SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K 405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-9724
SPECTRAVISION, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 75-2182004
(State of Incorporation) (I.R.S.Employee Identification No.)
1501 NORTH PLANO ROAD, RICHARDSON, TEXAS 75083-0775
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code: (214) 234-2721
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Class B Common Stock, $0.001 Par Value American Stock Exchange
Contingent Value Rights American Stock Exchange
11.65% Senior Subordinated Reset Notes, due 2002 American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Registrant's Class B Common Stock held by
non-affiliates of the Registrant as of March 24, 1995: $6,050,587. There is no
established public trading market for the Registrant's Class A Common Stock. As
of March 24, 1995, there were 19,390,379 shares of the Registrant's Class B
Common Stock outstanding and 4,593,526 shares of Class A Common Stock
outstanding.
APPLICABLE ONLY TO REGISTRANTS 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 ___
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DOCUMENTS INCORPORATED BY REFERENCE
Part of the Form 10-K into which
Title the document is incorporated
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SpectraVision, Inc. - Annual Meeting of Stockholders- Part III
Notice and Proxy Statement - 1995
TABLE OF CONTENTS
Page
----
Item 1. Current Financial Condition......................................... 1
General............................................................. 1
Strategy............................................................ 2
Pay-Per-View Services............................................... 4
Free-to-Guest Services.............................................. 5
Interactive and Other Services...................................... 5
Programming......................................................... 6
The EDS Service and Technology Agreement............................ 6
Markets and Customers............................................... 7
Hotel Contracts..................................................... 8
Manufacturing....................................................... 8
Competition......................................................... 8
Regulation.......................................................... 9
Patents, Trademarks and Copyrights.................................. 9
Employees........................................................... 9
Item 2. Properties.......................................................... 9
Item 3. Legal Proceedings................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................. 10
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 11
Item 6. Selected Financial Data............................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 13
Item 8. Financial Statements and Supplementary Data......................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 59
Item 10. Directors and Executive Officers of the Registrant................. *60
Item 11. Executive Compensation............................................. *60
Item 12. Security Ownership of Certain Beneficial Owners and Management..... *60
Item 13. Certain Relationships and Related Transactions..................... *60
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 61
_____________________________
* Included in Form 10-K by incorporation by reference to the Registrant's Proxy
Statement for the 1995 Annual Meeting of Stockholders.
-i-
PART I
ITEM 1. BUSINESS
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CURRENT FINANCIAL CONDITION
SpectraVision, Inc., (the "Company" or "SpectraVision") is highly leveraged
and faces significant liquidity problems. During 1994, the Company experienced a
net loss of $254.3 million as compared to a net loss of $45.8 million in 1993.
The increase in the net loss is largely due to the write-down of hotel contracts
(an intangible asset) in the amount of $196.3 million. Additionally, the
Company's EBITDA (earnings before interest, taxes, depreciation, amortization,
write-down of hotel contracts and certain other non-cash charges) was $19.1
million for 1994 as compared to $55.8 million during 1993.
The Company has total liabilities of approximately $596.0 million and
assets of $243.0 million. The Company's cash flow from operations in 1995 will
not be sufficient to satisfy its known demands for cash. The Company has no
borrowing availability under its current revolving line of credit to meet its
cash flow shortfalls. Additionally the Company is not in compliance with certain
financial covenants under the terms of the revolving credit facility with an
outstanding balance of $12.5 million. The lenders under the revolving credit
facility may, at their option, give notice to the Company that amounts owed are
immediately due and payable, and the Company does not have sufficient resources
to repay this obligation. The Company is also a defendant in a purported class
action complaint. Discovery has not yet begun in the case, and the outcome
cannot be predicted with any certainty. The Company believes that it has
meritorious defenses to the claims, and it intends to vigorously defend itself.
However, the Company is currently unable to determine the sufficiency of its
resources with respect to any material adverse effects of an unsuccessful
defense of the suit. See Note 14 included in Part II, Item. 8 "Financial
Statements and Supplementary Data." The Company's independent public accountants
included in their report on the Company's consolidated financial statements for
the year ended December 31, 1994 an explanatory paragraph that describes the
uncertainty about the Company's ability to continue as a going concern. See Part
II, Item. 8 "Financial Statements and Supplementary Data."
In February 1995, the Company retained a financial advisor and announced
its plans to restructure its debt and equity. The Company is also seeking new
sources of capital to remedy its liquidity deficiency, including obtaining a new
bank credit facility and potentially the sale of certain of its foreign
businesses. If the restructuring is unsuccessful and the Company cannot obtain
additional capital, the Company will be forced to seek protection under
applicable bankruptcy laws. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
In September 1994, Gary G. Weik replaced Albert D. Jerome as Chief
Executive Officer and Danny G. Hair resigned from the Company and was replaced
by Richard M. Gozia as Executive Vice President and Chief Financial Officer.
Prior to joining the Company, Mr. Weik was president and chief operating officer
of KBLCOM, one of the nation's largest cable TV multiple system operators.
During 1988 and 1989, Mr. Weik owned and operated WGA Communications, an
independent cable company. Prior to 1988, he was president and chief executive
officer of Harte-Hanks Cable Company, a subsidiary of Harte-Hanks
Communications, Inc. Mr. Gozia was previously president and chief executive
officer of Wyatt Cafeterias, Inc. from 1992 to 1994. From 1986 to 1991 Mr. Gozia
was president and chief executive officer of Gozia-Driver Media, Inc., a media
investment company. From 1982 to 1986 he was vice president and chief financial
officer of Harte-Hanks Communications, Inc.
GENERAL
The Company is the leading provider of interactive in-room video
entertainment services to the lodging industry. Founded in 1971, the Company
originally developed and patented a system, known as
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"SpectraVision," which provides in-room television viewing of recently released
major and other motion pictures on a pay-per-view ("PPV") basis. The Company
subsequently expanded its services to include providing PPV movies in an on-
demand format, delivering free-to-guest programming (such as HBO, ESPN, CNN and
WTBS) and providing interactive services that capitalize on the Company's
patented two-way communications equipment. The Company has been the largest
provider of these services to the lodging industry since 1971 and as of December
31, 1994, provided PPV services to 635,378 rooms in 2,308 hotels, including
212,208 rooms in 449 hotels with on-demand PPV service.
The Company currently has the largest market share in the United States and
believes that it is also the leading provider in Australia, the Pacific Rim,
Canada and Mexico. The Company provides its services under contracts to
corporate-owned hotel chains such as Hyatt and Four Seasons, hotel management
companies such as Interstate and individually owned and franchised hotel
properties.
In the fall of 1993, the Company and Electronic Data Systems ("EDS")
initiated the installation of a compressed digital video ("CDV(TM)"), satellite
delivered PPV system in the Company's U.S. hotel sites. This system replaces the
videotape and videocassette player-based technology used by the Company since
its inception in 1971 and is the first digital video system in the hotel PPV
industry. At December 31, 1994, the Company had installed the CDV service in
1,267 hotels containing a total of 382,380 rooms. The Company intends to install
the CDV technology in conjunction with contract renewals, and in any new U.S.
hotel sites for which it contracts to provide its PPV services.
In the fourth quarter of 1994, as an enhancement to the CDV technology, the
Company began installation of its new digital video on-demand service ("Digital
Guest Choice(TM)"). At December 31, 1994, the Company had installed Digital
Guest Choice systems in 100 hotels containing a total of 51,032 rooms. The
Company intends to install Digital Guest Choice in conjunction with contract
renewals, and in new U.S. hotel sites for which it contracts to provide its PPV
services.
In conjunction with the CDV service the Company is installing its UNIX
based integrated computer system ("SPEXIS"). These new products, CDV, Digital
Guest Choice and SPEXIS comprise the Company's "STARPATH" technology. The
STARPATH digital technology will provide the Company with more programming
flexibility than a tape-based system and also enable the Company to provide its
hotel customers and their guests with enhanced interactive services. Management
believes STARPATH will enable the Company to increase revenues and operating
cash flows from their current levels.
STRATEGY
Over the past few years, the Company has experienced major cost increases
and revenue decreases. Management believes that certain changes in the Company's
operations will enable the Company to achieve a reduction in costs and improve
its revenue position.
General. The Company's strategy is to generate higher PPV and interactive
revenues and cash flows from its existing room base and to expand by providing
these services to select new hotels and alternative markets. Specifically, the
Company intends to:
. Successfully complete the Company's proposed financial restructuring.
. Focus on premium hotels in the top metropolitan markets and major
hotel chains.
. Continue the deployment of the STARPATH technology.
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. Introduce new revenue producing interactive services and national
advertising in order to increase its revenues and cash flows
independent of PPV viewing levels.
. Expand existing and enter new international hotel markets.
. Reduce its operating costs.
. Explore alternative, non-hotel markets, including hospitals, cruise
ships, commercial buildings, multiple dwelling units, and educational
institutions through joint ventures and strategic alliances.
United States. In the United States, the Company's strategy is to
concentrate on the top U.S. metropolitan hotel markets, major hotel chains, and
other selected large hotels in non-metropolitan markets. The Company plans to
complete its deployment of the STARPATH technology in conjunction with contract
renewals.
Canada. In Canada, the Company's strategy is to maintain its current base
of hotels and expand into unpenetrated market segments. The Company intends to
install its SPEXIS computer systems and in conjunction with contract renewals,
upgrade hotels to tape-based video on-demand systems.
International. In other international markets, the Company intends to focus
on large hotels in top metropolitan markets. In Mexico, the Caribbean, Australia
and the Pacific Rim, the Company will continue to install its scheduled tape-
based systems and convert these systems to on-demand tape based systems in
conjunction with contract renewals. To improve its liquidity, the Company is
considering selling certain of its foreign businesses.
Technology. From its beginning in the early 1970's through the 1980's, the
Company was the dominant provider of PPV systems to the lodging industry and
concentrated on its scheduled-movie tape-based technology as its major source of
revenues. During the early 1990's, however, certain industry competitors began
to market on-demand PPV products and, with certain sales incentives, were able
to acquire notable market penetration. In response to this increased
competition, in late 1993, the Company initiated the installation of its
STARPATH technology. Management intends to continue its deployment of STARPATH
in conjunction with contract renewals.
Research and Development. The Company's research and development strategy
is based on the identification, development, and protection of enabling
technologies which provide a unique advantage for the Company in its chosen
markets. Such recently deployed technologies include the Company's digital
satellite network and the Company's digital file server system used with Digital
Guest Choice. Also essential to the Company's strategy is the development of
integration software that combines standard and proprietary hardware components
with software applications that deliver entertainment and interactive services
to its hospitality industry clients and their guests.
In 1994, the Company completed development and began wide-scale deployment
of its SPEXIS computer platform. SPEXIS is a standards-based hardware and
software operating environment utilized by the Company's proprietary application
software. SPEXIS provides the Company's hotel clients and their guests with
movie delivery and movie access management, billing and billing interface
control, remote monitoring, network management, system diagnostics, hotel and
guest interactive services capabilities and provides facilities for integrating
externally provided interactive services and entertainment. Continuing
enhancements to SPEXIS are planned by the Company.
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The Company's management believes that continuing investments in new
technologies including further development of its software integrations and
interactive services delivery expertise are necessary to enhance its competitive
position and to permit rapid entry into new market areas.
Manufacturing and Systems Operations. Historically the Company has
purchased standard components externally, and internally manufactured system-
unique proprietary components for deployment in the Company's movie and
interactive services delivery systems. However, in December 1993 the Company
sold its manufacturing operations and entered into an agreement with a
manufacturing services provider whereby the Company's proprietary components
would be manufactured for the Company.
The Company intends to continue its strategy of purchasing standards-based
hardware components whenever possible and contracting the manufacture of system-
unique components only when necessary. The manufacturing services contracts
entered into by the Company allow the Company flexibility to seek one or more
alternative suppliers providing the best quality products at the lowest price.
These contracts also provide protection for the Company's intellectual property
and prevent the sale of the Company's proprietary system components to other
parties.
PAY-PER-VIEW SERVICES
The Company's primary source of revenue is providing in-room television
viewing of recently released major movies and independently produced adult
motion pictures 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 cost to the hotel. The movie price is automatically charged to the
guest room in which the movie was viewed. At December 31, 1994, the Company
provided PPV service to 635,378 rooms in 2,308 hotels. The Company had
deliverable orders to install PPV systems in approximately 10,973 rooms at
February 28, 1995, of which it anticipates installing approximately 6,800 during
1995 and the remainder in 1996. At February 28, 1994 the Company had deliverable
PPV orders for approximately 29,500 rooms. Deliverable orders for hotel movie
systems consist of contracts which have been executed by the hotel and the
Company.
The Company provides its PPV service through several products including:
(i) SpectraVision, the Company's scheduled tape-based play system; (ii)
SpectraVision Guest Theater, the Company's CDV scheduled play system utilizing
the STARPATH technology with satellite delivery; (iii) Guest Choice, 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: The Company's tape-based SpectraVision 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 movies from independent producers. On the first day of each month,
the Company typically replaces a majority of the movies on each schedule with
new features. In a tape based system, the Company can only change movies once
per month because of the lead time and costs necessary to duplicate and
distribute videotapes. At December 31, 1994 the Company had SpectraVision
installed in 1,031 hotels with a total of 253,123 rooms.
Guest Theater: The Company's Guest Theater system utilizing the STARPATH
technology was introduced in the fourth quarter of 1993. Unlike the
SpectraVision tape-based system, Guest Theater, through the STARPATH technology,
increases the number of movies available to the hotel guest staying for more
than one night from 8 to 20 by varying movie selections on a nightly basis and
will enable the Company to replace poor performing movie product with better
performing movies. At December 31, 1994 the Company had Guest Theater installed
in 1,267 hotels with a total of 382,380 rooms.
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Guest Choice: In 1991, the Company introduced Guest Choice to provide hotel
guests with on-demand viewing from a library of up to 200 videotapes per hotel.
As of December 31, 1994, Guest Choice was installed in 212,208 rooms in 449
hotels, all of which also offer either SpectraVision or Guest Theater services.
The on-demand capability significantly increases usage of the PPV service by the
hotel guests, and the Company has experienced increases in viewership on average
of approximately 30% in the hotels in which Guest Choice systems have been
installed. Through Guest Choice, the Company provides on-demand viewing of major
motion pictures, adult features, and a variety of other topics, such as exercise
programs, business information, children's programming and other special
interest tapes. The Guest Choice system includes the Company's proprietary
equipment and software, and utilizes a patented video rack designed and
manufactured by a third party.
Digital Guest Choice: During 1994, the Company introduced its new digital
video on-demand service, Digital Guest Choice, that provides on-demand viewing
of digitally stored movies. Digital Guest Choice utilizes satellite, microwave
or fiber-optic 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 December 31, 1994, the Company had installed Digital Guest Choice in 100
hotels with a total of 51,032 rooms. The Company intends to expand the
installation of Digital Guest Choice in its major hotels in connection with
contract renewals as well as in new hotels beginning in 1996.
