<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER: 1-9724
SPECTRAVISION, INC.
-------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2182004
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 NORTH PLANO ROAD, RICHARDSON, TEXAS 75081
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(214) 234-2721
--------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes X No
----- -----
Number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Outstanding at
Title of each Class August 12, 1994
-------------------------------------- ---------------
Class A Common Stock, $0.001 Par Value 4,593,526
Class B Common Stock, $0.001 Par Value 19,390,379
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Statements of Financial Position
as of June 30, 1994 (unaudited) and December 31, 1993 . . . . . . . . . . 2
Condensed Consolidated Statements of Operations
for the three months ended June 30, 1994 and 1993 (unaudited) . . . . . . 4
Condensed Consolidated Statements of Operations
for the six months ended June 30, 1994 and 1993 (unaudited) . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1994 and 1993 (unaudited) . . . . . . . 6
Notes to the Condensed Consolidated Financial Statements . . . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 16
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<PAGE> 4
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 2,027 $ 14,285
Accounts Receivable 22,222 18,060
Prepaids and Other Assets 11,976 9,569
Video Systems
Installations In-Process 49,374 28,157
Completed Systems 228,605 211,781
--------- ---------
277,979 239,938
Less accumulated depreciation and amortization (152,825) (141,253)
--------- ---------
Total Video Systems 125,154 98,685
Building and Equipment
Building 4,249 4,241
Furniture, fixtures and other equipment 5,371 5,260
--------- ---------
9,620 9,501
Less accumulated depreciation (5,095) (4,747)
--------- ---------
Total Building and Equipment 4,525 4,754
Land 2,559 2,559
Hotel Contracts (net) 247,259 253,508
--------- ---------
TOTAL ASSETS $ 415,722 $ 401,420
========= =========
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
2
<PAGE> 5
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable $ 17,148 $ 12,348
Accrued Liabilities
Interest 2,979 2,598
Other 27,682 20,700
Income Taxes 1,002 660
Deferred Income Taxes 30,925 35,229
Debt
Revolving Credit Facility 3,000 -
Canadian Bank Credit Facility 7,350 7,350
11.5% Senior Disount Notes 162,923 154,055
11.65% Senior Subordinated Reset Notes 277,264 260,795
Capitalized Lease Obligations 20,700 14,028
Other Debt 253 329
Debt Issuance Costs (net) (7,415) (8,058)
---------- ----------
Total Debt 464,075 428,499
---------- ----------
Total Liabilities 543,811 500,034
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 June 30, 1994 and
December 31, 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 June 30, 1994 and
December 31, 1993, respectively. 19 19
Paid in Capital 390,885 390,885
Contingent Value Rights Valuation Adjustment (5,077) (5,077)
Class B Common Stock Warrants 6,377 6,377
Retained Deficit (540,757) (511,445)
Foreign Currency Translation Adjustment 459 622
---------- ----------
Total Stockholders' Deficit (148,089) (118,614)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 415,722 $ 401,420
========== ==========
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
3
<PAGE> 6
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------------
1994 1993
------------ ------------
<S> <C> <C>
REVENUES:
Pay-Per-View $ 31,067 $ 34,375
Free-To-Guest 3,707 4,930
Other 2,926 3,191
------------ ------------
TOTAL REVENUES 37,700 42,496
DIRECT COSTS:
Pay-Per-View 10,607 10,258
Free-To-Guest 2,689 3,186
Other 752 952
------------ ------------
TOTAL DIRECT COSTS 14,048 14,396
DEPRECIATION AND AMORTIZATION 11,060 11,049
TECHNOLOGY AND FIELD SERVICE CHARGE - 4,865
CONTRACTED SERVICE COSTS 5,528 -
OPERATING EXPENSES 2,206 6,037
SELLING AND MARKETING EXPENSES 2,184 1,233
GENERAL AND ADMINISTRATIVE EXPENSES 3,995 3,591
RESEARCH AND DEVELOPMENT (NET) 768 300
EXCHANGE LOSS 74 424
------------ ------------
TOTAL COSTS AND EXPENSES 39,863 41,895
------------ ------------
OPERATING INCOME (LOSS) (2,163) 601
INTEREST EXPENSE, NET 13,713 11,487
------------ ------------
LOSS BEFORE INCOME TAXES (15,876) (10,886)
INCOME TAXES
State and Foreign Provision 370 543
Deferred Benefit (2,152) (430)
------------ ------------
TOTAL INCOME TAX BENEFIT (1,782) 113
------------ ------------
NET LOSS $ (14,094) $ (10,999)
============ ============
NET LOSS PER COMMON SHARE $ (0.59) $ (0.67)
============ ============
AVERAGE COMMON SHARES OUTSTANDING $ 23,983,905 $ 16,333,905
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
4
<PAGE> 7
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
1994 1993
------------ ------------
<S> <C> <C>
REVENUES:
Pay-Per-View $ 62,681 $ 68,182
Free-To-Guest 7,575 10,007
