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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-9724
SPI HOLDING, 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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS 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
11.50% Senior Discount Notes, due 2001 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
--- ---
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. ( )
The aggregate market value of the Registrant's Class B Common Stock
held by non-affiliates of the Registrant as of March 25, 1994: $113,751,000
There is no established public trading market for the Registrant's Class A
Common Stock. As of March 25, 1994, 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
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
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Part of the Form 10-K into which
Title the document is incorporated
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SPI Holding, Inc. - Annual Meeting of Stockholders - Part III
Portions of Proxy Statement - 1994
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TABLE OF CONTENTS
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Item 1. Business
Background and Organization . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Pay-Per-View Services . . . . . . . . . . . . . . . . . . . . . 2
Free-to-Guest Services . . . . . . . . . . . . . . . . . . . . 4
Interactive and Other Services . . . . . . . . . . . . . . . . 4
Programming . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The EDS Strategic Alliance . . . . . . . . . . . . . . . . . . 5
Market and Customers . . . . . . . . . . . . . . . . . . . . . 8
Segment Data . . . . . . . . . . . . . . . . . . . . . . . . . 9
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . 9
Field Service Operations . . . . . . . . . . . . . . . . . . . 10
Research and Development . . . . . . . . . . . . . . . . . . . 10
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Patents and Trademarks . . . . . . . . . . . . . . . . . . . . 11
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 12
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 51
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . 52
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 52
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . 52
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 52
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . 53
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PART I
ITEM 1. BUSINESS
BACKGROUND AND ORGANIZATION
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, SPI
Holding, Inc. (the "Company"), acquired all of the outstanding stock of
Spectradyne, through the merger of its newly-formed wholly-owned subsidiary
with and into Spectradyne, following which Spectradyne remained the surviving
entity and a wholly-owned subsidiary of the Company. On April 12, 1989, DP
Acquisition Corp. ("DP"), a company controlled by Marvin Davis, acquired all of
the outstanding common stock of SPI Holding, Inc. In December, 1990, DP was
dissolved into its parent, Rainbow Company ("Rainbow"), a partnership
controlled by Mr. Davis. 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 on September 17, 1992 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
"Restructuring"). The 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"). The
Class A Common Stock has ten votes per share and the Class B Common Stock has
one vote per share. On October 5, 1993 the Company successfully completed a
public offering of 7,650,000 shares (including 650,000 shares 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"),
resulting in net proceeds to the Company of $223.8 million. The debt and
equity offerings referred to herein as the "Offerings." At December 31, 1993,
Rainbow owned 20% of the outstanding common stock of SPI and approximately 71%
of the total voting control of the Company.
Unless the context otherwise requires, all references herein to the
Company are not intended to imply exact corporate relationships and include SPI
Holding, Inc. and its subsidiaries. SPI Holding, Inc. was incorporated under
the laws of the State of Delaware in 1987. The Company intends to change its
name to "SpectraVision, Inc." subject to approval by the stockholders of the
Company at its annual meeting of stockholders on May 25, 1994. The address and
telephone number of the Company's principal executive offices are 1501 North
Plano Road, P.O. Box 830775, Richardson, Texas 75083-0775, (214) 234-2721.
GENERAL
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. The Company subsequently expanded its services to include
delivering free-to-guest programming (such as HBO, ESPN, CNN and WTBS) to
hotels and providing additional interactive services that capitalize on the
Company's patented two-way communications equipment. The Company has been the
dominant provider of these entertainment services to the lodging industry since
1971 and as of December 31, 1993 provided PPV services to 684,599 rooms in
2,442 hotels.
The Company's primary market for its pay-per-view systems and
additional services has been large hotels (typically more than 300 rooms per
property). The Company currently has the dominant market share in this segment
in North America, and the Company is also the leading provider in Canada,
Australia and
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Asia. The Company provides its services under exclusive contracts to
corporate-owned hotel chains such as Hyatt, hotel management companies such as
Interstate and individually owned or franchised hotel properties. The Company
typically negotiates standard contract terms for the corporate-managed hotels
in chains and negotiates separately with the franchised and independent
properties. The Company maintains its relationships with its hotel customers
by providing quality services and by continually expanding its product lines to
meet the needs of hotels and their guests.