FREE-TO-GUEST SERVICES
The Company 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 the Company a
fixed monthly fee per room for each programming channel selected. As of December
31, 1994, the Company provided free-to-guest services to 888 hotels serving
308,249 guest rooms. Approximately 77% of these rooms also offer the Company's
PPV services. As of January 31, 1995, the Company had deliverable backlog orders
to install free-to-guest systems in approximately 5,417 additional rooms, as
compared to approximately 7,987 rooms in backlog at January 31, 1994.
The Company provides its free-to-guest programming pursuant to affiliation
license agreements. The free-to-guest programming agreements typically are
multi-year contracts under which the Company pays the supplier a fee for each
room offering this programming. License agreements for HBO, ESPN and CNN expire
on December 31, 1997, July 31, 1996 and December 31, 1995, respectively.
INTERACTIVE AND OTHER SERVICES
In addition to entertainment services, the Company provides interactive
services to the lodging industry. These services generate revenues and cash
flows for the Company which are independent of viewing levels. These services
utilize the two-way interactive communications capability of the PPV equipment
and include Video Checkout(SM), Video Messaging(SM), Video Breakfast Menu(SM),
Video Bellman(SM), Smart Survey(SM) and room availability monitoring. The hotel
typically pays a fixed monthly fee for each service selected. Interactive
services are also currently available in Spanish, French, and certain other
foreign languages.
As of December 31, 1994, the Company provided one or more interactive
services to 481 hotels, all of which also offer the Company's PPV service. These
services differentiate the Company's products from those of its competitors, and
because they increase productivity of the hotel personnel resources, they
strengthen the Company's relationships with its hotel customers.
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Other revenue sources include the sale and license of the Company'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
The Company 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 the Company's PPV
system. Negotiated fees are related to the popularity of a given movie and the
volume of pictures licensed by the Company from a given studio. Those license
fees typically decline over the time the movie is played in the Company's PPV or
video on-demand systems. Typically, the Company 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. The Hotel/Motel PPV Window has historically
averaged 73 days. The Company 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. Generally, fresher movies generate a higher
viewing level. The Company expects to license more films in the future than it
has in the past to capitalize on the technological advantages of the new CDV
technology. These additional movies will be used to replace poorer-performing
films and to expand the variety for the hotel's guests to maximize the Company's
movie revenues.
With respect to most independently produced features, the Company 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, the Company entered into a ten-year agreement with EDS to install
the STARPATH system to replace its existing tape-based delivery system. In
conjunction with the installation of this system, the Company introduced its new
SPEXIS computer system, which allows the Company to provide new and improved
interactive services. The Company and EDS first installed antennae and
integrated receiver decoders ("IRDs") to enable the Company to provide its
scheduled play movies in a CDV format on a real time basis via satellite. The
CDV system was installed in 1,267 hotels with 382,380 rooms as of December 31,
1994. In late 1994, the Company and EDS began the second phase of the technology
conversion and initiated the installation of the new Digital Guest Choice video
on-demand system in selected hotels. This system consists of high capacity disk
arrays, which are used to store digitized movies, delivered to a hotel via
satellite, fiber-optic or microwave, for instantaneous on-demand viewing by
hotel guests. The Company will continue to install Digital Guest Choice in its
major hotels in connection with contract renewals and new customer hotels.
The Company believes it will realize revenue and cash flow increases as a
result of the product enhancements made available by the installation of the
STARPATH system. The conversion to this new system has taken longer than
originally anticipated. Installation, service and technology problems, many of
which the Company has corrected, resulted in significant interruptions in its
PPV service and material increases in revenues and cash flows from the STARPATH
system has not yet been realized.
FIELD SERVICE CONTRACT: The Company also entered into a contract with EDS
whereby EDS assumed the Company's field service. 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
(particularly those with tape based PPV systems) concurrent with rapid
installation of the CDV sites. The Company is currently in the process of
establishing a strong internal customer care function that will, over time,
transition control of the technical field service function to the SpectraVision
customer care
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representative. The Company believes that this will enable it to provide more
attentive and responsive support to its hotel customers.
In addition, EDS provides the Company with MIS services under the contract.
TECHNOLOGY: In accordance with the terms of the Company's ten-year
exclusive contract with EDS, EDS will install and maintain a CDV satellite
delivery PPV system throughout most of the Company's U.S. hotel sites. Under
this contract, EDS has granted the Company exclusive rights during the term of
the EDS contract with regard to the use, installation and operation of CDV
technology within the U.S. hotel market as well as in hospitals, nursing homes,
supervised retirement facilities and military installations. The Company has the
right, in its sole discretion, to approve any venture by EDS, whether on its own
or with a third party, to install, operate or manage any CDV network in the U.S.
market.
MARKETS AND CUSTOMERS
The Company currently provides PPV services to hotels that are part of
chains including Hyatt, Loew's, Four Seasons, Wyndham, Stouffer and Harvey
Hotels. The following table sets forth certain information regarding the number
of hotels and rooms served by the Company for the past five years:
AS OF DECEMBER 31,
-------------------------------------------
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Hotels Served:
Pay-Per-View 2,408 2,554 2,543 2,442 2,308
Free-To-Guest 995 1,018 998 1,006 888
Rooms Served:
Pay-Per-View 729,487 758,710 722,571 684,599 635,378
Free-to-Guest 357,160 363,116 336,295 330,138 308,249
The Company 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 the Company.
The Company 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.
International Markets: In addition to its operations in the United States,
the Company presently offers its services in Canada, Mexico, Puerto Rico, the
U.S. Virgin Islands, Hong Kong, Singapore, Thailand, Australia and the Bahamas.
The Company intends to continue to expand its international operations. The
Company has the leading market share in Asia-Pacific and Australia. The Company
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 U.S. because of higher prices and the lack of programming alternatives.
The competition to provide PPV services to hotels is generally less in
international markets than in the United States. Expansion of the Company's
operations into foreign markets involves certain risks that are not associated
with further expansion in the United States including availability of
programming, government regulation, language barriers, differences in signal
transmission formats, local economic and political conditions and restriction on
foreign ownership and investment. Consequently, these risks may hinder the
Company's
7
efforts to build a significant base of hotel rooms in foreign markets. To
improve its liquidity, the Company is considering selling certain of its foreign
businesses.
Mid-Level Hotel Market: The Company is currently re-evaluating its strategy
for expansion into the mid-level market. The Company has experienced average
revenue levels in its mid-level hotels substantially below those in its
traditional premium hotels. The Company is currently evaluating ways to utilize
its STARPATH technology to reduce the capital costs of installing pay-per-view
systems in mid-level hotels. Although the Company intends to continue to
selectively market to mid-level hotels in its top U.S. metropolitan markets, it
does not expect to rapidly expand in the mid-level market in the near future.
HOTEL CONTRACTS
The Company 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 and 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, the Company typically seeks to extend the
term of a hotel's contract with market competitive terms. At December 31, 1994,
approximately 19.8% of the pay-per-view hotels have contracts that have expired
and are on a month-to-month basis. Approximately 14.3% of the existing pay-per-
view served hotels have contract expiration dates during 1995.
MANUFACTURING
Prior to 1994, the Company manufactured substantially all of the equipment
used in its tape-based PPV and interactive hotel systems. In December 1993, the
Company's manufacturing capability was sold to The Cerplex Group. In connection
with this sale, SpectraVision 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 the use in
hotel PPV and interactive systems. In 1994, Certech provided manufacturing and
repair services to the Company totaling $18.0 million.
COMPETITION
The Company is the largest operator of pay-per-view hotel movie viewing
systems in North America. The Company has experienced intense competition from
other pay-per-view suppliers on a national scale in the United States market,
including competition for contract renewals at hotels operated by certain of the
major hotel chains served by the Company. From 1992 to 1994, contracts for three
major hotel chains, representing a total of 73,000 rooms, expired and were not
renewed. Additionally, the Company is experiencing increased competition in its
international markets. The principal components of the competition in the hotel
PPV market are service, advanced technological products and customer incentives.
Also, some of the Company's competitors have greater access to financial and
other resources.
Approximately 14%, 15% and 17% of the 635,378 rooms served by the Company
at December 31, 1994, are subject to contracts that expire in 1995, 1996 and
1997, respectively. In recent years the Company's competitors have expanded
their PPV room base, and the number of hotels into which the Company can
profitably expand has declined. Additionally, the Company's pay-per-view system
competes for a guest's viewing time with broadcast television, and where
available, the Company's own free-to-guest programming or cable television
service. Cable television also is able to offer pay-per-view programming, and it
is now being marketed to hotels by competitor cable companies on a limited basis
in certain areas.
8
In the satellite-delivered free-to-guest programming business, the Company
has several direct and indirect competitors and has no proprietary hardware,
exclusive programming or captive customer base. Major cable companies compete
with the Company in delivering free-to-guest programming to hotels in several
major metropolitan areas, such as New York City, Chicago, Atlanta, San Francisco
and Boston.
The Company's interactive services are available only to hotels equipped
with its pay-per-view movie systems. Other competitors have released and tested
similar interactive systems, but the Company believes that interactive services
can be marketed profitably only as part of a pay-per-view system due to the
substantial fixed costs of installing equipment in each hotel. Consequently, the
Company believes that its primary competitors in the interactive services market
are the same as its competitors in the pay-per-view market.
The communications industry is subject to rapid technological change. New
technological developments could have an adverse effect on the Company's
operations unless the Company is able to provide equivalent services at
competitive cost.
REGULATION
The Federal Communications Commission ("FCC") has broad jurisdiction over
electronic communications. The FCC does not directly regulate the Company's pay-
per-view or free-to-guest systems. The FCC's jurisdiction, however, does
encompass certain aspects of the Company's operations as they relate to the
Company's use of the radio frequency spectrum in certain hotels served by the
Company. The Company 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 the Company's free-to-guest services and obtained the
required licenses for the microwave point-to-point relay facilities.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company has four issued patents, one acquired and unexpired patent and
four patents pending in the United States covering various aspects of its pay-
per-view and interactive systems, which patents are for 17 years each. In
addition, the Company has numerous registered trademarks and servicemarks,
including "SpectraVision," "Guest Choice," "STARPATH" and pending trademark
applications for "SPEXIS" and "Guest Touch," and numerous registered copyrights
covering the protocol interface between the Company's computer and the hotel's
property management system computer ("PMS") and the protocol interface between
the Company's room-unit technology and various television products. The Company
considers its intellectual property rights to be valuable assets and intends to
protect them when necessary.
EMPLOYEES
As of December 31, 1994, the Company had 283 employees worldwide. The
Company believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
- -------------------
The Company owns its headquarters located in Richardson, Texas. The
headquarters contain approximately 84,000 square feet of manufacturing and
office space, of which 45,000 square feet are leased to Certech Technologies,
Inc. Additionally, the Company leases approximately 41,000 square feet of space
near its headquarters for new product development, engineering, sales and
service facilities pursuant to a lease that expires in September 1998. The
Company's annual rental for this facility is approximately $346,000. The Company
also leases office space throughout the United States, Canada, Mexico, Puerto
Rico, Hong Kong, and Australia for its customer support operations. The
Company's properties are suitable and adequate for the Company's business
operations.
9
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
On September 17, 1992, SPI Holding, Inc., SPI Newco Inc., and Spectradyne,
Inc., filed a pre-packaged petition under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware, Case Nos. 92-
1176, 92-1177 and 92-1178. On October 29, 1992 the Bankruptcy Court issued an
order confirming the plan of reorganization. The Reorganization Plan became
effective on November 23, 1992.
On October 2, 1992, Spectradyne, Inc. filed a lawsuit in federal district
court asserting patent infringement by On Command Video Corporation ("OCV") and
Comsat Video Enterprises, Inc. ("CVE"). Subsequently, OCV filed a counterclaim
against the Company charging violations of patent rights held by OCV. The
counterclaim requests an unspecified amount of damages and injunctive relief.
Spectradyne amended its original lawsuit to, in part, assert copyright
infringement regarding the PMS software protocol against OCV and CVE.
On October 20, 1994, a purported class action complaint was filed in the
United States District Court for the Northern District of Texas, Dallas
Division, styled Seth Stern v. SpectraVision Inc., Albert D. Jerome, Michael C.
Colleran, John Davis, Marvin Davis, Gerald S. Gray, Kenneth Ziffren, John F.
Berardi, Robert D. Beyer and Danny G. Hair. The complaint alleges violations of
Sections 11, 12(2) and 15 of the Securities Act of 1933, sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under
that Act relating to alleged misrepresentations and omissions concurrent with
and following the Company's public offering of Class B common stock and the
Company's offering of 11-1/2% senior discount notes, both on September 28, 1993,
including but not limited to alleged misrepresentations and omissions made in
the Prospectuses. The complaint asserts that it is brought on behalf of a class
consisting of purchasers of securities of the Company, including common stock
and senior discount notes, between September 28, 1993 and August 15, 1994. On
December 20, 1994, the defendants moved to dismiss the complaint. In response to
that motion, plaintiff agreed to file an amended complaint and the motions to
dismiss were withdrawn without prejudice. On February 2, 1995, plaintiff served
an amended complaint reasserting the claims set forth in the prior complaint and
adding claims under Section 33 of the Texas Securities Act, enlarging the class
period to November 7, 1994, and altering other allegations, including some of
the allegations relating to the alleged misrepresentations and omissions. The
amended complaint is the subject of motions to dismiss filed on March 7, 1995.
The plaintiffs seek unspecified damages, prejudgment interest, and fees and
costs of the plaintiffs. Discovery has not yet begun in the case, and the
outcome cannot be predicted with any certainty. The Company believes that it has
meritorious defenses to the claims, and it intends to vigorously defend itself.
See Item 1. - Business.
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 financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1994.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
There is no established public trading market for the Company's Class A
Common Stock. There were two Class A common stockholders as of March 24, 1995.
The Company's Class B Common Stock is available for public trading on the
American Stock Exchange under the ticker symbol "SVN". The high and low closing
prices by quarter for the Company's Class B Common Stock for the years ended
December 31, 1994 and 1993 are as follows:
Quarter ended High Low
----------------- -------- ---------
December 31, 1994 $ 2 1/4 $ 3/16
September 30, 1994 $ 3 3/8 $1 15/16
June 30, 1994 $ 6 $2
March 31, 1994 $ 9 5/8 $5 1/4
December 31, 1993 $13 3/8 $7 3/4
September 30, 1993 $15 3/8 $6 5/8
June 30, 1993 $ 7 1/2 $2 3/8
March 31, 1993 $ 6 7/8 $3 1/4
The Class B Common Stock price as of March 24, 1995 was $0.3125. As of
March 24, 1995, there were 19,390,379 shares of Class B Common Stock outstanding
held by approximately 493 stockholders of record.