Other 4,544 5,879
------------ ------------
TOTAL REVENUES 74,800 84,068
DIRECT COSTS:
Pay-Per-View 21,326 20,517
Free-To-Guest 5,819 6,460
Other 1,122 1,991
------------ ------------
TOTAL DIRECT COSTS 28,267 28,968
DEPRECIATION AND AMORTIZATION 22,529 22,453
TECHNOLOGY AND FIELD SERVICE CHARGE - 4,865
CONTRACTED SERVICE COSTS 8,099 -
OPERATING EXPENSES 8,451 12,150
SELLING AND MARKETING EXPENSES 3,543 2,444
GENERAL AND ADMINISTRATIVE EXPENSES 7,787 7,226
RESEARCH AND DEVELOPMENT (NET) 1,543 610
EXCHANGE LOSS 136 312
------------ ------------
TOTAL COSTS AND EXPENSES 80,355 79,028
------------ ------------
OPERATING INCOME (LOSS) (5,555) 5,040
INTEREST EXPENSE, NET 27,360 24,057
------------ ------------
LOSS BEFORE INCOME TAXES (32,915) (19,017)
INCOME TAXES
State and Foreign Provision 701 1,109
Deferred Benefit (4,304) (2,300)
------------ ------------
TOTAL INCOME TAX BENEFIT (3,603) (1,191)
------------ ------------
NET LOSS $ (29,312) $ (17,826)
============ ============
NET LOSS PER COMMON SHARE $ (1.22) $ (1.09)
============ ============
AVERAGE COMMON SHARES OUTSTANDING $ 23,983,905 $ 16,333,905
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
5
<PAGE> 8
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1994 1993
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (29,312) $ (17,826)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 22,529 22,453
Other non-cash items:
Conversion of non-cash interest to secondary notes 16,469 -
Technology and field service charge - 4,865
Deferred income tax benefit (4,304) (2,300)
Amortization of debt issuance costs 643 456
Accretion of discount on senior notes 8,868 -
Exchange loss 136 312
Other items (net) (743) 93
Increase (decrease) in:
Accounts payable 4,808 6,574
Accrued interest 381 1,085
Other accrued liabilities 6,501 703
Income taxes payable 342 561
Decrease (increase) in:
Accounts receivable (4,242) (878)
Prepaids and other assets (1,548) 5,972
---------- ----------
Net cash provided by operating activities 20,528 22,070
INVESTING ACTIVITIES:
Increase in raw materials - (1,011)
Cost of in-process systems and capital expenditures (33,983) (16,161)
---------- ----------
Net cash used in investing activities (33,983) (17,172)
FINANCING ACTIVITIES:
Borrowing under revolving credit facility 3,000 -
Repayment of bank credit facility - (15,000)
Borrowing under supplemental bank credit facility - 21,000
Repayment of supplemental bank credit facility - (11,000)
Repayment of other debt and capitalized leases (1,791) (469)
Payment of debt restructuring costs - (7,683)
---------- ----------
Net cash provided by (used in) financing activities 1,209 (13,152)
Effect of exchange rate changes on cash (12) (4)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,258) (8,258)
Cash and cash equivalents at beginning of period 14,285 9,593
---------- ----------
Cash and cash equivalents at end of period $ 2,027 $ 1,335
========== ==========
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
6
<PAGE> 9
SPECTRAVISION, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994
1. GENERAL
These consolidated financial statements should be read in the context of
the financial statements and notes thereto filed with the Securities Exchange
Commission in the 1993 Annual Report on Form 10-K of SPI Holding, Inc. On May
25, 1994, SPI Holding, Inc. changed its name to SpectraVision, Inc.
("SpectraVision," or the "Company"). The accompanying unaudited condensed
consolidated financial statements include SpectraVision and all of its
subsidiaries. Intercompany transactions have been eliminated. Certain prior
period amounts have been reclassified to conform with the current period
presentation. In the opinion of management, these financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position and results of its operations
for the periods presented. The results of operations for such interim periods
are not necessarily indicative of results of operations for the entire year.
2. ORGANIZATION AND BASIS OF PRESENTATION
The Company is the leading provider of in-room entertainment services to
the lodging industry. Founded in 1971, the Company originally developed and
patented a system, known as "Spectravision," which provides in-room television
viewing of recently released major and other motion pictures on a pay-per-view
("PPV") basis.
Unless the context otherwise requires, all references herein to the Company
are not intended to imply exact corporate relationships and include
SpectraVision, SPI Newco, Inc., its direct subsidiary, Spectradyne, Inc., the
direct subsidiary of SPI Newco, Inc., and the foreign subsidiaries.
3. DEBT
Senior Subordinated Reset Notes: The Company currently has outstanding
$277,264,000 principal amount of 11.65% Senior Subordinated Reset Notes due
December 1, 2002 (the "Reset Notes"). Interest is payable semi-annually on
June 1 and December 1.