On July 28, 1993, the Company entered into a ten year exclusive
agreement with Electronic Data Systems ("EDS") to install the most
technologically advanced PPV system in the industry. Under this agreement, EDS
and the Company will install a Compressed Digital Video ("CDV(TM)") 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," will replace 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 will also install a new satellite delivered on-demand movie
service, " Digital Guest Choice." Included in the STARPATH technology is the
Company's development of a sophisticated UNIX based integrated computer system
("Spexis") which will be installed in conjunction with the Company's PPV
systems and will enable the Company to provide additional enhanced interactive
services. Management believes the STARPATH technology will enable the Company
to generate higher revenues and cash flows from its existing installed and
future room base. EDS also has entered into a contract with the Company to
perform field service and management information services ("MIS") which
contract is expected to generate substantial operating cost savings for the
Company over 1992 levels. For a description of certain terms and conditions of
the EDS Strategic Alliance, see "EDS Strategic Alliance."
PAY-PER-VIEW SERVICES
The Company's primary source of revenue is providing in-room
television viewing of recently released major and independent motion pictures
to hotel guests. This service is attractive to hotel operators because it
provides a service desired by the guests and also generates income for the
hotel, which typically retains a 10% commission on all PPV movie sales. The
movie price is automatically charged to the guest room in which the movie was
viewed. At December 31, 1993, the Company provided PPV service to 684,599
rooms in 2,442 hotels. As of February 28, 1994, the Company had deliverable
orders to install PPV systems in approximately 29,500 rooms, as compared to
approximately 23,000 rooms at February 28, 1993. Deliverable orders for hotel
movie systems consist only of contracts which have been executed by the hotel
and the Company. Generally, if certain financial and other criteria are
acceptable to the Company, these orders are completed within six to nine
months.
The Company provides its PPV service through several products
including: (i) Spectravision(R), the Company's original tape-based delivery
system; (ii) SpectraVision Guest Theater(TM), the Company's scheduled play
system utilizing the STARPATH(TM) technology with satellite delivery; (iii)
SpectraVision Guest Choice(R), a system which provides on-demand viewing up to
200 videotapes; and (iv) SpectraVision Guest Touch(TM), which was designed to
provide PPV service in mid-level hotels.
Spectravision: The Company originally developed and patented the
Spectravision PPV system in 1971 and has used this tape-based video delivery
system through 1993. Spectravision offers a hotel guest from six to eight
movies per day at predetermined times. The movie schedule typically consists
of a mix of major motion pictures available after completing first-run
theatrical exhibition and before release on cable or home video, and movies
from independent producers. The Company is able to schedule movies on a
hotel-by-hotel basis and therefore can tailor its movie schedules to appeal to
the guest mix of each hotel. On the first day of each month, the Company
typically replaces three or more movies on each schedule with new features.
Movies which perform well are frequently carried over and played an additional
month. Beginning in the fourth quarter of 1993, the Company began
implementation of the SV Guest Theater system, described below, and will by
mid-1994 replace the Spectravision system in most of its North American hotel
sites.
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SV Guest Theater: The Company's SpectraVision Guest Theater system
utilizing the STARPATH technology and introduced in the fourth quarter of 1993,
typically offers a hotel guest eight movies scheduled at predetermined times
and also delivers more than twenty different movie titles every forty-eight
hours. Unlike the Spectravision tape-based system, Guest Theater, through the
STARPATH technology, allows the Company to change the programming of movie
line-ups overnight thus providing a more varied mix of movie product. The
Company can quickly replace poorly-performing movies with other fresh movie
titles. With the full implementation of Guest Theater, the Company will
significantly reduce most of the costs and time required for videotape and
movie card schedule production, duplication and distribution.