No dividends have been paid on the Company's Class A Common Stock or Class
B Common Stock during the years ended December 31, 1994 or 1993. Provisions of
the Company's indebtedness agreements limit payment of dividends on the Common
Stock. See Note 8 and Note 12 to the Consolidated Financial Statements included
in "Item 8. Financial Statements and Supplementary Data."
11
Item 6. Selected Financial Data
The financial data set forth below, except hotel and room data, was derived
from the audited consolidated financial statements of the Company and should be
read in connection with the consolidated financial statements and related notes
included elsewhere herein. References herein are to the financial statements and
footnotes included in Item 8. Financial Statements and Supplementary Data.
Year Ended December 31,
---------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Revenues:
Pay-Per-View $ 119,452 $ 134,830 $ 136,541 $ 138,695 $ 119,489
Free-to-Guest 14,840 17,875 21,275 23,118 22,515
Interactive and other 9,255 10,288 10,805 11,280 10,484
---------- ----------- ----------- ----------- -----------
Total Revenues 143,547 162,993 168,621 173,093 152,488
========== =========== =========== =========== ===========
Direct Costs:
Pay-Per-View 41,766 42,195 41,217 42,268 37,809
Free-to-Guest 11,719 12,804 12,085 13,142 13,702
Other 4,431 3,835 3,226 3,187 2,631
---------- ----------- ----------- ----------- -----------
Total Direct Costs 57,916 58,834 56,528 58,597 54,142
========== =========== =========== =========== ===========
EBITDA (a) 19,148 55,790 65,303 69,877 56,519
========== =========== =========== =========== ===========
Write off of Goodwill
(Note 19) - - 218,453 - -
Write down of Hotel Contracts ========== =========== =========== =========== ===========
(Note 19) 196,256 - - - -
========== =========== =========== =========== ===========
Loss Before Extraordinary Items
and Cumulative Effect of Change in
Accounting Principle (254,284) (43,057) (270,242) (60,003) (72,472)
Extraordinary Gain (Loss)
(Note 6) - (2,699) 23,378 - -
Cumulative Effect of Change in ---------- ----------- ----------- ----------- -----------
Accounting Principle (Note 9) - - (28,498) - -
---------- ----------- ----------- ----------- -----------
Net Loss (254,284) (45,756) (275,362) (60,003) (72,472)
Preferred Stock Dividend - - (21,878) (38,157) (32,622)
---------- ---------- ---------- ---------- ----------
Loss Applicable to Common
Stockholders $ (254,284) $ (45,756) $ (297,240) $ (98,160) $ (105,094)
========== ========== ========== ========== ==========
Loss per Common Share before
Extraordinary Items
and Cumulative Effect $ (10.60) $ (2.37) $ (166.31) $ (655.88) $ (702.24)
of Accounting Change
Other selected Data December 31,
---------------- --------------------------------------------------------------------------
(In thousands except 1994 1993 1992 1991 1990
hotel and room data) ------------ ------------ ------------ ------------ ------------
Total Assets $ 242,822 $ 409,478 $ 401,493 $ 619,518 $ 656,203
Total Debt $ 510,563 $ 436,557 $ 458,900 $ 514,782 $ 501,299
Stockholders' Equity $ (373,025) $ (118,614) $ (150,923) $ 59,899 $ 116,635
(Deficit)
Pay-Per-View Hotels 2,308 2,442 2,543 2,554 2,408
Pay-Per-View Rooms 635,378 684,599 722,571 758,710 729,487
Free-to-Guest Hotels 888 1,006 998 1,018 995
Free-to-Guest Rooms 308,249 330,138 336,295 363,116 357,160
Interactive Hotels 481 489 480 491 458
__________________________________
(a) EBITDA consists of earnings before interest expense, income taxes,
depreciation, amortization, write-off of goodwill and hotel contracts and
certain other non-cash charges. EBITDA is not intended to represent cash flow
or any other measure of performance in accordance with generally accepted
accounting principles. EBITDA is included herein because management believes
that certain investors find it a useful tool for measuring the ability to
service debt.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion and analysis addresses results of operations for
the calendar years ended December 31, 1994, 1993 and 1992.
CURRENT FINANCIAL CONDITION
During 1994, the Company experienced a net loss of $254.3 million as
compared to a net loss of $45.8 million in 1993. The increase in the net loss
is largely due to the write-down of hotel contracts (an intangible asset) in the
amount of $196.3 million. Additionally, the Company's EBITDA (earnings before
interest, taxes, depreciation, amortization, write-down of hotel contracts and
certain other non-cash charges) was $19.1 million for 1994 as compared to $55.8
million during 1993.
The Company has total liabilities of approximately $596.0 million and
assets of $243.0 million. The Company's cash flow from operations in 1995 will
not be sufficient to satisfy its known demands for cash. The Company has no
borrowing availability under its current revolving line of credit to meet its
cash flow shortfalls. Additionally the Company is not in compliance with
certain financial covenants under the terms of the revolving credit facility
with an outstanding balance of $12.5 million. The lenders under the revolving
credit facility may, at their option, give notice to the Company that amounts
owed are immediately due and payable, and the Company does not have sufficient
resources to repay this obligation. The Company is also a defendant in a
purported class action complaint. Discovery has not yet begun in the case, and
the outcome cannot be predicted with any certainty. The Company believes that
it has meritorious defenses to the claims, and it intends to vigorously defend
itself. However, the Company is currently unable to determine the sufficiency
of its resources with respect to any material adverse effects of an unsuccessful
defense of the suit. See Note 14 included in Part II, Item. 8 "Financial
Statements and Supplementary Data." The Company's independent public
accountants included in their report on the Company's consolidated financial
statements for the year ended December 31, 1994 an explanatory paragraph that
describes the uncertainty about the Company's ability to continue as a going
concern. See Part II, Item. 8 "Financial Statements and Supplementary Data."
In February 1995, the Company retained a financial advisor and announced
its plans to restructure its debt and equity. The Company is also seeking new
sources of capital to remedy its liquidity deficiency, including obtaining a new
bank credit facility and potentially the sale of certain of its foreign
businesses. If the restructuring is unsuccessful and the Company cannot obtain
additional capital, the Company will be forced to seek protection under
applicable bankruptcy laws. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
13
PAY-PER-VIEW SERVICES
The following table sets forth, for the periods indicated, certain
information and certain statistical data regarding the Company's pay-per-view
customer base and revenues.
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994
---- ---- ----
Hotels Served.............................. 2,543 2,442 2,308
Rooms Served............................... 722,571 684,599 635,378
Average Price per View..................... $7.78 $7.73 $7.71
Revenue per Equipped Room per Day ("RER").. $0.49 $0.53 $0.51
During 1994, 1993 and 1992, revenues from the Company's pay-per-view movie
services accounted for 83.2%, 82.7%, and 81.0%, respectively, of the Company's
total revenues. Management expects pay-per-view services, including Guest
Choice and other pay-per-view services, to continue to provide the largest
portion of the Company's revenues for the foreseeable future. The Company's
pay-per-view revenues depend on a variety of factors, including the number of
SpectraVision systems installed during a period, the hotel occupancy rate, the
frequency of movie viewing by hotel guests, the availability of popular movies,
the price charged per view and the proximity of a movie's introduction in the
Company's PPV system to its first-run theatrical release and length of time of
the "window" in which the movie is available in the Company's PPV system but is
not available for home video, cable television exhibition or direct sales to the
consumer.
Pay-per-view systems installed. The number of rooms equipped with pay-per-
view systems decreased during 1994 by 49,221 rooms to 635,378 rooms as of
December 31, 1994 due to intense competition. Included in this decrease are
approximately 20,000 rooms under the pay-per-view service contract covering
Marriott corporate owned hotels. The Company expects the number of PPV rooms
served will continue to decrease due to the competitive market. In September
1993, the Company signed a seven-year exclusive contract renewal with Hyatt
Hotels & Resorts to provide pay-per-view movies and interactive video services.
This contract covers 105 hotels with a total of approximately 57,000 rooms.
Hyatt Hotels are now equipped with the Digital Guest Choice system and is the
first hotel chain to be completely installed with the CDV Satellite Network. At
February 28, 1995, the Company had deliverable orders for systems (not including
Guest Choice installations) to be installed in approximately 10,973 additional
rooms, of which 6,800 will be filled in 1995 and the remainder in 1996 as
compared to approximately 29,500 rooms at February 28, 1994. Using the 1994
operating statistics and assuming no change in any other variable component of
the Company's business, for every change in the installed room base of 10,000
rooms, pay-per-view revenues would have increased or decreased by approximately
$1.9 million on an annualized basis.
Price per view. The average price per view decreased to $7.71 in 1994 from
$7.73 in 1993 and $7.78 in 1992. During 1994, the average price per view was
$7.85 in the United States, US$6.30 in Canada, US$9.05 in Hong Kong, US$7.60 in
Mexico, US$8.34 in Thailand and US$7.95 in Australia. Foreign exchange rate
fluctuations impact the consolidated average price per view. The ability of
the Company to raise movie prices is subject to notice and certain other
provisions its contracts with the hotels.
14
Revenue per equipped room per day ("RER"). RER represents total pay-per-
view revenues earned per equipped PPV room per day. RER declined from $0.53 per
room per day in 1993 to $0.51 in 1994. The lower RER is attributable to the two
primary factors discussed below:
* Conversion of PPV rooms to the new technology: The rapid changeover of
existing analog tape based PPV equipment to the new STARPATH technology
beginning in October 1993, caused PPV systems in over 1,000 hotels to be
non-operational from one to three days during the equipment change to
compressed digital video ("CDV"). 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 the rapid installation of the CDV system. The
Company is currently in the process of establishing a strong internal
customer care function that will transition control of the technical field
service function to the SpectraVision customer care representatives.
* Poorly performing movie product: The decline in RER is also
attributable to the lower viewing levels of the major movies exhibited on
the PPV system in 1994 as compared to the major movies exhibited in 1993.
Theater box office results generally were lower for the selection of major
movies exhibited during 1994 than for movies shown in 1993. Currently, the
Company is only changing movies once per month because of the cost to
duplicate and distribute videotapes and printed movie schedule cards in its
tape-based hotel systems versus CDV hotel systems. The availability of
popular movie product is beyond the control of the Company.
Direct costs. Direct costs incurred with the offering of pay-per-view
services include film licensing costs, hotel commissions, videotapes, in-room
cards and transponder access fees necessary to provide signals to transmit the
digitized movies to the hotels.
FREE-TO-GUEST AND OTHER SERVICES
Free-to-guest services to hotel guests include satellite delivery of
programming such as HBO, CNN, ESPN and other cable networks, as well as
providing to the hotels, in most cases, the satellite equipment to receive the
programming. The hotel typically pays the Company a fixed monthly fee per room
for each programming channel selected.
During the fiscal years 1994, 1993 and 1992, revenues from the Company's
free-to-guest services accounted for 10.3%, 11.0% and 12.6% of the Company's
total revenues, respectively. Revenues from free-to-guest services are a
function of total rooms served and the fee charged to hotels by the Company.
The number of rooms served by the Company's free-to-guest systems decreased from
330,138 rooms as of December 31, 1993 to 308,249 rooms as of December 31, 1994.
The majority of this decrease was the result of the non-renewal of a free-to-
guest services contract with certain corporate owned Marriott Hotels that
expired during 1994. As of December 31, 1994 the Company provided free-to-guest
services to 888 hotels as compared to 1,006 hotels as of December 31, 1993. At
February 28, 1995, the Company had deliverable orders for systems to be
installed in approximately 5,200 additional rooms, which are expected to be
filled during 1995, as compared to approximately 9,500 rooms on order at
February 28, 1994. Direct costs incurred in connection with the offering of
free-to-guest services to hotels consist primarily of license fees paid to
programming suppliers.
The balance of the Company's revenues are derived from the fees earned from
hotels for interactive communications services, such as Video Checkout, and
sales of various other products and services, such as remote control units,
satellite dishes, master antennae system upgrades and licensing agreements.
15
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 ("1994") COMPARED TO YEAR ENDED DECEMBER 31, 1993
("1993")
Total revenues decreased to $143.5 million in 1994 from $163.0 million in
1993, a decrease of $19.5 million or 11.9% 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 1994, 83.2% were revenues from pay-per-view, 10.3%
were from free-to-guest, 6.5% 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. The Company 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 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 (particularly those with
tape-based PPV systems) concurrent with the installation of the CDV sites.
Free-to-guest revenues decreased to $14.9 million in 1994 from $17.9
million in 1993, a decrease of $3.0 million or 17.0%. 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 $9.3 million in 1994 from $10.3 million in
1993, a decrease of $1.0 million or 10.0%. This decrease is primarily due to 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 CDV 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 STARPATH 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 $11.7 million in 1994 from $12.8
million in 1993, a decrease of $1.1 million or 8.5%. 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 $596,000 or 15.5%. As a percentage of other revenues,
other direct costs increased to 57.9% 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 14.6%. The increase
in depreciation is due to the increase in video systems capitalized during 1994
due to the installation of the new STARPATH.
16
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. The Company 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 the Company'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 the
Company'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 the Company'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 the Company a portion of the hotel PPV system
components. Certech has leased the manufacturing space at the Company's
corporate headquarters. The cash proceeds to the Company 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
$34.3 million in 1994 from $26.3 million in 1993, a net increase of $8.0 million
or 30.5%. Operating expenses for periods prior to April 1994 include costs of
the Company'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 the Company'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 the Company
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 Company 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 72.9%. 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. In 1995, certain new business and product
marketing costs will be decreased in an effort to control costs and invest
resources in improved customer service.
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 27.0%. 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.
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 STARPATH.
17
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 the
Company'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 the Company'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 (see Note 19 - Goodwill
and Hotel Contracts). The Company 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. See Note 19 - Goodwill and Hotel Contracts.
18
YEAR ENDED DECEMBER 31, 1993 ("1993") COMPARED TO YEAR ENDED DECEMBER 31, 1992
("1992")
Total revenues decreased to $163.0 million in 1993 from $168.6 million in
1992, a decrease of $5.6 million or 3.3% primarily due to the reduction of
installed hotel rooms and certain price reductions of non-PPV services in
connection with long-term contract renewals. Of the total revenues reported in
1993, 82.7% were revenues from pay-per-view, 11.0% were from free-to-guest, 6.3%
were from interactive services and other revenue sources.
Pay-per-view revenues decreased to $134.8 million in 1993 from $136.5
million in 1992, a decrease of $1.7 million or 1.3%. This decrease in pay-per-
view revenues in part reflected the decrease in the number of rooms served,
which resulted in an approximate $11.1 million decrease in revenue and was
substantially offset by an increase in RER, contributing $10.3 million in 1993
PPV revenues.