Subject to the provision of the Reset Notes indenture, the Company has the
option to pay interest on the Reset Notes on December 1, 1994 and June 1, 1995
through the issuance of additional Reset Notes valued at 100% of the principal
amount (the "PIK Option"). If the PIK Option is exercised, the annual interest
rate on the Reset Notes for the interest period for which such option is
exercised is increased by 100 basis points over the 11.65% annual interest
rate. The Company elected to exercise the PIK Option for the six-month
interest period ending June 1, 1994 and, accordingly, the Company issued
additional Reset Notes in the aggregate amount of $16,490,000.
7
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NEW TECHNOLOGY
In accordance with the terms of the Company's ten-year exclusive contract
with Electronic Data Systems Corporation ("EDS"), EDS will (a) install and
maintain a satellite delivery PPV system throughout most of the Company's North
American hotel sites utilizing San Jose, California-based Compression Labs,
Inc.'s ("CLI") Compressed Digital Video (CDV(TM)) technology, and (b) provide
and operate a primarily satellite-based distribution network to supply
pay-per-view in-room video entertainment services to most of the Company's
North American hotel sites. Under this agreement, EDS and the Company are
installing a Compressed Digital Video satellite movie transmission system, the
"CDV Satellite Network," throughout most of the Company's current and future
North American hotel sites. The new technology, "STARPATH(TM)," will replace
the Company's existing analog technology, which relies exclusively on videotape
players located at each hotel or studio location. As of June 30, 1994, the CDV
Satellite Network has been installed in 1,169 hotels with a total of 355,117
rooms. EDS and the Company will also install a new satellite delivered
on-demand movie service, "Digital Guest Choice(TM)". As of August 1, 1994, the
Company had successfully completed two test site installations of its Digital
Guest Choice system, the industry's first digital video-on-demand product.
Included in the STARPATH technology is the Company's development of a
sophisticated UNIX based integrated computer system ("SPEXIS(TM)") which will
be installed in conjunction with the Company's PPV systems and will enable the
Company to provide additional enhanced interactive services. EDS also has
entered into a contract with the Company to perform field service and
management information services, which contract is expected to generate
substantial operating cost savings commencing in 1995.
RESULTS OF OPERATIONS
The following discussion and analysis addresses the results of operations
for the three month periods ended June 30, 1994 (the "1994 Second Quarter") and
June 30, 1993 (the "1993 Second Quarter") and the six month periods ended June
30, 1994 (the "1994 Six Months") and June 30, 1993 (the "1993 Six Months").
The Company's operations consist primarily of its pay-per-view and
free-to-guest services through its ownership of Spectradyne and the Company's
other operating subsidiaries. The following table sets forth certain
information regarding the Company's pay-per- view customer base and certain
statistical data affecting pay-per-view revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Hotels Served at June 30 2,404 2,544 2,404 2,544
Rooms Served at June 30 671,600 707,588 671,600 707,588
Average Price per View $7.70 $7.76 $7.70 $7.76
Revenue per Equipped Room per Day ("RER") $0.52 $0.54 $0.51 $0.53
</TABLE>
8
<PAGE> 11
SECOND QUARTER ENDED JUNE 30, 1994 COMPARED
TO SECOND QUARTER ENDED JUNE 30, 1993
Total revenues decreased to $37.7 million in the 1994 Second Quarter from
$42.5 million in the 1993 Second Quarter, a decrease of $4.8 million or 11.3%.
Of the total revenues reported in the 1994 Second Quarter, 82.4% were revenues
from pay-per-view, 9.8% were from free-to-guest and 7.8% were from other
sources.
Pay-per-view revenues decreased to $31.1 million in the 1994 Second Quarter
from $34.4 million in the 1993 Second Quarter, a decrease of $3.3 million or
9.6%. This decrease in pay-per-view revenues primarily reflects the decline in
the number of rooms served, which resulted in a decrease in revenues of
approximately $1.9 million. The decline in the number of revenue producing
rooms during the quarter includes the loss of rooms due to non-renewal of
certain hotel PPV contracts, including the Marriott Courtyard properties with
approximately 121 hotels with a total of 17,756 rooms. At June 30, 1994, the
Company had deliverable orders for PPV systems to be installed in approximately
44,000 additional rooms.
RER declined from $0.54 in the 1993 Second Quarter to $0.52 in the 1994
Second Quarter resulting in an approximate $1.4 million decline in pay-per-view
revenues for the 1994 Second Quarter. The lower RER is attributable to two
primary factors discussed below:
Refit of base rooms with new technology equipment: The rapid change-out of
existing PPV equipment to the new STARPATH technology has caused some PPV
systems to be off-line during the 1994 Second Quarter. During the 1994 Second
Quarter, the Company installed 434 hotels with a total of 143,000 rooms with
the CDV Satellite Network. Additionally, the transition of the Company's field
service to EDS and its major sub-contractor, Granada, involved some temporary
difficulties for field service personnel from all three companies in
maintaining the normal level of repairs and maintenance of existing PPV rooms
concurrent with the rapid installations of the CDV sites. Although these
disruptive events caused declines in RER for the 1994 Second Quarter, they were
offset by increases in RER from the benefits of the new technology in the CDV
installed sites.