SV Guest Choice: In 1991, the Company introduced SpectraVision Guest
Choice to provide hotel guests with on-demand viewing from a library of up to
200 videotapes per hotel. The service is provided in addition to the
Spectravision or Guest Theater system and as of December 31, 1993 was installed
in 176,918 rooms in 363 hotels. The on-demand capability significantly
increases usage of the PPV service by the hotel guests, and the Company has
experienced increases in revenue and 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 and a
variety of other topics, such as exercise, business information, children's
programming and other special interest tapes. The Guest Choice system includes
the Company's proprietary equipment and software, but also utilizes a patented
video rack designed and manufactured by a third party under an agreement that
provides the Company exclusive rights for its use in the hotel industry. This
agreement is automatically renewable for a one year period upon satisfaction of
certain minimum annual purchase requirements, which the Company intends to meet
in 1994. The new Digital Guest Choice will be installed as an addition to
Guest Choice at those hotels with previously installed Guest Choice systems and
in most new hotel installations. This new system will further enhance
on-demand viewing by significantly increasing the availability of movies
available to hotel guests and by virtually eliminating those potential
on-demand views which are missed because another guest is already viewing a
particular videotape. Digital Guest Choice distributes movies through
satellite, microwave or fiber-optic technology in a digitized format and is
stored at the viewing site and then decoded and forwarded to the guest
instantaneously and on-demand. With Digital Guest Choice, the Company will
realize benefits from quickly replacing poorly-performing movies and from
reductions in videotape production, duplication and distribution costs.
SV Guest Touch: During 1992, the Company began testing a new
pay-per-view system, SpectraVision Guest Touch, designed by the Company to cost
effectively provide PPV service to rooms in the mid-level hotel market, a
segment which currently has only a small percentage of its rooms served. This
market segment, which the Company estimates to contain approximately 1.3
million rooms in North America, is largely unserved by the hotel PPV industry.
As of December 31, 1993, the Guest Touch product had been installed in 36
hotels with a total of 5,437 rooms. Guest Touch utilizes a patented telephone
with a built-in credit card reader for the selection and payment of PPV movies.
The price of the movie is charged directly to the guest's credit card, thereby
eliminating interaction by hotel employees in the PPV system and, as a result,
the hotels typically receive only a 5%, rather than a standard 10%, commission
on Guest Touch receipts. This benefit to the Company, however, is partially
offset by a 3% credit card transaction fee. Management believes Guest Touch
is best suited for mid-level hotels because of their (i) smaller hotel front
desk staff, who are not required with Guest Touch to collect the revenue from
the guest and (ii) interface with less sophisticated property management
information systems. In addition to providing in-room movies, the Guest Touch
system, with its telephone access operation, also allows these mid-level
properties to provide interactive services and other amenities typically
offered only by much larger properties. In March 1993, the Company signed an
agreement with Hospitality Franchise Systems, Inc. ("HFS") under which the
Company will be the exclusive preferred provider of PPV services to potentially
all of the HFS hotels. HFS has under management over 360,000 rooms in the
mid-level market consisting primarily of Ramada, Howard Johnson and Days Inn.
Utilizing the STARPATH technology, the Company will be able to more cost
effectively enter and service this market because delivery through the CDV
Satellite Network system will dramatically reduce the need for costly field
service visits to these hotels, many of which are located away from larger
metropolitan areas, to replace movies and maintain equipment.
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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 pays the Company a
fixed monthly fee per room for each programming channel selected. As of
December 31, 1993, the Company provided free-to-guest services to 1,006 hotels
serving 330,138 guest rooms. Approximately 78% of these rooms also offer the
Company's PPV services. In 1993, free-to-guest services accounted for
approximately 11% of the Company's revenues. As of February 28, 1994, the
Company had deliverable backlog orders to install free-to-guest systems in
approximately 9,500 additional rooms, which are expected to be filled during
1994, as compared to approximately 7,100 rooms outstanding at February 28,
1993. With the implementation of STARPATH, the Company plans to introduce
national advertising on the Company's free-to-guest systems in order to
capitalize on the strong demographic profile and easily identifiable viewing
habits of the Company's primarily business traveler viewer base.