Free-to-guest revenues decreased to $17.9 million in 1993 from $21.3
million in 1992, a decrease of $3.4 million or 16.0%. This decrease primarily
reflects negotiated price reductions in connection with certain PPV hotel
contract renewals.
Other revenues decreased to $10.3 million in 1993 from $10.8 million in
1992, a decrease of $517,000 or 4.8%. This decrease is primarily due to
decreases in interactive revenues from price reductions granted in connection
with certain PPV contract renewals.
Pay-per-view direct costs increased to $42.2 million in 1993 from $41.2
million in 1992, an increase of $1.0 million or 2.4%. As a percentage of pay-
per-view revenues, pay-per-view direct costs increased slightly to 31.3% in 1993
from 30.2% in 1992. The increase resulted primarily from costs of the
transponder lease required for the implementation of the CDV Satellite Network
during the last quarter of 1993.
Free-to-guest direct costs increased to $12.8 million in 1993 from $12.1
million in 1992, an increase of $719,000 or 5.9%. As a percentage of free-to-
guest revenues, free-to-guest direct costs increased to 71.6% in 1993 from 56.8%
in 1992. The increase in free-to-guest direct costs as a percentage of free-to-
guest revenues primarily reflects the lower revenues due to price reductions
granted in connection with certain PPV contract renewals.
Other direct costs increased to $3.8 million in 1993 from $3.2 million in
1992, an increase of $609,000 or 18.9%. As a percentage of other revenues,
other direct costs increased to 50.2% in 1993 from 48.0% in 1992 principally due
to lower profit margins on the sale of equipment to the hospital market and
decreases of royalty income (with no related direct costs) from certain foreign
subsidiaries.
Depreciation and amortization expense decreased to $44.1 million in 1993
from $54.1 million in 1992, a decrease of $10.0 million or 18.4%. The decrease
in depreciation is due to the revaluation of assets associated with the 1987
Acquisition becoming fully depreciated during 1992 as well as a larger number of
PPV systems becoming fully depreciated. The decrease in amortization is due to
the elimination of the amortization of goodwill subsequent to the write-off of
goodwill at June 30, 1992.
Technology and field service charge reflects the one-time costs due to
changes in technology and field service operations in connection with the EDS
Service and Technology Agreement. The Company has 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 the Company's field service operations.
19
Loss on sale of manufacturing assets and inventory is a result of the
Company's sale of the Company's manufacturing operations to The Cerplex Group in
December 1993. Certech Technology, Inc., a wholly-owned subsidiary of The
Cerplex Group, will manufacture and sell to the Company its hotel entertainment
system components. Certech has leased the Company's manufacturing space at the
Company's corporate headquarters. The cash proceeds to the Company 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 decreased to $24.6 million in 1993 from $25.3 million in
1992, a decrease of $699,000 or 2.8%, primarily due to declines in field service
labor costs due to decreased overtime costs and increased labor costs charged to
capital projects. These decreases were partially offset by increases in repairs
and maintenance costs.
Contracted service costs were $1.7 million in 1993 representing charges
under the EDS Service and Technology Agreement for field service and network
service (in connection with the implementation of the CDV Satellite Network)
during the fourth quarter of 1993.
Selling and marketing expenses increased to $5.1 million in 1993 from $4.2
million in 1992, an increase of $855,000 or 20.4%. Sales costs increased
approximately $0.2 million due to increases in sales personnel and sales
commissions. Marketing costs increased approximately $0.7 million due to
activities associated with public relations and the promotion of new products.
General and administrative expenses decreased to $15.4 million in 1993 from
$16.0 million in 1992, a net decrease of $559,000 or 3.5%. Expenses in 1993
included increases due to management bonuses of $750,000, increased bad debt
expense and increased fees for eight additional members of the board of
directors. These increases were more than offset by decreases in the cost of
directors' and officers' liability insurance, outside management advisory fees,
property and franchise taxes and recruiting and severance payout costs, all
related to the 1992 Restructuring.
Research and development expenses increased to $1.6 million in 1993 from
$1.3 million in 1992, an increase of $266,000 or 20.2%.
Losses on foreign exchange transactions decreased to $833,000 in 1993 from
$1.4 million in 1992, a decrease of $571,000. Both the 1992 and the 1993
periods experienced exchange losses due to the declining Canadian dollar
exchange rate, however, 1993 to a lesser degree than 1992. The US dollar
denominated balances of the foreign subsidiaries are restated at the rate of
exchange at year end, and any resulting gains or losses are included in results
of operations.
Interest expense (net) decreased to $49.0 million in 1993 from $66.9
million in 1992, a decrease of $17.9 million or 26.8%. Cash interest expense
increased from $23.1 million in 1992 to $43.2 million in 1993, an increase of
$20.1 million. The exchange of the old 14.875% reset notes for the 11.5% Reset
Notes, as a result of the Restructuring, resulted in $26.9 million of additional
cash interest. The increase in the cash interest expense on the Reset Notes was
partially offset by a $7.0 million decrease in cash interest expense on the Bank
Credit Facility due to a decrease in the average outstanding balance and lower
interest rates. Non-cash interest expense decreased from $44.0 million in 1992
to $6.1 million in 1993, a decrease of $38.0 million. The decrease in non-cash
interest expense is primarily due to the elimination of the old 14.875% reset
notes, slightly offset by accretion of discount on the Senior Notes for the
fourth quarter of 1993.
20
Current income tax expense, comprised of state and foreign income tax
expense, decreased to $1.7 million in 1993 from $2.2 million in 1992, a decrease
of $508,000 or 22.6%, due to decreased state income taxes primarily as a result
of lower operating income. The Company recognized deferred tax benefits in the
amount of $4.5 million in 1993 and $7.5 million in 1992 as a result of the
reduction in the Company's net deferred tax liabilities. The $3.0 million
decrease in the tax benefit was due to a reduction in the amount of net
operating loss carryforwards which the Company will be able to recognize in
future periods. The Company 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, 1993 the net operating loss
carryforwards for federal income tax purposes were $254.0 million.
Loss before extraordinary items and cumulative effect of change in
accounting principle decreased to $43.1 million in 1993 from $270.2 million in
1992, a decrease of $227.1 million. The net loss for 1992 includes a one-time
charge of $218.5 million for the write-off of goodwill. Excluding the write-off
of goodwill in 1992, the loss in 1993 represents a decrease of $8.6 million due
to decreased interest expense partially offset by lower operating income for
1993.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents were $1.3 million and $14.3 million at December
31, 1994 and 1993, respectively. During 1994 the Company used net funds
generated from operating cash flow (earnings before interest, taxes,
depreciation, amortization and exchange gain/loss) of $19.1 million, net funds
generated from working capital of $21.1 million (primarily the deferral of
payments for purchases of equipment and services under the EDS Service and
Technology Agreement), borrowings of $12.5 million and cash on hand to repay
obligations under capital leases of $4.2 million, cash interest payments of $3.5
million, state and foreign income taxes of $0.6 million and cash capital
expenditures of $57.4 million.
Installations in process and completed systems are $295.6 million at
December 31, 1994. Capital expenditures for 1994 were $86.9 million (including
those purchased under capital leases of $13.5 million and $16.0 million of
purchases to be converted to operating leases on January 1, 1995). Capital
expenditures in 1994 are largely comprised of $20.5 million for the installation
of the CDV Satellite Network systems, $12.9 million for Digital Guest Choice
systems, $20.5 million for televisions installed at hotel sites and $7.1 million
for personal computers installed in connection with SPEXIS. The remaining
capital expenditures are for Guest Choice installations ($3.8 million), refits
to the SpectraMate room unit ($8.6 million) and other capital in support of the
Company's business needs.
Accounts payable was $48.8 million at December 31, 1994 as compared to
$12.3 million at December 31, 1993. Included in the 1994 balance is
approximately $32.6 million payable to EDS and its affiliates for equipment
purchases and services in connection with the EDS Service and Technology
Agreement. Other accrued liabilities were $21.5 million at December 31, 1994 as
compared to $10.9 million at December 31, 1993. Included in the accrued
liabilities balance at December 31, 1994 are estimated additional amounts due
for equipment and services payable to EDS, primarily in connection with Digital
Guest Choice installation during the last quarter of 1994 in the amount of $8.0
million. On January 1, 1995 the Company entered into an agreement (the "Special
Provisions Agreement") with regards to $16.0 million of the amount outstanding
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 accrues interest at 11.5% per annum with payment
due in full on or before August 31, 1995. Additionally, the Company is required
to make minimum payments of $500,000 for each of January, February and March
1995 for current (1995) service fees. To the extent current service fees exceed
these payments made during this period, the excess will be due and payable on
August 31, 1995. Notwithstanding 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. Accordingly, $16.0 million of system components classified
in video systems and the related liability classified in accrued liabilities and
accounts payable at December 31, 1994, will be accounted for as an operating
lease effective January 1, 1995.
21
EBITDA (earnings before interest, taxes, depreciation, amortization,
write-down of hotel contracts and certain other non-cash charges) for 1994 was
$19.1 million as compared to 1993 operating cash flow of $55.8 million. The
Company believes the decrease is primarily due to revenues lost and costs
incurred in 1994 due to the technology change over, costs of severance for
replacement of the executive management and significant loss in the number of
installed hotel rooms with pay-per-view service. The Company expended $57.4
million in cash capital expenditures (excluding $13.5 million of capital
expenditures funded through capital leases and $16.0 million of equipment under
the EDS Equipment Lease) of which $33.4 million was used to refit a significant
portion of the Company's installed systems with the new STARPATH technology
including Digital Guest Choice. The Company anticipates cash capital expenditure
requirements to be approximately $30 million in 1995.
The Company has total liabilities of approximately $596.0 million and
assets of $243.0 million. The Company's cash flow from operations in 1995 will
not be sufficient to satisfy its known demands for cash. The Company has no
borrowing availability under its current revolving line of credit to meet its
cash flow shortfalls. Additionally the Company is not in compliance with
certain financial covenants under the terms of the revolving credit facility
with an outstanding balance of $12.5 million. The lenders under the revolving
credit facility may, at their option, give notice to the Company that amounts
owed are immediately due and payable, and the Company does not have sufficient
resources to repay this obligation. The Company is also a defendant in a
purported class action complaint. Discovery has not yet begun in the case, and
the outcome cannot be predicted with any certainty. The Company believes that
it has meritorious defenses to the claims, and it intends to vigorously defend
itself. However, the Company is currently unable to determine the sufficiency
of its resources with respect to any material adverse effects of an unsuccessful
defense of the suit. See Note 14 included in Part II, Item. 8 "Financial
Statements and Supplementary Data." The Company's independent public
accountants included in their report on the Company's consolidated financial
statements for the year ended December 31, 1994 an explanatory paragraph that
describes the uncertainty about the Company's ability to continue as a going
concern. See Part II, Item. 8 "Financial Statements and Supplementary Data."
In February 1995, the Company retained a financial advisor and announced
its plans to restructure its debt and equity. The Company is also seeking new
sources of capital to remedy its liquidity deficiency, including obtaining a new
bank credit facility and potentially the sale of certain of its foreign
businesses. If the restructuring is unsuccessful and the Company cannot obtain
additional capital, the Company will be forced to seek protection under
applicable bankruptcy laws. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
Consolidated Statements of Financial Position at December 31, 1994 and
1993
Consolidated Statements of Operations for the years ended December 31,
1994, 1993 and 1992
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992
Notes to the Consolidated Financial Statements
23
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
SpectraVision, Inc.:
We have audited the accompanying consolidated financial statements of
SpectraVision, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the index at Item 14.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in notes 3 and
8, the Company has debt substantially in excess of its assets, is not in
compliance with certain financial covenants of its Revolving Credit Facility and
currently does not have sufficient resources to meet its debt service
requirements in 1995, which 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. The Company is also unable to determine the
sufficiency of its resources with respect to any material adverse effects of a
purported class action complaint discussed in note 14. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
As discussed in note 9 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1992.