Poorly performing movie product: The decline in RER can also be attributed
to the major movies shown on the system in the 1994 Second Quarter as compared
to the major movies shown in the 1993 Second Quarter. Theater box office
results generally were lower for the group of major movies exhibited during the
1994 Second Quarter than for the movies exhibited during the 1993 Second
Quarter. Previously, the Company could only change movies once per month
because of the lead time and cost necessary to produce, duplicate and
distribute videotapes. As a result of the CDV Satellite Network, the Company
will be able to replace movies shortly after their release from the studio
primarily due to the elimination of the need to duplicate and distribute
thousands of videotapes each month. Without the need to duplicate and
distribute thousands of videotapes, the Company will be able to quickly replace
poorly-performing movies with better performing product.
The Company's strategies for increasing RER include (i) continually
upgrading movie equipment to offer the latest technology (such as is involved
in the new STARPATH technology); (ii) actively managing its pay-per-view
programming by quickly replacing poorly performing movies; (iii) utilizing
variable pricing and price packaging and (iv) installing Guest Choice, which
allows on demand viewing from a wide variety of entertainment selections. As
of June 30, 1994, Guest Choice was installed in 426 hotels with a total of
202,661 rooms, which is an increase of 142 hotels with 59,794 rooms over the
number of Guest Choice installed sites at June 30, 1993. As of June 30, 1994,
the CDV Satellite Network was installed in 1,169 sites, an increase of 434
sites since March 31, 1994. As of August 1, 1994, the Company has also
completed two successful test site installations of its Digital Guest Choice
system, the industry's first digital video-on-demand product.
9
<PAGE> 12
Free-to-Guest revenues decreased to $3.7 million in the 1994 Second Quarter
from $4.9 million in the 1993 Second Quarter, a decrease of $1.2 million or
24.8%. This decrease primarily reflects negotiated price reductions granted in
the third quarter of 1993 in connection with certain PPV contract renewals.
Other revenues decreased to $2.9 million in the 1994 Second Quarter from
$3.2 million in the 1993 Second Quarter, a decrease of $265,000 or 8.3%. Other
revenues include interactive services in addition to revenues from other
sources. This decrease primarily reflects a decline in revenues from
interactive services resulting from negotiated price reductions granted in the
third quarter of 1993 in connection with certain PPV contract renewals.
Pay-per-view direct costs increased to $10.6 million in the 1994 Second
Quarter from $10.3 million in the 1993 Second Quarter, an increase of $349,000
or 3.4%. As a percentage of pay-per-view revenues, pay-per-view direct costs
increased to 34.1% in the 1994 Second Quarter from 29.8% in the 1993 Second
Quarter. This increase primarily reflects the duplication of costs of both
videotapes and in-room cards along with costs of the transponder lease required
for the implementation of the STARPATH technology. Significant reductions in
costs of videotapes and in-room cards are expected to be realized upon full
roll-out of the CDV Satellite Network, including SPEXIS, which is expected to
be completed by the end of 1994.
Free-to-guest direct costs decreased to $2.7 million in the 1994 Second
Quarter from $3.2 million in the 1993 Second Quarter, a decrease of $497,000 or
15.6%. As a percentage of free-to-guest revenues, free-to-guest direct costs
increased to 72.5% in the 1994 Second Quarter from 64.6% in the 1993 Second
Quarter. The increase in free-to-guest direct costs as a percentage of
free-to-guest revenues primarily reflects the price reductions in free-to-guest
revenues in connection with certain PPV contract renewals, offset somewhat by
negotiated price reductions from programming suppliers for certain hotels
served.
Other direct costs decreased to $752,000 in the 1994 Second Quarter from
$952,000 in the 1993 Second Quarter, a decrease of $200,000 or 21.0%. As a
percentage of other revenues, other direct costs decreased to 25.7% in the 1994
Second Quarter from 29.8% in the 1993 Second Quarter.
Technology and Field Service Charge was $4.9 million in the 1993 Second
Quarter. This charge reflected the anticipated costs due to changes in
technology and field service management in connection with the service contract
with EDS. The Company recorded estimated costs in the amount of $4.9 million
for the write-off of obsolete equipment, (primarily videotape players and
computers), and personnel related costs associated with the reorganization of
the Company's field service operations. As of December 31, 1993, the Company
had accrued a total of $7.0 million in such costs of which approximately $4.9
million was attributable to the write-off of obsolete equipment and $2.1
million was due to anticipated cash charges for personnel related costs. As of
June 30, 1994, $1.9 million has been incurred in actual cash expenditures.
Contracted Service Costs were $5.5 million in the 1994 Second Quarter.
These costs primarily include the contracted fixed fees (which fees only
increase as the Company's net room base grows) paid to EDS for maintenance of
the Company's North American hotel sites.