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 and other in-room guest services to the lodging industry. These
services generate revenues and cash flows to the Company which are independent
of viewing levels. These services utilize the two-way communications
capability of the PPV equipment and include Video Checkout, Video Messaging,
Video Breakfast Menu, Video Bellman, Smart Survey and room availability
monitoring. The hotel pays a fixed monthly fee for each service selected. In
April of 1993 the Company entered into an agreement with US West, Inc. ("US
West") to introduce a first-of-its-kind interactive multimedia travel
information service. This advertiser-supported service, called US West
CityKey, is currently installed in approximately 5,000 hotel rooms in San
Francisco. Following a successful initial launch, this service is expected to
be made available in other geographic locations throughout the U.S.
As of December 31, 1993, the Company provided one or more interactive
services to 489 hotels, all of which also offer the Company's PPV system. The
Company expects to add additional interactive services in conjunction with the
STARPATH technology, including such value-added services as video
teleconferencing, voice mail, fax mail and interactive distance learning, among
others. These services will 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 links to its hotel customers. See
"The EDS Strategic Alliance."
The Company's Video Checkout system permits a guest to review all
charges posted to his or her hotel bill. If the charges are acceptable, the
guest may automatically check out using the channel selector unit of the
television without stopping at the front desk. Video Messaging permits a guest
to have all of his or her messages displayed on the television screen. Video
Breakfast Menu allows a guest to enter a breakfast room service order and
delivery time through the television directly to the hotel kitchen. Video
Bellman allows a guest to request that a bellman be sent to the guest's room.
The room availability monitoring system permits the hotel's housekeeping staff
to indicate to the front desk that the room has been cleaned and is ready for
occupancy. Smart Survey is an interactive video guest comment card which
immediately alerts hotel management to the guest's level of satisfaction with
hotel services. Interactive services are also currently available in Spanish,
French and certain other foreign languages.
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Other revenue sources include the sale and license of the Company's
proprietary systems for utilization in the hospital industry, 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 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 picture 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 system. Typically, the Company obtains rights to exhibit major
motion pictures during the "Hotel/Airline PPV Window" which is the time period
after initial theatrical release and before release for cable television
exhibition or home video distribution. The Hotel/Airline PPV Window has
historically averaged approximately 73 days. The Company attempts to license
pictures as close as possible to a motion picture's theatrical release date to
benefit from studios' advertising and promotional efforts. Generally, fresher
movies and greater variety of movies generate a higher viewing level. The
Company expects to license more major films in the future than it has in the
past to capitalize on the technological advantages of STARPATH. These
additional films will be used to replace poorly-performing movies to increase
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 a fixed
period of time.
THE EDS STRATEGIC ALLIANCE
In accordance with the terms of the Company's ten-year exclusive
contract with EDS, EDS will (a) install and maintain a CDV 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 hotel sites. Under the
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 North American 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 any of these markets.
The Company and EDS have now developed a compressed digital video
distribution system that allows, even in its initial stages, the Company to
replace the manual reproduction and distribution of video tapes (except with
respect to Guest Choice properties) with the automatic, highspeed transmission
of compressed digital VHS-quality satellite signals from a central "uplink"
facility, located at EDS's Plano, Texas facility, to a transponder on a
satellite in fixed orbit positioned so as to offer transmission to most of
North America, including Alaska and Hawaii. These compressed transmissions are
digitally encrypted to prevent nonsubscribers from receiving usable signals.
The transmissions are recoverable on a small aperture satellite-dish antenna
located at each hotel served by the Company and are automatically decoded and
decompressed by means of an integrated receiver/decoder ("IRD") installed at
each hotel and fed into the existing MATV system supplying each room.