KPMG Peat Marwick LLP
March 10, 1995
Dallas, Texas
24
SPECTRAVISION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
December 31,
-----------------------------------------
1994 1993
------------- -------------
ASSETS
Cash and Cash Equivalents $ 1,317 $ 14,285
Accounts Receivable (net of allowance for doubtful accounts
of $1,072 and $967 for 1994 and 1993, respectively) 20,417 18,060
Debt Issuance Costs (net) 6,797 8,058
Prepaids and Other Assets 8,933 9,569
Video Systems
Installations in-process 38,144 28,157
Completed systems 257,484 211,781
----------- -----------
295,628 239,938
Less accumulated depreciation and amortization (149,045) (141,253)
----------- -----------
Total Video Systems 146,583 98,685
Building and Equipment
Building 4,294 4,241
Furniture, fixtures and other equipment 6,887 5,260
----------- -----------
11,181 9,501
Less accumulated depreciation (4,965) (4,747)
----------- -----------
Total Building and Equipment 6,216 4,754
Land 2,559 2,559
Hotel Contracts (net) 50,000 253,508
----------- -----------
TOTAL ASSETS $ 242,822 $ 409,478
=========== ===========
See Accompanying Notes to the Consolidated Financial Statements
25
SPECTRAVISION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(Dollars in thousands, except share data)
December 31,
------------------------------------------
1994 1993
------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable $ 48,807 $ 12,348
Accrued Liabilities
Interest 3,413 2,598
Technology and Field Service Charge - 6,629
Compensation 4,495 3,122
Other 21,522 10,949
Income Taxes 290 660
Deferred Income Taxes 6,757 35,229
Debt
Bank Credit Facility 12,500 -
Canadian Bank Credit Facility 7,350 7,350
11.5% Senior Discount Notes 172,295 154,055
11.65% Senior Subordinated Reset Notes 294,768 260,795
Capitalized Lease Obligations 23,492 14,028
Other Debt 158 329
----------- -----------
Total Debt 510,563 436,557
----------- -----------
Total Liabilities 595,847 508,092
Contingent Value Rights 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 and 4,745,526 shares
at December 31, 1994 and 1993, respectively. 5 5
Class B Common Stock - $0.001 par value, authorized 144,000,000
shares, issued and outstanding 19,390,379 and 19,238,379 shares
at December 31, 1994 and 1993, respectively. 19 19
Additional Paid in Capital 392,185 392,185
Retained Deficit (765,729) (511,445)
Foreign Currency Translation Adjustment 495 622
----------- -----------
Total Stockholders' Deficit (373,025) (118,614)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 242,822 $ 409,478
=========== ===========
See Accompanying Notes to the Consolidated Financial Statements
26
SPECTRAVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
------------------------------------------------
1994 1993 1992
------------- ------------ -------------
Revenues $ 143,547 $ 162,993 $ 168,621
Costs and Expenses
Direct costs 57,916 58,834 56,528
Depreciation and
amortization 50,534 44,103 54,050
Write-off of goodwill - - 218,453
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 13,304 24,583 25,282
Contracted service
costs 21,029 1,716 -
Selling and marketing
expenses 8,741 5,054 4,199
General and
adminstrative expenses 19,595 15,431 15,990
Research and
development (net) 3,814 1,585 1,319
Exchange loss 581 833 1,404
------------- ------------ -------------
Total costs and expenses 371,770 159,788 377,225
------------- ------------ -------------
Operating Income (Loss) (228,223) 3,205 (208,604)
Interest expense (net) 54,981 48,990 66,905
------------- ------------ -------------
Loss Before Income Taxes,
Extraordinary Items and
Cumulative Effect of
Change in Accounting
Principle (283,204) (45,785) (275,509)
Income Taxes
State and foreign
provision (benefit) (448) 1,739 2,247
Deferred benefit (28,472) (4,467) (7,514)
------------- ------------ -------------
Total Income Tax Benefit (28,920) (2,728) (5,267)
------------- ------------ -------------
Loss Before Extraordinary
Items and Cumulative
Effect of Change in
Accounting Principle (254,284) (43,057) (270,242)
Extraordinary Items
Loss from debt
extinguishment - (2,699) -
Gain on debt
restructuring - - 23,378
------------- ------------ -------------
Total Extraordinary Items - (2,699) 23,378
Cumulative Effect of
Change in Accounting
Principle - - (28,498)
------------- ------------ -------------
Net Loss (254,284) (45,756) (275,362)
Preferred Stock Dividend - - (21,878)
------------- ------------ -------------
Net Loss Applicable to
Common Stockholders $ (254,284) $ (45,756) $ (297,240)
============= ============ =============
Loss Per Common Share:
Before extraordinary
items and cumulative
effect of
accounting change $ (10.60) $ (2.37) $ (166.31)
Extraordinary items - (0.15) 13.31
Cumulative effect of
accounting change - - (16.22)
------------- ------------ -------------
Net Loss $ (10.60) $ (2.52) $ (169.22)
============= ============ =============
See Accompanying Notes to the Consolidated Financial Statements
27
SPECTRAVISION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Dollars in thousands)
Year Ended December 31,
---------------------------------------------
1994 1993 1992
-------------- ------------- ------------
16% Cumulative Preferred
Stock
Beginning balance $ - $ - $ 105
Stock dividend - - 9
Exchange of preferred
stock for common stock - - (114)
-------------- ------------- ------------
Ending Balance $ - $ - $ -
-------------- ------------- ------------
Class A Common Stock
Beginning balance 5 5 -
Issued in restructuring - - 5
-------------- ------------- ------------
Ending Balance $ 5 $ 5 $ 5
-------------- ------------- ------------
Class B Common Stock
Beginning balance 19 11 -
Issued in public
offering 8 -
Issued in restructuring - - 11
-------------- ------------- ------------
Ending Balance $ 19 $ 19 $ 11
-------------- ------------- ------------
Additional Paid in Capital
Beginning balance 392,185 314,544 341,174
Issued in public
offering - 77,641 -
Preferred stock
dividends - - 21,860
Capital contribution - - 1,800
Issued in restructuring - - 67,723
Cancellation of
preferred stock in
restructuring - - (112,936)
Contingent value
rights valuation
adjustment - - (5,077)
-------------- ------------- ------------
Ending Balance $ 392,185 $ 392,185 $ 314,544
-------------- ------------- ------------
Retained Deficit
Beginning balance (511,445) (465,689) (281,385)
Net loss (254,284) (45,756) (275,362)
Preferred stock
dividend - - (21,878)
Cancellation of
preferred stock in
restructuring - - 112,936
-------------- ------------- ------------
Ending Balance $ (765,729) $ (511,445) $ (465,689)
-------------- ------------- ------------
Translation Adjustment
Beginning balance 622 206 5
Translation adjustment (127) 416 201
-------------- ------------- ------------
Ending Balance $ 495 $ 622 $ 206
-------------- ------------- ------------
Total Stockholders' Deficit $ (373,025) $ (118,614) $ (150,923)
============== ============= ============
See Accompanying Notes to the Consolidated Financial Statements
28
SPECTRAVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------
1994 1993 1992
----------- ----------- ------------
Operating Activities:
Net loss $ (254,284) $ (45,756) $ (275,362)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 50,534 44,103 54,050
Loss on sale of manufacturing
assets and inventory - 649 -
Payment of 1992 Restructuring
costs - (9,236) (7,802)
Payment of 1993 Debt issuance
costs - (8,417) -
Other non-cash items:
Write-off of goodwill - - 218,453
Write-down of hotel
contracts 196,256 - -
Technology and field service
charge - 7,000 -
Cumulative effect of
accounting change - - 28,498
Deferred income tax benefit (28,472) (4,467) (7,514)
Extraordinary loss from debt
extinguishment - 2,699 -
Extraordinary gain on debt
restructuring - - (23,378)
Decrease in accrued
interest paid in kind - - (8,226)
Conversion of non-cash
interest to secondary
notes 33,973 - 39,611
Accretion of discount on
senior notes 18,240 4,074 -
Amortization of debt issuance costs 1,261 1,055 2,536
Exchange loss 581 833 1,404
Other items (net) (948) 86 283
Increase (decrease) in:
Accounts payable 27,463 1,377 (6,146)
Accrued interest 816 (1,248) 10,884
Other accrued liabilities (2,138) 2,374 (556)
Income taxes payable (370) (124) (341)
Decrease (increase) in:
Accounts receivable (2,504) 559 675
Prepaids and other assets (4,243) 2,282 (178)
----------- ----------- ----------
Total adjustments 290,449 43,599 302,253
----------- ----------- ----------
Net cash provided by (used
in) operating activities $ 36,165 $ (2,517) $ 26,891
----------- ----------- ----------
See Accompanying Notes to the Consolidated Financial Statements
29
SPECTRAVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
Year Ended December 31,
------------------------------------------
1994 1993 1992
------------ -------------- ------------
Investing Activities:
Proceeds from sale of manufacturing assets
and inventory $ - $ 5,201 $ -
Decrease (increase) in raw materials - (313) 43
Cost of in-process systems and capital
expenditures (57,362) (36,097) (27,195)
------------ -------------- ------------
Net cash used in investing activities $ (57,362) $ (31,209) $ (27,152)
------------ -------------- ------------
Financing Activities:
Borrowings under Revolving Credit Facility $ 12,500 $ - $ -
Borrowings under Supplemental Bank Credit
Facility - 23,000 13,000
Repayment of Supplemental Bank Credit Facility - (31,000) (15,000)
Repayment of Bank Credit Facility - (180,120) (20,000)
Repayment of other debt and capitalized leases (4,187) (1,432) (930)
Issuance of class A common stock - - 24,600
Issuance of class B common stock - 84,150 8,198
Stock issuance costs - (6,501) -
Issuance of senior discount notes - 149,981 -
Preferred stock dividend - fractional shares - - (9)
------------ -------------- ------------
Net cash provided by financing activities $ 8,313 $ 38,078 $ 9,859
------------ -------------- ------------
Effect of exchange rate changes on cash (84) (20) (54)
------------ -------------- ------------
Net Increase (Decrease) in cash and cash equivalents (12,968) 4,692 9,544
Cash and cash equivalents at beginning of period 14,285 9,593 49
------------ -------------- ------------
Cash and cash equivalents at end of period $ 1,317 $ 14,285 $ 9,593
============ ============== ============
See Accompanying Notes to the Consolidated Financial Statements
30
SPECTRAVISION, INC.
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 the 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.
Unless the context otherwise requires, all references herein to the Company
are not intended to imply exact corporate relationships and include
SpectraVision and its subsidiaries, including SPI Newco, its direct subsidiary,
and Spectradyne, the direct subsidiary of SPI Newco, as well as, Spectradyne's
foreign operating subsidiaries.
31
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
$28,249,000 and $14,765,000 of equipment, primarily televisions, under capital
leases at December 31, 1994 and 1993, respectively. Accumulated amortization of
such leased equipment was $4,465,000 and $1,146,000 at December 31, 1994 and
1993, respectively. Depreciation and amortization, which includes the
amortization of assets recorded under capital leases, is computed by the
straight-line method over 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 $37,288,000 for 1994, $31,220,000 for
1993 and $36,269,000 for 1992. Prior to installation, in-process video systems
are stated at cost, and depreciation of video systems begins when the system is
installed and activated. The Company capitalized interest related to the
installation of video systems and related equipment of $2,892,000 for the year
ended December 31, 1994.
INTANGIBLE ASSETS: In connection with the 1989 Acquisition, hotel
contracts were recorded at fair value and are amortized on a straight-line basis
over 25 years. The Company routinely assesses the propriety of the carrying
amount of hotel contracts through a future cash flows method as well as the
amortization period to determine whether circumstances warrant adjustment to the
carrying amount or estimated useful life. Accumulated amortization related to
the hotel contracts was zero at December 31, 1994 and $58,950,000 at December
31, 1993. Amortization expense was $12,498,000 for each of 1994, 1993 and 1992.
Pursuant to the adoption of the Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("Statement 109") discussed below, the
carrying amount of hotel contracts was increased, effective January 1, 1992, by
$18.7 million (net of $2.3 million of accumulated amortization). At December
31, 1994 the carrying amount of hotel contracts was decreased. (See Note 19 -
Goodwill and Hotel Contracts).
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.
32
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES: In February 1992, the Financial Accounting Standards Board
issued Statement No. 109 -"Accounting for Income Taxes". Statement 109 requires
a change from the deferred method of accounting for income taxes of APB Opinion
11 to the asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, 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. 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. Under Statement 109, 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. Effective January 1, 1992, the Company adopted Statement 109
and has reported the cumulative effect of that change in the method of
accounting for income taxes in the 1992 consolidated statement of operations.
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, 1994 and 1993. Cash and cash equivalents, accounts
receivable and accounts payable have been excluded since the carrying amounts
reported in the accompanying consolidated statements of financial position
approximate fair values.
At December 31, 1994 At December 31, 1993
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Financial liabilities:
Revolving Credit Facility (Note 8) $ 12,500 $12,500 - -
Canadian Bank Credit Facility (Note 8) $ 7,350 $ 7,350 $ 7,350 $ 7,350
Senior Discount Notes (Note 8) $172,295 $75,800 $154,055 $154,055
Senior Subordinated Reset Notes (Note 8) $294,768 $29,500 $260,795 $265,200
Contingent Value Rights, net (Note 11) $ 14,923 $ 800 $ 14,923 $ 11,900
Interest Rate Protection Agreement (Note 8) $ - $ - $ 23 $ 23
33
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of the Revolving Credit Facility at December 31, 1994 and
the Canadian Credit Facility at December 31, 1994 and 1993 approximated the
carrying amount because the facilities bear interest at current market rates.
The fair value of the Senior Discount Notes and Reset Notes at December 31,
1994 was estimated using recent market transaction information. The fair value
of the Senior Discount Notes at December 31, 1993 approximated the carrying
amount because the Senior Discount Notes were issued in October 1993. The fair
value of the Reset Notes at December 31, 1993 is based upon the interest rate
reset on November 23, 1993 to cause the market value of the Reset Notes to equal
101.7% of the principal amount. The fair value of the Contingent Value Rights
at December 31, 1994 and 1993 is based upon quoted market prices. The fair
value of the Interest Rate Protection Agreement approximates the carrying amount
at December 31, 1993.
NOTE 3 - 1995 RESTRUCTURING
At December 31, 1994 the Company had $243 million in assets with $511
million in debt. Operating cash flow (earnings before interest, taxes,
depreciation, amortization, write-down of hotel contracts and certain other non-
cash charges for 1994 was $19.1 million as compared to 1993 operating cash flow
of $55.8 million. The Company believes the decrease is primarily due to
revenues lost and costs incurred in 1994 due to the technology change over,
costs of severance for replacement of the executive management and significant
loss in the number of installed hotel rooms with pay-per-view service. The
Company expended $57.4 million in cash capital expenditures (excluding $13.5
million of capital expenditures funded through capital leases and $16.0 million
of equipment under the EDS Equipment Lease) of which $33.4 million was used to
refit a significant portion of the Company's installed systems with the new
STARPATH technology including Digital Guest Choice. The Company anticipates cash
capital expenditure requirements to be approximately $30 million in 1995. The
Company's operating cash flow in 1995 will not be sufficient to satisfy its
known demands for cash.
At December 31, 1994 the Company was not in compliance with the financial
covenants under the terms of the Revolving Credit Facility with an outstanding
balance of $12.5 million. The lenders under the Revolving Credit Facility may,
at their option, give notice to the Company that amounts owed are immediately
due and payable. The Company currently does not have sufficient resources to
repay this obligation. Further, the Company will not have sufficient resources
to service its outstanding debt including interest payments of $18.0 million on
the 11.65% Senior Subordinated Reset Notes ("Reset Notes") due December 1, 1995,
payment of the EDS Services Note due August 31, 1995 and payment of the Canadian
Bank Credit Facility due June 30, 1995.
In February 1995, the Company retained a financial advisor and announced
its plans to restructure its debt and equity. The Company is also seeking new
sources of capital to remedy its liquidity deficiency, including obtaining a new
bank credit facility and potentially the sale of certain of its foreign
businesses. If the restructuring is unsuccessful and the Company cannot obtain
additional capital, the Company will be forced to seek protection under
applicable bankruptcy laws. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
34
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 - EDS SERVICE AND TECHNOLOGY AGREEMENT
The Company is exploring various plans to restructure its debt and capital.
Additionally, the Company must seek new sources of capital to remedy its
liquidity deficiency. If the restructuring is unsuccessful and the Company
cannot obtain additional capital, the Company will be forced to seek protection
under applicable bankruptcy laws. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
On July 28, 1993, the Company entered into a ten year exclusive agreement
with Electronic Data Systems ("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 100 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 (particularly those with tape-based PPV systems) concurrent with rapid
installation of the CDV sites. The Company is currently in the process of
establishing a strong internal customer care function that will transition
control of the technical field service function to the SpectraVision customer
care representatives. The Company believes that this will enable it to provide
more attentive and responsive support to its hotel customers.
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.
Assuming a fixed number of hotels served of 1,750 sites, these contracted
service fees would be approximately $23.0 million, $21.6 million, $20.3 million
for the years ended December 31, 1995, 1996, 1997, respectively, and $20.3
million each year 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 incurred total
purchases to date from EDS for these components of approximately $28 million.
35
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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 accrues interest at 11.5% per annum with payment
in full on or before August 31, 1995. Additionally, the Company is 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 exceed the
payments made during this period, the excess will be due and payable on August
31, 1995. Notwithstanding 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. Accordingly, $16.0 million of system components classified in
video systems at December 31, 1994, will be accounted for as an operating lease
effective January 1, 1995. Included in Note 13 - Commitments under operating
leases are the amortized payments under the EDS Equipment Lease in the amount of
$5,638,000 in each year ending December 31, 1995, 1996 and 1997.