Operating expenses decreased to $2.2 million in the 1994 Second Quarter
from $6.0 million in the 1993 Second Quarter, a decrease of $3.8 million or
63.5%. Operating expenses consist primarily of maintenance of hotel systems.
At April 30, 1994, the majority of the Company's field service labor force
ceased to be employees of the Company. This decrease primarily reflects the
reduction in the Company's internal field service labor force due to the
transition to EDS for maintenance of the Company's hotel sites. Operating
expenses, after full assumption of field services by EDS, will consist of
repair costs of certain PPV components and the field service costs currently
incurred by the Company in its international operations.
10
<PAGE> 13
Selling and marketing expenses increased to $2.2 million the 1994 Second
Quarter from $1.2 million in the 1993 Second Quarter, an increase of $951,000
or 77.1%. This increase is primarily due to costs associated with new business
development, the introduction of new products, and growth of customer services.
General and administrative expenses increased to $4.0 million in the 1994
Second Quarter from $3.6 million in the 1993 Second Quarter, an increase of
$404,000 or 11.3%. This increase is primarily due to higher legal fees and
annual financial reporting expenses.
Research and development costs increased to $768,000 in the 1994 Second
Quarter from $300,000 in the 1993 Second Quarter, an increase of $468,000.
Certain development costs of approximately $316,000 were capitalized in the
1993 Second Quarter, and there were no capitalized projects in the 1994 Second
Quarter. Additionally, research and development spending increased in the 1994
Second Quarter compared to the 1993 Second Quarter as the Company continued to
devote additional resources to the development of new products in a continuing
effort to maintain and enhance its competitive position.
Interest expense (net) increased to $13.7 million in the 1994 Second
Quarter from $11.5 million in the 1993 Second Quarter, an increase of $2.2
million or 19.4%. The Company elected to exercise the PIK option under the
Reset Notes for the interest period ended June 1, 1994. In accordance with the
Reset Note indenture, the annual interest rate for the six-month interest
period ended June 1, 1994 was increased by 100 basis points which resulted in
an increase of $832,000 of additional interest expense.
State and foreign income tax expense decreased to $370,000 in the 1994
Second Quarter from $543,000 in the 1993 Second Quarter, a decrease of $173,000
or 31.9%, primarily due to lower taxable income in the 1994 Second Quarter.
Deferred income tax benefits increased to $2.1 million in the 1994 Second
Quarter from $430,000 in the 1993 Second Quarter. These benefits are primarily
due to the reversal of future temporary differences relating to intangible
assets and net operating loss carryforwards.
Net loss increased to $14.1 million in the 1994 Second Quarter from $11.0
million in the 1993 Second Quarter, an increase of $3.1 million. The net loss
for the 1994 Second Quarter includes the overlapping of costs due to the
transition of the Company's technology without the benefit of anticipated
future cost savings. Additional losses are a result of (i) lower PPV revenues
due to the decline in the number of rooms served and lower RER and (ii) lower
revenues from negotiated price reductions of other non-PPV services, as
compared to the 1993 Second Quarter, in connection with certain PPV contract
renewals.
11
<PAGE> 14
SIX MONTHS ENDED JUNE 30, 1994 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1993
Total revenues decreased to $74.8 million in the 1994 Six Months from $84.1
million in the 1993 Six Months, a decrease of $9.3 million or 11.0%. Of the
total revenues reported in the 1994 Six Months, 83.8% were revenues from
pay-per-view, 10.1% were from free-to-guest and 6.1% were from other sources.
Pay-per-view revenues decreased to $62.7 million in the 1994 Six Months
from $68.2 million in the 1993 Six Months, a decrease of $5.5 million or 8.1%.
This decrease in pay-per-view revenues primarily reflects the decline in the
number of rooms served which resulted in a decrease in revenues of
approximately $3.0 million. Additionally, RER declined from $0.53 in the 1993
Six Months to $0.51 in the 1994 Six Months. The Company believes the lower RER
is in part due to the transition and rapid change-out of the current PPV
equipment to the new STARPATH technology which has caused some systems to be
off-line during the installation of new equipment and other factors as
described in the three-month comparison. The decline in RER contributed
approximately $2.5 million to the decrease in the pay-per-view revenues for the
1994 Six Months.
Free-to-guest revenues decreased to $7.6 million in the 1994 Six Months
from $10.0 million in the 1993 Six Months, a decrease of $2.4 million or 24.3%.
This decrease primarily reflects negotiated price reductions granted in the
third quarter of 1993 in connection with certain PPV contract renewals.
Other revenues decreased to $4.6 million in the 1994 Six Months from $5.9
million in the 1993 Six Months, a decrease of $1.3 million or 22.7%. Other
revenues include interactive services in addition to revenues from other
sources. This decrease is primarily due to the decline in revenues from
interactive services. In addition, the 1993 Six Months included insurance
claim proceeds from losses due to the hurricanes in Florida and Hawaii in 1992.
