996 Six Months from
$55.1 million in the 1995 Six Months, 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 the Company'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 1995 Six Months to $8.32 for the 1996 Six Months
contributing approximately $4.0 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 $5.5 million in the 1996 Six Months from
$6.9 million in the 1995 Six Months, 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 1996 Six Months
from $19.2 million in the 1995 Six Months, 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 1996 Six Months from 34.8% in the 1995 Six Months. 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 1995 Six Months as compared to 19.0% in the 1996 Six Months. 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 1996 Six Months
from $5.7 million in the 1995 Six Months, 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 1996 Six Months from 82.5% in the 1995 Six Months. 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 $20.0 million in the 1996 Six Months from
$21.0 million in the 1995 Six Months, 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
1996 Six Months from $10.2 million in the 1995 Six Months, an 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.
16
Interest expense (net) decreased to $3.1 million in the 1996 Six Months from
$26.9 million in the 1995 Six Months, 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. The Company also capitalized
interest in the amount of $.2 million for the 1996 Six Months as compared to
$1.8 million in the 1995 Six Months. The Company's cash interest for the 1996
Six Months was $3.2 million compared to $.6 million for the 1995 Six Months.
Reorganization items were $1.8 million in the 1996 Six Months and consisted
of normal bankruptcy, professional and other miscellaneous charges.
Net loss was $22.8 million for 1996 Six Months and $39.6 million for the 1995
Six Months. The decrease in the net loss for the 1996 Six Months compared to
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.
17
PART II
Item 1. Legal Proceedings
See references made in the Company's Form 10-Q for the Quarter Ended
March 31, 1996 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 six months ended June 30,
1996
18
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.
August 2, 1996 /s/ MICHAEL SCOTT SMITH
-------------------- ---------------------------------------------
(Date) MICHAEL SCOTT SMITH
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Chief Financial Officer and officer duly
authorized to sign on behalf of the
Registrant)
19