As a result of the changes in technology and field service operations, the
Company accrued charges in the amount of $7.0 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 $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. 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,
------------------------------
1994 1993 1992
------- ------- -------
(Dollars in thousands)
Cash interest paid $ 3,463 $43,854 $22,075
State and foreign income taxes paid $ 612 $ 2,191 $ 2,699
Non-cash investing and financing activities:
Accrued liabilities exchanged for equity $ - $- $ 1,800
Payment of preferred stock dividend in kind $ - $- $21,878
Issuance of common stock and CVRs in exchange for debt
pursuant to the 1992 Restructuring $ - $- $32,084
Capital lease obligation incurred on lease of equipment $13,484 $12,915 $ 2,511
Accrued proceeds from sale of notes for common stock $ - $ - $ 6,269
EDS equipment lease to be incurred (Note 3) $16,000 $ - $ -
36
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 - EXTRAORDINARY ITEMS
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.
In connection with the 1992 Restructuring, the Company issued 6,253,004
shares of Class B Common Stock in exchange for outstanding debentures originally
due in 2002. An extraordinary gain on extinguishment of debt in the amount of
$38.1 million, net of related unamortized debt issuance costs of $2.7 million,
was recognized. Additionally, the portion of costs relating to the debt
refinancing in the 1992 Restructuring of $14.7 million was recorded, resulting
in a net gain from debt restructuring of $23.4 million.
NOTE 7 - 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.
The net loss has been adjusted to give effect to the preferred stock dividend
issued each period through June 30, 1992. The average shares outstanding have
been restated in 1992 to reflect the effect of the 1-for-20 reverse stock split
effective on June 30, 1992. See Note 12 - Stockholders' Deficit. The weighted
average number of common shares outstanding and the preferred stock dividend for
each period are as follows (dollars in thousands):
Average Shares Preferred Dividend
-------------- ------------------
1994: 23,983,905 $ -
1993: 18,178,289 $ -
1992: 1,756,518 $ 21,878
The unaudited supplementary loss and loss per share of common stock before
extraordinary item and cumulative effect of change in accounting principle for
the year ended December 31, 1992, after giving effect to the 1992 Restructuring
as of the beginning of the year, was $254.3 million and $15.57 per share,
respectively. Unaudited supplementary loss and loss per share of common stock
before extraordinary item for the year ended December 31, 1993, after giving
effect to the 1993 Offerings as of the beginning of the year, was $45.3 million
and $1.89 per share, respectively.
NOTE 8 - DEBT
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. At March 10, 1995, the Company had no borrowing availability under the
Revolving Credit Facility. The Revolving Credit Facility matures October 5,
1997. All outstanding loans bear 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 will be payable quarterly in
arrears and interest on Eurodollar loans will be payable at the earliest of
either three months or the end of the applicable interest period. At December
31, 1994 there was $12,500,000 outstanding under the Revolving Credit Facility
at 10.75%.
37
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Revolving Credit Facility is 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 is senior to
the Reset Notes and CVRs and pari passu in right of payment with the Senior
Notes.
The Revolving Credit Facility contains 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 prohibits the Company from
making any cash payments with respect to the CVRs.
At December 31, 1994 the Company was not in compliance with the financial
covenants relating to its operating cash flow and total debt to cash flow ratio
requirements. Under the terms of the Revolving Credit Facility, the lenders
may, at their option, give notice that the amounts outstanding are immediately
due and payable. As discussed in Note 4 - 1995 Restructuring, the Company will
be seeking new sources of financing to replace its Revolving Credit Facility and
to provide for capital funding.
Canadian Bank Credit Facility: The Canadian Bank Credit Facility provides
borrowing up to US$7.35 million. The loan allows 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 bear
interest at the Eurodollar rate plus .75%, payable as the Eurodollar loans
mature or quarterly, whichever occurs earlier. The principal balance of the
Canadian Bank Credit Facility is payable in full in June 1995. At December 31,
1994, the Company had $7.35 million in Eurodollar loans at 6.75%. The loan is
secured by the $7.5 million Standby Letter of Credit provided by the Revolving
Credit Facility.
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.
38
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Senior Notes are senior to the Reset Notes and CVRs and pari passu in
right of payment to the Revolving Credit Facility.
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 and December 1, 1994 through the
issuance of additional Reset Notes in the amount of $33,973,000 (the "PIK
Option"). The annual interest rate on the Reset Notes for the interest period
for which such option was exercised was increased to 12.65%. On June 1, 1995
the Company has another PIK Option. On December 1, 1995 and each interest
payment thereafter, the Reset Note indenture requires interest to be paid in
cash.
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.....................101.25%
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 Contingent Value Rights 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.
39
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1993 and
1992 additional interest expense under this agreement and a previous similar
agreement was $23,000, $1,741,000 and $3,006,000, respectively. The Company
currently has no financial derivatives.
The following table indicates future maturities of all debt excluding
minimum annual rentals under capital lease obligations. Due to the Company's
non-compliance with the financial covenants under the Revolving Credit Facility,
the amount outstanding is classified as currently payable (dollars in
thousands):
1995........ $ 19,908
1996........ 50
1997........ 50
1998........ -
1999........ -
After 1999 457,063
---------
$ 487,071
=========
NOTE 9 - INCOME TAXES
As discussed in Note 2, the Company adopted Statement 109 in the fourth
quarter of 1992 and has applied the provisions of Statement 109 retroactively to
January 1, 1992. The cumulative effect of the change in accounting for income
taxes of $28,498,000 is determined as of January 1, 1992 and is reported
separately in the 1992 consolidated statement of operations. The effect on the
Company's 1992 loss before income taxes, extraordinary item and cumulative
effect of change in accounting principle, resulting from the adoption of
Statement 109, was approximately $850,000.
40
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The extraordinary gain recognized on the extinguishment of debt in the 1992
Restructuring is not recognized as taxable income because the 1992 Restructuring
occurred under Chapter 11 of the U.S. Bankruptcy Code. Accordingly, the total
income tax benefit of $5,267,000 for the year ended December 31, 1992 was
allocated to the loss before extraordinary items and cumulative effect of
accounting change. The income tax benefit attributable to continuing operations
for the years ended December 31, 1994, 1993 and 1992 consists of the following
(in thousands):
Year ended December 31,
--------------------------------
1994 1993 1992
---------- --------- ---------
CURRENT:
--------
U.S. Federal $ - $ - $ -
State and local (812) 1,275 2,087
Foreign 364 464 160
-------- ------- -------
$ (484) $ 1,739 $ 2,247
======== ======= =======
DEFERRED:
---------
U.S. Federal $(18,519) $(3,325) $(6,651)
State and local (9,946) (1,044) (818)
Foreign (7) (98) (45)
-------- ------- -------
$(28,472) $(4,467) $(7,514)
======== ======= =======
Income tax benefit for the years ended December 31, 1994, 1993, and 1992
differed from the amount computed by applying the U.S. Federal income tax rate
of 35 percent in 1994 and 1993 and 34 percent in 1992 to the loss before income
taxes, extraordinary items and cumulative effect of accounting change as a
result of the following (in thousands):
Year ended December 31,
--------------------------------
1994 1993 1992
---------- --------- ---------
Computed "expected" tax benefit $(99,122) $(16,025) $(93,673)
Change in income tax benefit resulting from:
Amortization and write-off of goodwill - - 75,979
State income taxes (6,993) 150 838
Current year losses for which no benefit is recognized 76,963 10,112 10,451
Other, net 232 3,305 599
-------- -------- --------
$(28,920) $ (2,728) $ (5,267)
======== ======== ========
41
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1994 and 1993 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):
1994 1993
-------- --------
Deferred tax assets:
Net operating loss carryforwards............................. $ 99,764 $ 91,279
Tax benefit of deferred state taxes.......................... 1,063 4,557
Original issue discount...................................... 25,034 5,831
Other........................................................ 9,226 10,740
------ -------
Total gross deferred tax assets.............................. 135,087 112,407
Less valuation allowance.................................... (113,375) (38,240)
---------- ---------
Net deferred tax assets..................................... $ 21,712 $ 74,167
---------- ---------
Deferred tax liabilities:
Intangible assets, principally due to differences in basis.. $ 20,000 $101,657
Video systems and fixed assets, principally due to
differences in depreciation................................ 6,568 6,603
Other....................................................... 1,900 1,136
========== =========
Total gross deferred tax liabilities........................ 8,468 109,396
========== =========
Net deferred tax liability.................................. $ 6,756 $ 35,229
========== =========
At January 1, 1994 the valuation allowance for deferred tax assets was
$38,240,000. The net change in the total valuation allowance for the years
ended December 31, 1994 and 1993 were increases of $75,135,000 and $23,656,000,
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, 1994, 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, 1994, SpectraVision had an unused net operating loss
("NOL") carryforward for federal income tax purposes of $285 million which will
expire in years 2002 through 2009. 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.
42
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the
"1993 Act") was signed into law which increased the corporate tax rate from 34%
to 35%, effective for taxable years beginning on or after January 1, 1993, on
that portion of regular taxable income in excess of $10 million. The 1993 Act
also imposes an additional tax on corporate taxable income in excess of $15
million equal to the lesser of (i) 3% of such excess or (ii) $100,000. In
accordance with Statement 109, the increase in the tax rate resulted in an
increase of the Company's deferred tax liability and a reduction of $690,000 of
tax benefits in the third quarter of 1993.
NOTE 10 - STOCK OPTIONS
The 1994 Management Incentive Equity Plan (the "1994 Option Plan") was
approved by shareholders 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
shareholder 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 shareholder 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, 1994.
43
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1991 3,010 $37.30
Granted - -
Exercised - -
Canceled - -
-------
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
=======
Exercisable at December 31, 1994 55,171 $7.875 - $37.30
=======
NOTE 11 - CONTINGENT VALUE RIGHTS
In November 1992, the Company issued 3,269,544 CVRs. Holders of the CVRs
are entitled to a payment (the "Mandatory Redemption Payment") on November 23,
1995 (the "Mandatory Redemption Date"). For each CVR, the holder will receive a
payment equal to the lesser of $6.12 (the "Ceiling Price") or the amount, if
any, by which $30.59 (the "Target Price") exceeds the current market value per
share of Class B Common Stock, subject to certain adjustments. The Mandatory
Redemption Payment must be made in cash, except where agreements under senior
obligations of the Company prohibit cash payments. Under the terms of the
Revolving Credit Facility, the Company is prohibited from making the payment in
cash. In accordance with the CVR agreement, the Mandatory Redemption Payment
may be made, at the Company's option, in debt securities or shares of Class B
Common Stock, or any combination thereof. The Company has recorded the maximum
obligation as temporary equity and recorded an adjustment to equity in the
amount necessary to adjust the net carrying value of the CVRs to the present
value of $14,923,000 at the date of issuance of the CVRs.
44
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 - 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. No additional
shares of Class A Common Stock shall be issued subsequent to the effective date
of the 1992 Restructuring.
The indentures governing the Reset Notes and the Senior Notes and the
Revolving Credit Facility 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
1994, 1993 and 1992:
- -----------------------------------------------------------------------------
16% CUMULATIVE PREFERRED STOCK 1994 1993 1992
- -----------------------------------------------------------------------------
Beginning of the year - - 10,510,441
Stock dividend - - 874,772
Canceled in 1992 Restructuring - - (11,385,213)
End of the year - - -
- -----------------------------------------------------------------------------
CLASS A COMMON STOCK 1994 1993 1992
- -----------------------------------------------------------------------------
Beginning of the year 4,745,526 5,145,526 149,662
Issued in 1992 Restructuring - - 4,995,864
Converted to Class B Common Stock (152,000) (400,000) -
End of the year 4,593,526 4,745,526 5,145,526
- -----------------------------------------------------------------------------
CLASS B COMMON STOCK 1994 1993 1992
- -----------------------------------------------------------------------------
Beginning of the year 19,238,379 11,188,379 -
Issued in 1992 Restructuring - - 11,188,379
Issued in 1993 Offering - 7,650,000 -
Converted from Class A Common Stock 152,000 400,000 -
End of the year 19,390,379 19,238,379 11,188,379
=============================================================================
On June 30, 1992, the Company authorized a 1-for-20 reverse stock split of
its Common Stock. The Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements have been restated to reflect the effect of
the reverse stock split.
45
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1994 there were 4,322,260 warrants outstanding.
NOTE 13 - 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
$5,083,000, $4,038,000, and $2,934,000 in 1994, 1993 and 1992, respectively.
Future minimum annual rentals under lease arrangements, including payments under
the EDS Equipment Lease, are as follows (in thousands):
Capital Leases Operating Leases
-------------- ----------------
1995................... $ 7,933 $10,520
1996................... 6,525 10,212
1997................... 6,092 13,263
1998................... 6,233 4,175
1999................... 3,046 3,636
Thereafter - 15,802
------- -------
$29,829 $57,608
=======
Less imputed interest (6,337)
-------
$23,492
=======
In connection with the EDS Service and Technology Agreement, certain
operating lease payments are reimbursable to the Company by EDS. The amount of
reimbursed rents included in Operating Leases above are $488,000, $429,000,
$363,000, $241,000, $136,000 and $455,000 for the years ended December 31, 1995,
1996, 1997, 1998, 1999 and thereafter, respectively. See Note 3 - EDS Service
and Technology Agreement for additional description of other commitments.
NOTE 14 - 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 with the 1993 Offerings. The plaintiffs seek
unspecified damages, prejudgment interest, and fees and costs of the plaintiffs.
The Company believes that it has meritorious defenses to the claims, and it
intends to vigorously defend itself.
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.
46
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1994 and 1993 (in thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
1994 (a)
- ----
Revenues $ 37,100 $ 37,700 $ 34,602 $ 34,145
Operating loss (3,392) (2,163) (7,873) (214,795)
Income taxes (benefit) (1,821) (1,782) 61 (25,378)
Net loss applicable
to common stockholders (15,218) (14,094) (22,631) (202,341)
Loss per common share
before extraordinary item $ (0.63) $ (0.59) $ (0.95) $ (8.43)
1993 (b)
- ----
Revenues $ 41,572 $ 42,496 $ 40,257 $ 38,668
Operating income (loss) 4,439 601 (449) (1,386)
Income tax benefit (1,304) 113 (210) (1,327)
Loss before extraordinary item (6,827) (10,999) (11,677) (13,554)
Net loss applicable
to common stockholders (6,827) (10,999) (11,677) (16,253)
Loss per common share
before extraordinary item $ (0.42) $ (0.67) $ (0.72) $ (0.57)
(a) The fourth quarter of 1994 includes the revaluation of hotel contracts and
write off of patent costs in the amount of $196,256,000.
(b) The fourth quarter of 1993 includes an extraordinary loss resulting from
extinguishment of debt in the amount of $2,699,000.