Pay-per-view direct costs increased to $21.3 million in the 1994 Six Months
from $20.5 million in the 1993 Six Months, an increase of $809,000 or 3.9%. As
a percentage of pay-per-view revenues, pay-per-view direct costs increased to
34.0% in the 1994 Six Months from 30.1% in the 1993 Six Months. This increase
primarily reflects the duplication of costs of both videotapes and in- room
cards along with costs of the transponder lease required for the implementation
of the STARPATH technology. Significant reductions in the costs of videotapes
and in-room cards are expected to be realized upon full roll-out of the CDV
Satellite Network, including SPEXIS, which is expected to be complete by the
end of 1994.
Free-to-guest direct costs decreased to $5.8 million in the 1994 Six Months
from $6.5 million in the 1993 Six Months, a decrease of $641,000 or 9.9%. As a
percentage of free-to-guest revenues, free-to-guest direct costs increased to
76.8% in the 1994 Six Months from 64.5% in the 1993 Six Months. This increase
in free-to-guest direct costs as a percentage of free-to-guest revenues
primarily reflects the price reductions in free-to-guest revenues in connection
with certain PPV contract renewals, offset somewhat by negotiated price
reductions from programming suppliers for certain hotels served.
Other direct costs decreased to $1.1 million in the 1994 Six Months from
$2.0 million in the 1993 Six Months, a decrease of $869,000 or 43.6%. As a
percentage of other revenues, other direct costs decreased to 24.7% in the 1994
Six Months from 33.9% in the 1993 Six Months.
Contracted Service Costs were $8.1 million in the 1994 Six Months. These
costs primarily include the contracted fixed fees (which fees only increase as
the Company's net rooms base grows) paid to EDS for maintenance of the
Company's North American hotel sites.
12
<PAGE> 15
Operating expenses decreased to $8.4 million in the 1994 Six Months from
$12.1 million in the 1993 Six Months, a decrease of $3.7 million or 30.4%.
Operating expenses consist primarily of maintenance of hotel systems. At April
30, 1994, the majority of the Company's field service labor force ceased to be
employees of the Company. This decrease primarily reflects the reduction in
the Company's internal field service labor force due to the transition to EDS
for maintenance of the Company's hotel sites. Operating expenses, after full
assumption of field services by EDS, will consist of repair costs of certain
PPV components and the field service costs currently incurred by the Company in
its international operations.
Selling and marketing expenses increased to $3.5 million in the 1994 Six
Months from $2.4 million in the 1993 Six Months, an increase of $1.1 million or
45.0%. This increase primarily reflects the costs associated with new business
development, the introduction of new products, and growth of customer services.
General and administrative expenses increased to $7.8 million in the 1994
Six Months from $7.2 million in the 1993 Six Months, an increase of $561,000 or
7.8%. This increase is primarily due to higher legal fees and annual
financial reporting expenses.
Research and development costs increased to $1.5 million in the 1994 Six
Months from $610,000 in the 1993 Six Months. In the 1993 Six Months certain
development costs of approximately $534,000 were capitalized and there were no
capitalized projects in the 1994 Six Months. Additionally, research and
development spending increased in the 1994 Six Months compared to the 1993 Six
Months as the Company continued to devote additional resources to the
development of new products in a continuing effort to maintain and enhance its
competitive position.
Interest expense (net) increased to $27.4 million in the 1994 Six Months
from $24.1 million in the 1993 Six Months, an increase of $3.3 million or
13.7%. The Company elected to exercise the PIK option under the Reset Notes
for the interest period ended June 1, 1994. In accordance with the Reset Note
indenture, the annual interest rate for the six-month interest period ended
June 1, 1994 was increased by 100 basis points which resulted in an increase of
$1.9 million of additional interest expense. Cash interest expense decreased
to $3.8 million in the 1994 Six Months from $23.5 million in the 1993 Six
Months due to the Company exercising the PIK option on the Reset Notes.
State and foreign income taxes decreased to $701,000 in the 1994 Six Months
from $1.1 million in the 1993 Six Months, a decrease of $408,000 or 36.8% due
to lower taxable income in the 1994 Six Months.
Deferred income tax benefits increased to $4.3 million in the 1994 Six
Months from $2.3 million in the 1993 Six Months. These benefits are primarily
due to the reversal of future temporary differences relating to intangible
assets and net operating loss carryforwards.
Net loss increased to $29.3 million in the 1994 Six Months from $17.8
million in the 1993 Six Months, an increase of $11.5 million. The net loss for
the 1994 Six Months includes the overlapping of costs due to the transition of
the Company's technology without the benefit of anticipated future cost
savings. Additional losses are a result of (i) lower PPV revenues due to the
decline in the number of rooms served and lower RER and (ii) lower revenues
from negotiated price reductions of other non-PPV services, as compared to the
1993 Six Months, in connection with certain PPV contract renewals.
13
<PAGE> 16
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the 1994 Six Months, the Company used net funds generated from
operations and short-term invested cash deposits primarily for capital
expenditures of $34.0 million, which includes $14.8 million of expenditures for
the rollout of the CDV Satellite Network and $7.2 million for the upgrades of
existing systems to on-demand and refit of room units to the boxless
SpectraMate in connection with PPV contract renewals.