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The Company purchases from EDS personal computers, small aperture
antennae and CLI's SpectrumSaver(TM) IRDs, and EDS manages their installation
and maintenance at the Company's customer hotels. Additionally, EDS, through
its private digital telecommunications network, EDSNET, provides the Company
with data and communications linkage.
For a scheduled fixed fee (which fee only increases as the Company's
room base grows), through the use of its own field service force and the
services of pre-qualified and trained local contractors in certain locations,
EDS will assume responsibility for systems integration, field services and
maintenance of such systems, including the antennae, IRDs, and personal
computers. Additionally for a contracted fixed price, EDS will be responsible
for installation of the CDV Satellite Network, Digital Guest Choice and the
Spexis computer system and the supply of antennae, IRDs, and personal computers
for each site.
The Company believes it will realize substantial revenue and cash flow
increases as a result of the STARPATH technology once it is fully in place.
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. PPV revenues are dependent upon the viewing levels in its
PPV systems such as the availability of popular movies and competing
programming. In turn, the success of marketing initiatives and other efforts
of 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 sources of the revenue and cash flow increases are summarized as
follows:
Quicker Movie Replacement: The Company will be able to replace movies
shortly after their release from the studio, as compared to approximately
twenty-one days as currently required. This reduction will primarily result
from the elimination of the need to duplicate and distribute over 20,000
videotapes per month. As a result, the Company will be able to continually
offer fresher and more varied movie product. The Company believes, based on
historical experience in certain studio fed hotels, it will realize higher
usage levels and cash flows as a result of its ability to change movies more
quickly.
Proactive Programming/Film Share Management: The Company will be able
to quickly replace poorly-performing movies with better performing product or
with movies that have a lower commission payable to the studio (film share)
than the poorly-performing movie. The Company typically has several movies
available which it could substitute, and the Company expects to obtain the
rights to additional movies from the studios in order to capitalize on this
technological capability. Currently, the Company can only change movies once
per month because of the lead time and cost necessary to produce, duplicate and
distribute videotapes. In addition, the Company will be able to significantly
increase the number of movies available to the guest in a substantial number of
its rooms by varying movie selections on a nightly basis.
Package and Variable Pricing: The installation of the new Spexis
computer system will enable the Company to offer its guest customers in Guest
Choice sites several movie pricing options, including package pricing (volume
discounts) at hotels with compatible property management software. The Company
will also be able to vary pricing by film category. The Company currently
offers similar options to guests in several of its existing Guest Choice
hotels and has experienced cash flow improvements in these sites.
On-Demand Viewing: Digital Guest Choice will be the first on-demand
PPV system which allows multiple users to access the same digitally stored
movie image at varying times. Unlike current systems which require the storage
of multiple copies of a particular movie videotape in order to permit multiple
users to access the same movie in an on-demand format, Digital Guest Choice
will require only one CDV image of the movie to be stored, which can then be
accessed by multiple users at varying times. The Company expects that the
on-demand feature of Digital Guest Choice will provide substantial benefits.
First, the Company anticipates significant increases in revenue per equipped
room ("RER") at hotels which are converted from the traditional Spectravision
or Guest Theater scheduled-play only system. The Company's current on-demand
Guest Choice system generates viewership and revenues which are, on average,
approximately 30% higher than that of scheduled play only systems. In
addition, in hotels that already have Guest Choice installed, the tape
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based Guest Choice system will be retained in many sites following
implementation of Digital Guest Choice in order to increase the titles offered
in an on-demand format. Finally, because these on-demand movies will be
delivered primarily via satellite, the Company expects to realize program
management benefits in Digital Guest Choice which are similar to those which
the Company expects to realize from its scheduled play system, Guest Theater.