47
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 16 - OPERATIONS BY GEOGRAPHIC AREA
The following table presents the Company's revenues and operating loss before
income taxes for the years ended December 31, 1994, 1993 and 1992 and
identifiable assets net of accumulated depreciation and amortization as of
December 31, 1994, 1993 and 1992 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):
1994 1993 1992
----------- ----------- -----------
Revenues:
United States $ 119,869 $ 140,457 $ 148,795
Canada 12,879 12,867 11,532
Other 10,799 9,669 8,294
--------- --------- ---------
Total Revenues $ 143,547 $ 162,993 $ 168,621
========= ========= =========
Operating Income (Loss)
Before Corporate Expenses:
United States $ (21,707) $ 13,562 $ 28,538
Canada 2,035 1,518 (1,537)
Other 2,944 3,113 2,635
--------- --------- ---------
(16,728) 18,193 29,636
Less corporate expenses:
Parent company expenses 1,993 2,105 2,846
Amortization of corporate
intangibles 13,246 12,883 16,941
Write-off of goodwill - - 218,453
Write-down of hotel contracts 196,256 - -
Interest expense 54,981 48,990 66,905
--------- --------- ---------
Operating Loss Before
Income Taxes $(283,204) $( 45,785) $(275,509)
========= ========= =========
Identifiable Assets, net:
United States $ 166,782 $ 137,151 $ 111,435
Canada 9,276 10,958 9,984
Other 9,819 7,650 7,337
--------- --------- ---------
185,877 147,701 124,937
Hotel Contracts, net 50,000 253,508 266,006
Corporate Assets 6,945 211 6,731
--------- --------- ---------
Total Assets, net $ 242,822 $ 409,478 $ 401,330
========= ========= =========
PPV Rooms: (unaudited)
United States 527,608 584,354 628,568
Canada 73,987 74,777 71,436
Other 33,783 25,468 22,567
--------- --------- ---------
635,378 684,599 722,571
========= ========= =========
48
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 17 - RELATED PARTIES
Pursuant to a management services agreement effective as of the 1989
Acquisition, Rainbow provided to the Company and its subsidiaries technical and
financial advice, information and assistance, as the Company requested, in
connection with the management and conduct of the business and affairs of the
Company (the "Old Management Agreement"). In connection with the 1992
Restructuring, the Old Management agreement was terminated on November 23, 1992.
Fees expensed under this agreement were $364,000 for the year ended December 31,
1992.
Pursuant to a separate agreement effective as of the 1989 Acquisition,
Rainbow (i) arranged for and negotiated on behalf of the Company a senior credit
facility from Wells Fargo Bank, (ii) arranged for and guaranteed the repayment
of a temporary bridge loan, (iii) rendered significant financial advice in
connection with the refinancing, and (iv) continued to provide financial advice
to the Company. In consideration, the Company accrued a fee payable to Rainbow
for its services as financial advisor in the amount of $3,500,000 (the
"Refinancing Fee").
In consideration of the guarantee by Mr. Marvin Davis of repayment of the
Company's then outstanding supplemental credit facility, the Company accrued a
fee payable to Mr. Davis equal to one percent per annum of any outstanding
principal amount under the supplemental credit facility (the "Supplemental Fee
Agreement"). In connection with the 1992 Restructuring, the Supplemental Fee
Agreement was terminated on November 23, 1992. Expenses under the Supplemental
Fee Agreement charged to interest expense were $174,000 for the year ended
December 31, 1992.
On December 19, 1991, the Company entered into a Contribution Agreement
with Rainbow Company. The Contribution Agreement provided for the contributions
of capital by Rainbow on December 31, 1991, March 31, 1992, and June 30, 1992
(the "Contribution Dates") in amounts equal to the amount necessary to comply
with certain financial covenants under the old bank credit facility. The
Contribution Agreement also provided for payment of the capital contribution to
be made by the cancellation, in the amount of the contribution, of the Company's
obligations under the Old Management Agreement, Supplemental Fee Agreement and
Refinancing Fee Agreement (collectively, the "Agreements"). Accordingly, for
the year ended December 31, 1992 obligations under the Agreements in the amount
of $1,800,000 were converted and contributed to the Company's paid-in-capital.
In connection with the 1992 Restructuring, the Company terminated the Agreements
on November 23, 1992 and canceled outstanding obligations under the Old
Management Agreement and the Supplemental Fee Agreement in the amount of
$242,000.
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' 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.
49
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
Pursuant to an employment agreement dated May 25, 1987, Mr. Howard T.
Buchanan, former Chairman of the Board and Chief Executive Officer of
SpectraVision and currently a director of the Company, receives $12,500 per
month and customary employee benefits not to exceed $30,000 in any 12-month
period in satisfaction of a change-of-control clause, which was triggered by the
1987 Acquisition and accrued by the Company at that time. This agreement expires
in April 1995. Payments under this agreement were $166,500 and $167,250 for the
years ended December 31, 1994 and 1993, respectively. In 1985, the Board of
Directors of the Company adopted the Executive Retirement Plan to provide
retirement and death benefits to its executive officers, which plan was
terminated by the Company in 1987 for new participants. Mr. Buchanan is the
only current director or officer of the Company covered by the Executive
Retirement Plan. The plan provides annual payments to Mr. Buchanan for twenty
years after his retirement and were accrued in connection with the 1987
Acquisition. In the event of the death of an executive officer, the Company
will pay his beneficiaries the remaining benefits. The benefits under the plan
for executive officers are unfunded. The Company, however, has purchased
insurance to cover its costs to pay the death benefits described above. In 1994
and 1993 the Company paid premiums of $26,000 to insure the death benefit under
the plan. Mr. Buchanan received $150,000 under this plan for 1994 and 1993.
NOTE 18 - 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. 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 $425,000,
$564,000, and $492,000 for 1994, 1993, and 1992, respectively. In January 1995,
the Company suspended its matching contribution pending the proposed 1995
Restructuring.
50
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 19 - GOODWILL AND HOTEL CONTRACTS
The historical basis of the Company's recorded value of goodwill was the
excess purchase price paid over the fair value of the net assets acquired by
Rainbow in the 1989 Acquisition. The financial forecast of the Company, at the
time of the 1989 Acquisition, was developed using the historical experience of
the Company, industry trends and prior management's estimate of future
performance. Subsequent to the 1989 Acquisition, the Company sustained
significant recurring losses and did not meet the previously prepared forecast
of revenue, net income and operating cash flow. The Company realized that the
trends it was experiencing were primarily a result of the increasing competitive
pressures and rapid technological advances in the Company's industry. These
factors raised substantial doubt about the Company's ability to achieve the
results of operations forecasted at the time of the 1989 Acquisition and
indicated that the value of the previously recorded goodwill would not be
realized. Accordingly, the Company wrote off the remaining book value of
goodwill at June 30, 1992 in the amount of $218,453,000.
The hotel contracts were recorded at fair value as a result of the 1989
Acquisition and are 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 $191,010,000 of
the carrying amount of hotel contracts at December 31, 1994 which resulted in a
remaining balance of hotel contracts of $50,000,000 as of December 31, 1994.
Additionally, the Company wrote-off $5.2 million in patent costs at December 31,
1994.
NOTE 20 - 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 or Spectradyne (the "Subordinated
Guarantees"). Such guarantee is full, unconditional and joint and several.
SPI Newco and Spectradyne also guarantee the indebtedness outstanding under
the Revolving Credit Facility which guarantee ranks senior to the Subordinated
Guarantees.
The following supplemental combining financial information presents:
(1) Statements of Financial Position as of December 31, 1994 and 1993 and
Statements of Operations and Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992 of (a) SpectraVision, the parent, (b) SPI Newco
and Spectradyne, the Guarantors, (c) combined non-guarantor subsidiaries and (d)
the consolidated Company.
(2) Elimination entries required to consolidate SpectraVision, SPI Newco
and Spectradyne and the combined nonguarantor subsidiaries.
51
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1994
(Dollars in thousands)
Parent Guarantor Subsidiaries Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
------------ ----------- ------------ ---------------- ---------------- -------------
ASSETS
Cash and Cash $ 2 $ - $ 260 $ 1,055 $ - $ 1,317
Equivalents
Accounts Receivable,
less allowance for
doubtful accounts - - 16,646 3,771 - 20,417
Prepaids and Other
Assets 6,942 1 7,499 1,288 - 15,730
Intercompany
receivables 163,604 160,096 16,547 100 (340,347) -
Intercompany note
receivable 350,000 - - - (350,000) -
Intercompany
investments 127,150 477,150 3,072 - (607,372) -
Video Systems - - 260,991 34,637 - 295,628
Less accumulated
depreciation
and amortization - - (128,146) (20,899) - (149,045)
------------ ----------- ------------ ---------------- ---------------- -------------
Total Video Systems - - 132,845 13,738 - 146,583
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
------------ ----------- ------------ ---------------- ---------------- -------------
TOTAL ASSETS $ 647,698 $ 637,247 $ 235,494 $ 20,102 $ (1,297,719) $ 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 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 392,185 127,150 477,150 2,652 (606,952) 392,185
Retained Deficit (247,600) (351) (505,411) (13,540) 1,173 (765,729)
Foreign Currency
Translation
Adjustment - - - 1,668 (1,173) 495
------------ ----------- ------------ ---------------- ---------------- -------------
Total Stockholders'
Equity (Deficit) 144,609 126,799 (28,261) (8,800) (607,372) (373,025)
------------ ----------- ------------ ---------------- ---------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 647,698 $ 637,247 $ 235,494 $ 20,102 $ (1,297,719) $ 242,822
============ =========== ============ ================ ================ =============
52
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1993
(Dollars in thousands)
Parent Guarantor Subsidiaries Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
------------ ----------- ----------- ------------- --------------- ---------------
ASSETS
Cash and Cash
Equivalents $ 6 $ 1 $ 13,193 $ 1,085 $ - $ 14,285
Accounts Receivable,
less allowance for
doubtful accounts - - 14,878 3,182 - 18,060
Prepaids and Other
Assets 8,262 - 8,167 1,198 - 17,627
Intercompany
receivables 112,026 108,521 14,852 - (235,399) -
Intercompany note
receivable 350,000 - - - (350,000) -
Intercompany
investments 127,150 477,150 3,072 - (607,372) -
Video Systems - - 208,464 31,474 239,938
Less accumulated
depreciation
and amortization - - (123,840) (17,413) - (141,253)
------------ ----------- ----------- ------------- --------------- ---------------
Total Video Systems - - 84,624 14,061 - 98,685
Land, Building and
Equipment - - 10,880 1,180 - 12,060
Less accumulated
depreciation - - (3,709) (1,038) - (4,747)
------------ ----------- ----------- ------------- --------------- ---------------
Total Land, Building
and Equipment - - 7,171 142 - 7,313
Hotel Contracts (net) - - 253,508 - - 253,508
------------ ----------- ----------- ------------- --------------- ---------------
TOTAL ASSETS $ 597,444 $ 585,672 $ 399,465 $ 19,668 $ (1,192,771) $ 409,478
============ =========== =========== ============= =============== ===============
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
Liabilities
Accounts payable $ - $ - $ 12,027 $ 321 $ - $ 12,348
Other accrued
liabilities 3,692 - 18,798 808 - 23,298
Income taxes - - 35,239 650 - 35,889
Intercompany
payables - 108,870 108,521 18,008 (235,399) -
Intercompany note
payable - 350,000 - - (350,000) -
Debt
Canadian Bank
Credit Facility - - - 7,350 - 7,350
11.5% Senior
Discount Notes 154,055 - - - - 154,055
11.65% Senior
Reset Notes 260,795 - - - - 260,795
Capitalized Lease
Obligations - - 13,470 558 - 14,028
Other Debt - - 200 129 - 329
------------ ----------- ----------- ------------- --------------- ---------------
Total Debt 414,850 - 13,670 8,037 - 436,557
Contingent Value Rights 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 392,185 127,150 477,150 2,652 (606,952) 392,185
Retained Deficit (233,307) (348) (265,940) (11,850) 1,173 (510,272)
Foreign Currency
Translation
Adjustment - - - 622 (1,173) (551)
------------ ----------- ----------- ------------- --------------- ---------------
Total Stockholders'
Equity (Deficit) 158,902 126,802 211,210 (8,156) (607,372) (118,614)
------------ ----------- ----------- ------------- --------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 597,444 $ 585,672 $ 399,465 $ 19,668 $ (1,192,771) $ 409,478
============ =========== =========== ============= =============== ===============
53
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(Dollars in thousands)
Parent Guarantor Subsidiaries Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
--------- ----------- ---------------- ------------ ------------ --------------
Revenues $ - $ - $ 123,301 $ 24,659 $ (4,413) $ 143,547
Costs and Expenses
Direct costs - - 50,477 7,439 - 57,916
Depreciation and amortization 20 - 45,353 5,161 - 50,534
Write-down of hotel contracts - - 196,256 - - 196,256
Operating expenses - - 9,901 3,403 - 13,304
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 - - 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) (226,642) (741) 1,173 (228,223)
Interest expense (net) 54,628 - (239) 592 - 54,981
Intercompany interest exp (income) (42,345) 42,345 - - - -
Intercompany dividend exp (income) - (42,345) 42,345 - - -
----------- ----------- ----------- ----------- ---------- ----------
Income (Loss) Before Income Taxes (14,293) (3) (268,465) (1,333) 1,173 (283,204)
Income Taxes
State and foreign provision - - (812) 364 - (448)
Deferred benefit - - (28,465) (7) - (28,472)
----------- ----------- ----------- ----------- ---------- ----------
Total Income Tax Benefit - - (29,277) 357 - (28,920)
----------- ----------- ----------- ----------- ---------- ----------
Net Income (Loss) $ (14,293) $ (3) $ (239,471) $ (1,690) $ 1,173 $ (254,284)
========== ========= =========== ========== ========== ===========
54
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(Dollars in thousands)
Parent Guarantor Subsidiaries Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
----------- ----------- -------------- ------------- ------------- --------------
Revenues $ - $ - $ 143,493 $ 23,579 $ (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 charge - - 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 - - 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
Interest expense (net) 47,762 - 696 532 - 48,990
Intercompany Interest
Exp (Income) (57,532) 57,532 - - - -
Intercompany Dividend
Exp (Income) - (57,532) 57,532 - - -
----------- ----------- -------------- ------------- ------------- --------------
Income (Loss) Before
Income Taxes and
Extraordinary Item 7,634 (48) (53,302) (69) - (45,785)
Income Taxes
State and foreign - - 1,275 464 - 1,739
provision
Deferred benefit - - (4,369) (98) - (4,467)
----------- ----------- -------------- ------------- ------------- --------------
Total Income Tax (Benefit) - - (3,094) 366 - (2,728)
----------- ----------- -------------- ------------- ------------- --------------
Income (Loss) Before
Extraordinary Item 7,634 (48) (50,208) (435) - (43,057)
Extraordinary Item
Loss from debt
extinguishment (2,699) - - - - (2,699)
----------- ----------- -------------- ------------- ------------- --------------
Net Income (Loss) $ 4,935 $ (48) $ (50,208) $ (435) $ - $ (45,756)
=========== =========== ============== ============= ============= ==============
55
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992
(Dollars in thousands)
Parent Guarantor Subsidiaries Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
------------ ----------- ------------- ------------- ------------ -------------
Revenues $ 242 $ - $ 150,605 $ 20,865 $ (3,091) $ 168,621
Costs and Expenses
Direct costs - - 50,619 5,909 - 56,528
Depreciation and
amortization 3,078 67 44,043 6,862 - 54,050
Write-off of goodwill 132,608 37 87,361 (1,553) - 218,453
Operating expenses - - 21,912 3,370 - 25,282
Selling and marketing
expenses - - 3,999 200 - 4,199
General and
administrative expenses 2,843 3 11,395 1,749 - 15,990
Research and
development (net) - - 1,143 176 - 1,319
Exchange (gain) loss - - (102) 1,506 - 1,404
Intercompany charges - - - 3,091 (3,091) -
--------- ----------- ------------ ------------- ------------ -------------
Total costs and
expenses 138,529 107 220,370 21,310 (3,091) 377,225
Operating Loss (138,287) (107) (69,765) (445) - (208,604)
Interest expense (net) 65,966 - 428 511 - 66,905
Intercompany Interest
Exp (Income) (20,976) 20,976 - - - -
Intercompany Dividend
Exp (Income) - (20,976) 20,976 - - -
-------- ----------- ------------ ------------- ------------ -------------
Loss Before Income Taxes,
Extraordinary
Item and Cumulative
Effect of Change
in Accounting Principle (183,277) (107) (91,169) (956) - (275,509)
Income Taxes
State and foreign
provision - - 2,082 165 - 2,247
Deferred benefit - - (7,514) - - (7,514)
------------ ----------- ------------ ------------- ----------- --------------
Total Income Tax (Benefit) - - (5,432) 165 - (5,267)
------------ ----------- ------------ ------------- ----------- --------------
Loss Before Extraordinary
Item and
Cumulative Effect of
Change in
Accounting Principle (183,277) (107) (85,737) (1,121) - (270,242)
Extraordinary Item
Gain on debt
restructuring 23,378 - - - - 23,378
Cumulative Effect of
Change in
Accounting Principle - - (28,175) (323) - (28,498)
------------ ------------ ------------ ------------- ----------- -------------
Net Loss $ (159,899) $ (107) $ (113,912) $ (1,444) $ - $ (275,362)
============ ============ ============ ============= =========== =============
56
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(Dollars in thousands)
Parent Guarantor Subsidiaries 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 equivalents at
beginning of period 6 1 13,193 1,085 14,285
----------- --------------- --------------- --------------- -----------------
Cash and equivalents at
end of period $ 2 $ - $ 260 $ 1,055 $ 1,317
=========== =============== =============== =============== =================
57
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
(Dollars in thousands)
Parent Guarantor Subsidiaries Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Consolidated
------------ ----------- -------------- -------------- --------------
Operating Activities:
Net cash provided by
(used in) operating
activities $ (39,519) $ (4) $ 31,138 $ 6,228 $ (2,157)
------------ ----------- -------------- -------------- --------------
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 Bank
Credit Facility $ 23,000 $ - $ - $ - $ 23,000
Repayment of
Supplemental Bank
Credit Facility (31,000) - - - (31,000)
Repayment of Bank
Credit Facility (180,000) - - - (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
------------ ----------- -------------- -------------- --------------
Net cash provided by
(used in) financing
activities $ 39,510 $ - $ (1,043) $ (389) $ 38,078
------------ ----------- -------------- -------------- --------------
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 equivalents at
beginning of period 15 5 9,160 413 9,593
------------ ----------- -------------- -------------- --------------
Cash and equivalents at
end of period $ 6 $ - $ 13,193 $ 1,085 $ 14,285
============ =========== ============== ============== ==============
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
59
PART III
Information called for by Items 10-13 is incorporated by reference from the
SpectraVision, Inc. - 1995 Annual Meeting of Stockholders - Notice and Proxy
Statement (to be filed pursuant to Regulation 14A not later than 120 days after
the close of fiscal year) which meeting involves the election of directors, in
accordance with General Instruction G to the Annual Report on Form 10-K.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of SpectraVision, Inc.