The Company's primary uses of cash are for funding of the Company's capital
expenditure requirements, debt service on outstanding borrowings and working
capital needs. The Company's growth capital expenditures are incurred to
expand its base of rooms with installed pay-per-view systems. The Company's
maintenance capital expenditures are incurred to upgrade installed systems,
primarily in connection with contract renewals.
The Company began installation of the CDV Satellite Network in the fourth
quarter of 1993 and, with the exception of Canada, expects this network to be
completed by 1994 year-end. At June 30, 1994 the Company had 1,169 hotels with
a total of 355,117 hotel rooms equipped with the CDV technology. The Company
requires a total of approximately $34 million of capital expenditures to
complete the installation of antennae, UNIX personal computers and integrated
receiver decoders required in connection with STARPATH to be installed in
substantially all of its North American hotels. Of the $34 million in capital
expenditures required to complete the CDV Satellite Network, approximately
$17.5 million has been incurred through June 30, 1994.
The Company intends to fund capital expenditures in part from operating
cash flow, cash on hand, available borrowings under the Revolving Credit
Facility and capital lease financing. The Company also has the ability to pay
interest on the Reset Notes by issuing additional Reset Notes for each of the
interest periods ending December 1, 1994 and June 1, 1995. Additionally, the
Company is exploring additional borrowing opportunities for its foreign
subsidiaries, expanding its capital lease financing capacity, exploring
potential joint venture opportunities with strategic partners and the sale of
non-strategic assets, and possibly raising equity through the sale of
additional stock. To date, the Company does not have readily available
external sources of cash to satisfy all of its capital expenditure
commitments. If the Company is unable to satisfy its cash requirements from
internal and external sources, the Company will be required to reduce,
eliminate or delay certain of its capital expenditures, including further
deployment of the STARPATH technology. Decreased capital expenditures will
delay realization of the benefits of the technology. In addition, the
Company's future ability to continue to satisfy its financial covenants under
its Revolving Credit Facility, as well as to meet future cash needs, is
highly dependant upon realizing certain benefits including significantly
increased cash flows from the technology.
The Company is currently involved in negotiations to modify its Revolving
Credit Facility including, among others, a reduction in its annual operating
cash flow requirement for 1994. The Company is currently in compliance with
the existing covenants under the Revolving Credit Facility; however, due to the
delays in fully implementing the CDV Satellite Network as planned, operating
cash flow for 1994 will not be at the level required in the current covenant.
The Company is in a highly competitive industry in a market where there is
a high level of penetration in the upscale lodging industry by pay-per-view
providers. Additionally, growth in the large hotel market has declined with
fewer new hotel constructions due to general economic conditions. Consequently
the Company has experienced increased competition for contract renewals on a
national scale in the large hotel market. Competition for contract renewals at
hotels operated by certain of the major hotel chains historically served by the
Company have included providing customer incentives such as guest room
televisions, significant reductions in prices for other non-PPV services and/or
increasing the portion of PPV revenues retained by the hotel. As a result of
this competition, the Company's revenues and related profit margins from
non-PPV sources, such as free-to-guest and interactive services will be less
than in previous periods.
14
<PAGE> 17
The Company expects 1994 to be a transition year in implementation of the
STARPATH technology and therefore does not anticipate realizing the full
benefits of the technology until 1995, including increased PPV margins and cost
savings under the EDS agreement. Pay-per-view margins are expected to be
enhanced by the Company's ability to (i) actively manage its pay-per-view
programming by quickly replacing poorly-performing movies; (ii) convert to a
twenty-movie program equipped hotel rooms which currently have only a six,
seven or eight movie program; (iii) provide Digital Guest Choice; (iv) offer
packaged and variable movie pricing to guests and (v) substantially reduce
videotape and movie card schedule production, duplication and distribution
costs. The Company's ability to increase revenues and operating cash flow
after completion of the rollout of the STARPATH technology is highly sensitive
to a number of factors. The Company's PPV revenues have been highly sensitive
to changes in viewing levels in its PPV systems. Viewing levels depend upon
factors largely beyond the Company's control such as the availability of
popular movies and competing programming. In turn, the success of marketing
initiatives and other efforts by the Company to increase viewing levels and
average price per view, are dependent upon prevailing economic conditions and
other factors, many of which are beyond the control of the Company. The CDV
Satellite Network and the Company's new SPEXIS UNIX interactive system together
will be able to provide other revenue opportunities through new interactive and
communication services, including voice mail, fax mail, video teleconferencing
and interactive distance learning as well as the introduction of national
advertising on its free-to-guest system.
15
<PAGE> 18
PART II
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to various lawsuits and
claims arising in the ordinary course of business. While the outcome
of such claims, lawsuits or other proceeding 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. (See Item 3 in the Company's 1993 Annual
Report on Form 10-K.)