Reduction in Unbillable Views: The Company expects to significantly
reduce the frequency at which guests are not charged for a viewed movie due to
tape-based quality issues. The new system will provide much higher and
consistent picture quality as compared to the current tape-based system, in
which the picture quality deteriorates because each videotape in the
scheduled-play system is played almost continuously throughout a given month or
the deterioration of the videotape players' moving parts. Presently, the
Company does not charge customers who were unable to watch due to poor picture
quality of the movie. The Spexis computer system will also require customers
to confirm their desire to watch a movie before the movie begins playing and
before the customers are charged for their selection.
Upgrade to Eight Channels: Installation of the STARPATH technology
will upgrade current properties from an eight movie program monthly schedule to
a selection from twenty different movies every forty-eight hours during the
month. Over 100,000 rooms to be converted have historically offered less than
eight movie titles a month. The Company has historically realized increased
viewing levels and associated revenues and cash flows by performing such
upgrades.
Additional Interactive & Communication Services: In the future, the
Company plans to offer additional interactive and communication services,
including, among others, voice mail, fax mail, video conferencing and
interactive distance learning. These services would generate revenues and cash
flows which would be independent of viewing levels. The Company expects these
services to generate incremental revenue with low incremental costs and will
enable the Company to differentiate its products from those of competitors.
The Company is currently focused on developing these new interactive services
to meet the desires of its customers and to improve its competitive position.
The Company can also target corporate customers by offering these services
through the network of the Company's customer hotels.
Reduced Duplication and Field Service Costs: Currently the Company
provides pay-per-view movies and other in-room entertainment by manually
reproducing and distributing to each hotel site videotapes for insertion into
banks of videotape players. This distribution system requires substantial
inventory and production of videotapes and requires a relatively
labor-intensive distribution process. It also requires the use of multiple
videotape players which require periodic servicing. Following installation of
the CDV Satellite Network, the Company will significantly reduce manual tape
production, inventory and distribution (with limited exceptions for Guest
Choice sites). The new technology, when fully implemented, will enable the
Company to significantly reduce the present need to produce approximately
20,000 videotapes for scheduled play movie systems and over one million movie
cards per month required to service its existing hotels. As a result of the
use of less maintenance intensive components, the EDS field service contract
provides for annual cost reductions of $2 million per year in each of the first
three years after the first full year of operation.
Other Revenue Opportunities: STARPATH will enable the Company to
pursue broader applications of its PPV and interactive services in new markets,
such as hospitals, large apartment complexes, military housing and educational
institutions. The Company will also be able to offer national advertisers who
want to target business and leisure travelers the opportunity to insert their
message in non-PPV programming delivered by the system. The CDV Satellite
Network will also enable the Company to offer additional PPV services,
including major event telecasts such as championship boxing, rock concerts and
wrestling, as well as unique radio programming. In addition, access to EDS's
global communication network will enable the Company to more effectively expand
into foreign markets.
7
<PAGE> 10
MARKET AND CUSTOMERS
Traditional, Large Hotel Market: The Company's primary market has been
large hotels located in metropolitan areas of North America. The Company
currently provides PPV services to hotels that are part of chains including
Hyatt, Loews, Four Seasons, Wyndham and Radisson. In many cases, the Company's
hotel customers have been under contract for PPV services for over ten years.
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,
------------------
1989 1990 1991 1992 1993
---- ---- ---- ---- ----
Hotels Served:
Pay-Per-View . . . . . . . 2,154 2,408 2,554 2,543 2,442
Free-to-Guest . . . . . . . 916 995 1,018 998 1,006
Rooms Served:
Pay-Per-View . . . . . . . 659,996 729,487 758,710 722,571 684,599
Free-to-Guest . . . . . . . 338,411 357,160 363,116 336,295 330,138
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.