are included in Item 8:
Independent Auditors' Report
Consolidated Statements of Financial Position at December 31, 1994 and
1993
Consolidated Statements of Operations for the years ended December 31,
1994, 1993 and 1992
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992
Notes to the Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules of
SpectraVision,Inc. are included:
Schedule II -- Valuation Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and,
therefore, have been omitted.
61
(A)(3) EXHIBITS
Exhibit No. Description
----------- -----------
2.0 Order dated October 29, 1992 confirming debtors' plan of
reorganization under Chapter 11 of the bankruptcy code
(Filed as Exhibit 2 to the Company's Report on Form 10-Q
for the period ended September 30, 1992 (Commission File
No. 1-9724) and incorporated herein by reference)
3.1 Certificate of Incorporation of SPI Holding, Inc. (Filed as
Exhibit 3(a) to the Company's Registration Statement on
Form S-4 (Registration No. 33-16859} and incorporated
herein by reference)
3.1.1 Certificate of Amendment of the Certificate of
Incorporation of SPI Holding, Inc. (Filed as Exhibit 3(b)
to the Company's 1988 Form 10-K (Commission File No. 1-
9724} and incorporated herein by reference)
3.1.2 Certificate of Amendment of the Certificate of
Incorporation of SPI Holding, Inc. filed April 12, 1989
(Filed as Exhibit 3 to the Company's Report on Form 8-K
dated April 26, 1989 (Commission File No. 1-9724) and
incorporated herein by reference)
3.1.3 Certificate of Amendment of the Certificate of
Incorporation of SPI Holding, Inc. filed September 13, 1991
(Filed as Exhibit 3.1.3 to the Company's Registration
Statement on Form S-4 (Registration No. 33-43199) and
incorporated herein by reference)
3.1.4 Certificate of Amendment of the Certificate of
Incorporation of SPI Holding, Inc. filed July 1, 1992
(Filed as Exhibit 3.1.4 to the Company's Registration
Statement on Form S-4 (Registration No. 33-43199) and
incorporated herein by reference)
3.1.5 Certificate of Amendment of the Certificate of
Incorporation of SPI Holding, Inc. filed November 23, 1992
(Filed as Exhibit 3.1.5 to the Company's 1992 Form 10-K
(Commission File No. 1-9724) and incorporated herein by
reference)
3.1.6 Certificate of Amendment of the Certificate of
Incorporation of SectraVision, Inc. (Filed as Exhibit 3.1.6
to the Company's Report of Form 10-Q for the period ended
June 30, 1994 (Commission File No. 1-9724) and icorporated
herein by reference)
3.2 Amended and Restated Bylaws of SPI Holding, Inc. (filed as
Exhibit 3.2 to the Company's Registration Statement on Form
S-4 (Registration No. 33-43199) and incorporated herein by
reference)
3.3 Certificate of Incorporation of Spectradyne, Inc. (Filed as
Exhibit 3.4 to the Company's Registration Statement on Form
S-1/S-3 (Registration No. 33-62502) and incorporated herein
by reference)
3.4 Amended and Restated Bylaws of Spectradyne, Inc. (Filed as
Exhibit 3.5 to the Company's Registration Statement on Form
S-2/S-3 (Registration No. 33-62502) and incorporated herein
by reference)
62
(A)(3)33 EXHIBITS (CONTINUED)
Exhibit No. Description
----------- -----------
3.6 Certificate of Incorporation of SPI Newco, Inc. (Filed
as Exhibit 3.6 to the Company's Registration Statement
on Form S-1/S-3 (Registration No. 33-62502) and
incorporated herein by reference)
3.7 By-Laws of SPI Newco, Inc. (Filed as Exhibit 3.7 to
the Company's Registration Statement on Form S-1/S-3
(Registration No. 33-62502) and incorporated herein by
reference)
4.1 Indenture dated as of November 23, 1992 by and among
SPI Holding, Inc., Spectradyne, Inc., SPI Newco, Inc.,
and U.S. Trust Company of Texas, N.A., as Trustee, re:
11 1/2% Senior Subordinated Reset Notes due 2002
(Filed as Exhibit 4.2 to the Company's 1992 Form 10-K
(Commission File No. 1-9724) and incorporated herein
by reference)
4.2 Form of Note (Filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-1/S-2 (Registration
No. 33-66762) and incorporated herein by reference)
4.4 Contingent Value Rights Agreement dated as of November
23, 1992 by and among SPI Holding, Inc., Spectradyne,
Inc., and U.S. Trust Company of Texas, N.A., as
Trustee, re: Contingent Value Rights (Filed as Exhibit
4.3 to the Company's 1992 Form 10-K (Commission File
No. 1-9724) and incorporated herein by reference)
4.5 Form of Indenture dated as of October 1, 1993 by and
among SPI Holding, Inc., Spectradyne, Inc., SPI Newco,
Inc., and First Trust National Association, as
Trustee, re: 11 1/2% Senior Discount Notes due 2001
(Filed as Exhibit 4.5 to the Company's Registration
Statement on Form S-1/S-3 (Registration No. 33-66762)
and incorporated herein by reference)
63
(A)(3) EXHIBITS (CONTINUED)
Exhibit No. Description
- ----------- -----------
10.9 Agreement dated January 1, 1990 between Spectradyne,
Inc. and International Alliance Theatrical Stage
Employees and Moving Picture Machine Operators of the
United States and Canada, AFL-CIO (filed as Exhibit
10.1 to the Company's Registration Statement on Form S-
4 (Registration No. 33-43199) and incorporated herein
by reference)
10.12 Warrant Agreement dated as of October 8, 1987, between
SPI Holding, Inc. and the rights agent thereunder
(Filed as Exhibit 10(u) to the Company's 1988 Form 10-K
(Commission File No. 1-9724) and incorporated herein by
reference)
10.13 Terms and conditions of Credit Facilities dated as of
April 5, 1990 between The Royal Bank of Canada and
Spectravision of Canada, Inc. (filed as Exhibit 10.10
to the Company's Registration Statement on Form S-4
(Registration No. 33-43199) and incorporated herein by
reference)
10.14 Management Services Agreement dated as of November 23,
1992 between SPI Holding, Inc. and Rainbow Company
(Filed as Exhibit 10.11 to the Company's 1992 Form 10-K
(Commission File No. 1-9724) and incorporated herein by
reference)
10.15 Employment Agreement dated as of January 28, 1992
between SPI Holding, Inc., Spectradyne, Inc. and Albert
D. Jerome (Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-4 (Registration No.
33-43199) and incorporated herein by reference)
10.16 Employment Agreement dated August 31, 1994 between
SpectraVision and Gary Weik
10.17 Amendment Number One dated January 1, 1995 to
Employment Agreement between SpectraVision and
Gary Weik
10.18 Restated Employment Agreement dated September 21, 1994
between SpectraVision, Inc. and Richard M. Gozia
10.19 Restated Employment Agreement dated April 5, 1993
between SpectraVision, Inc. and Harry S. Budow
10.20 Employment Agreement dated January 1, 1995 between
SpectraVision, Inc. and Howard D. Gardner
10.21 Restated Employment Agreement dated December 5, 1994
between SpectraVision, Inc. and Elaine Parrish
10.22 Executive Retirement Plan (Filed as Exhibit 10(g) to
Spectradyne, Inc.'s 1986 Form 10-K (Commission File No.
0-9312) and incorporated herein by reference)
10.23 Management Incentive Bonus Plan of SpectraVision, Inc.
dated February 2, 1994 (Filed as Exhibit 10.17 to the
Company's 1993 Form 10-K (Commission File No. 1-9724)
and incorporated herein by reference.)
22 Subsidiaries of SpectraVision, Inc.
27 Financial Data Schedule for the year ended December 31,
1994
_______________
(b) REPORTS ON FORM 8-K
None
64
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
RICHARDSON, STATE OF TEXAS ON APRIL 5, 1995.
SpectraVision, Inc.
By: /s/ Gary G. Weik
---------------------------------
Gary G. Weik
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE
SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ GARY G. WEIK Chief Executive Officer April 5, 1995
- -------------------------- -------------
(Gary G. Weik) (Principal Executive Officer)
Executive Vice President
/s/ RICHARD M. GOZIA and Chief Financial Officer April 5, 1995
- -------------------------- -------------
(Richard M. Gozia) (Principal Financial Officer)
/s/ NANCY J. DEEMER Vice President and Controller April 5, 1995
- -------------------------- -------------
(Nancy J. Deemer) (Principal Accounting Officer)
65
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ JOHN F. BERARDI Director April 5, 1995
- -------------------------- ---------------
John F. Berardi
/s/ MICHAEL C. COLLERAN Director April 5, 1995
- -------------------------- ---------------
Michael C. Colleran
/s/ JOHN DAVIS Director April 5, 1995
- -------------------------- ---------------
John Davis
/s/ MARVIN DAVIS Director April 5, 1995
- -------------------------- ---------------
Marvin Davis
/s/ LEONARD GOLDBERG Director April 5, 1995
- -------------------------- ---------------
Leonard Goldberg
/s/ GERALD S. GRAY Director April 5, 1995
- -------------------------- ---------------
Gerald S. Gray
/s/ SIDNEY POITIER Director April 5, 1995
- -------------------------- ---------------
Sidney Poitier
/s/ MICHAEL J. SEIBERT Director April 5, 1995
- -------------------------- ---------------
Michael J. Seibert
/s/ STEPHEN D. SILBERT Director April 5, 1995
- -------------------------- ---------------
Stephen D. Silbert
66
SIGNATURE TITLE DATE
- --------- ----- ----
Director
- -------------------------- ---------------
Skip Victor
/s/ KENNETH ZIFFREN Director April 5, 1995
- -------------------------- ---------------
Kenneth Ziffren
Director
- -------------------------- ---------------
Albert D. Jerome
67
SPECTRAVISION, INC.
Schedule II
VALUATION ACCOUNTS
------------------
COL. A COL. B COL. C COL. D COL. E
Additions
-----------------------------------
Balance at Charged to Balance at
Description Beginning of Period Costs & Expenses Charged to Other Deductions End of Period
---------------------------- ------------------- ---------------- ---------------- ---------- -------------
From January 1, 1994 To December 31, 1994
Deferred tax asset valuation allowance $ 38,240,000 $ 75,135,000 $ - $ - $ 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
From January 1, 1992 To December 31, 1992
Deferred tax asset valuation allowance $ - $ 14,584,000 $ - $ - $14,584,000
Bad debt allowance 438,000 765,000 - 679,000 524,000
68