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 certain patent rights held by OCV. The counterclaim
requests an unspecified amount of damages and injunctive relief. OCV,
however, was forced to dismiss with prejudice its allegation of
infringement in regard to one of its two patents. Spectradyne amended
its original lawsuit to, in part, assert copyright infringement by OCV
and CVE regarding two hotel property management system ("PMS") software
protocols developed by Spectradyne and various PMS vendors.
On July 27, 1994, the court granted CVE's motion for partial summary
judgement ruling that neither CVE's or OCV's remote diagnostics and
data retrieval devices "literally" infringe Spectradyne's related
patent. However, the court's ruling did not preclude the prospect that
the CVE and OCV devices infringe Spectradyne's patent under the
"doctrine of equivalents". In addition, the court granted CVE's motion
for partial summary judgement ruling that Spectradyne was not the
original author of one of its PMS software protocols. To date, the
second PMS software protocol has not been challenged in court.
With respect to OCV's patent counterclaim against Spectradyne, on June
10, 1994, the court refused without prejudice to allow OCV to amend and
expand its counterclaim to assert its new, reissued patent claims
against Spectradyne and to include the Digital Guest Choice device in
the case. On August 3, 1994, OCV filed a motion to voluntarily dismiss
its patent counterclaims against Spectradyne. At that time, OCV filed
a new lawsuit in federal district court in San Francisco asserting that
Spectradyne's video on-demand devices, including Digital Guest Choice,
infringe OCV's new, reissued patent. However, prior to OCV's filing of
the new lawsuit, Spectradyne filed an action on July 22, 1994 for
declaratory judgement in federal district court in Dallas seeking a
ruling that its video on-demand devices do not infringe the new claims
in OCV's new, reissued patent.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on May 25, 1994 in
Richardson, Texas. The four matters voted upon were (i) the election
of 14 directors to serve until the next Annual Meeting of Stockholders
or until their successors are elected and qualified, (ii) the
appointment of KPMG Peat Marwick as independent accountants for the
fiscal year ending December 31, 1994, (iii) the amendment of the
Certificate of Incorporation to change the name of the Company, and
(iv) the approval of the 1994 Management Incentive Equity plan. All
nominated directors were elected and all other matters approved.
Holders of Class A Common Stock are entitled to ten votes per share and
holders of Class B Common Stock are entitled to one vote per share.
16
<PAGE> 19
The balloting results are as follows:
<TABLE>
<CAPTION>
Votes in Votes Broker
Favor Withheld Nonvotes
--------- -------- --------
<S> <C> <C> <C>
(i) Election of Directors
Class A Directors
-----------------
Albert D. Jerome 45,935,260 - -
Michael C. Colleran 45,935,260 - -
John Davis 45,935,260 - -
Marvin Davis 45,935,260 - -
Leonard Goldberg 45,935,260 - -
Gerald S. Gray 45,935,260 - -
Sidney Poitier 45,935,260 - -
Michael J. Seibert 45,935,260 - -
Kenneth Ziffren 45,935,260 - -
Class B Directors
-----------------
John F. Berardi 14,478,935 100,032 -
Robert D. Beyer 14,470,985 107,982 -
Howard T. Buchanan 14,471,585 107,382 -
Stephen D. Silbert 14,479,135 99,832 -
Skip Victor 14,479,435 99,532 -
</TABLE>
<TABLE>
<CAPTION>
Votes in Votes Broker
Favor Against Abstain Nonvotes
--------- ------- ------- --------
<S> <C> <C> <C> <C>
(ii) Appointment of KPMG Peat Marwick
as Independent Accountants 60,471,462 29,369 13,396 -
(iii) Amendment to the Company's Certificate
of Incorporation to change the name of
SPI Holding, Inc. to SpectraVision, Inc. 60,493,407 8,678 12,142 -
(iv) Approval of the Company's 1994
Management Incentive Equity Plan 51,580,855 1,544,906 22,871 7,365,595
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1.6 Certificate of Amendment of the Certificate of
Incorporation of SpectraVision, Inc. filed May 25, 1994.
(b) Reports on Form 8-K
None
17
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SPECTRAVISION, INC.
August 15, 1994 /s/ DANNY G. HAIR
(Date) DANNY G. HAIR
VICE PRESIDENT
(Chief Financial Officer and officer duly
authorized to sign on behalf of the Registrant)
18
<PAGE> 1
EXHIBIT 3.1.6
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
SPI HOLDING, INC.
SPI Holding, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
FIRST: That the Board of Directors of said corporation, at a
meeting duly held, adopted a resolution proposing and declaring advisable the
following amendment to the Certificate of Incorporation of said corporation, so
that, as amended, Article FIRST shall read in its entirety:
"FIRST: The name of the Corporation is SpectraVision, Inc."
SECOND: That at a meeting of stockholders duly held upon written
notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware, the stockholders have duly adopted said amendment.
THIRD: That the aforesaid amendment was duly adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware.