Mid-Level Hotel Market: The Company recently introduced Guest Touch, a
new product which was developed by the Company to provide PPV services to the
mid-level hotel market. This market segment, which the Company estimates to
contain approximately 1.3 million rooms in North America, is largely unserved
by the hotel PPV industry. The Guest Touch product, which as of December 31,
1993 is installed in approximately 36 hotels with a total of 5,437 rooms,
enables the Company to cost effectively service this market. The Guest Touch
product uses a patented telephone with a built-in credit card reader which is
used by the guest for the selection and payment of PPV movies, eliminating the
need for hotel employees to collect movie charges from their guests. The
STARPATH technology will allow the Company to more cost effectively service
this market, by reducing the need for costly videotape replacement and for
equipment maintenance field service visits to these hotels, many of which are
located away from large metropolitan areas. In March 1993, the Company signed
an agreement with HFS under which the Company will be the preferred provider of
PPV services to up to 360,000 rooms under HFS management in the mid-level hotel
market. The HFS managed hotels in the mid-level market consist primarily of
Ramada, Howard Johnson and Days Inn.
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 and Australia. The Company expects to
continue to expand into international markets. Expansion of the Company's
operations into foreign markets involves certain risks that are not associated
with further expansion in the United States and Canada, 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 efforts to build a significant base of hotel rooms in foreign
markets.
8
<PAGE> 11
Non-Hotel Markets: The Company currently sells PPV equipment and
receives royalties from a company engaged in providing pay-per-day services to
hospitals with an aggregate of approximately 8,000 beds. The Company has
significant opportunities to expand its services to other non-hotel markets
such as military installations and educational institutions.
SEGMENT DATA
For the amounts of revenue, operating income or loss before income
taxes, and identifiable assets attributable to each of the Company's geographic
segments for the last three fiscal years, see Note 16 to the Consolidated
Financial Statements included in "Item 8. Financial Statements and
Supplementary Data."
CONTRACTS
The Company typically enters into a separate contract with each hotel
for the services provided. The terms contained in the 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 hotels, the contracts are
generally negotiated separately with each hotel. Existing contracts generally
have a term of five years from the date the system becomes operational. At the
scheduled expiration of a contract, the Company seeks to extend the term of a
hotel's contract with market competitive terms. At December 31, 1993,
approximately 10.3% of the pay-per-view hotels have contracts which have
expired and are on a month-to-month basis. Approximately 19.4% of the existing
pay-per-view served hotels have contract expiration dates during 1994.
MANUFACTURING AND SYSTEMS OPERATIONS
Since the Company's inception the production of the Company's channel
selector units, signal modulation units, video racks and satellite signal
receiving equipment consisted primarily of assembly and test functions at the
Company's headquarters in Richardson, Texas. On December 17, 1993 the Company
sold its manufacturing operations, including equipment and manufacturing
inventories, to The Cerplex Group. Certech Technology, Inc., ("Certech," a
wholly-owned subsidiary of The Cerplex Group) will sell to the Company all of
its required pay-per-view components that the Company previously manufactured
and provide repairs and refurbishment of these system components. The Company
leased its manufacturing space at its corporate headquarters to Certech. The
components manufactured by Certech, primarily channel selector units and signal
modulators, are manufactured in accordance with the Company's specifications.
The Company retains ownership of all equipment supplied to hotel customers.
As a result of the sale and manufacturing agreement, which has a term of five
years, Certech is currently the Company's primary source of these components.
The Company maintains relationships with other suppliers to ensure alternative
sources of supply. However, the Company could experience cost increases or
production delays if it were to change primary suppliers.
Historically, the Company has designed and manufactured all of the
equipment and developed the software for use in its pay-per-view and
interactive hotel systems. SpectraMate, developed in 1990, is the least
expensive unit to produce and provides pay-per-view movies, interactive
services and is a remote controlled, "boxless" alternative to earlier
generation room units. The SpectraMate unit is termed boxless because it has a
sleek design, small configuration and can be attached to the back of the TV and
therefore is out of view. Because of the unique design, developed by the
Company as a copyrighted industry standard protocol for most television
manufacturers, there is no risk to the television's original design integrity,
warranty coverage, re-sale value or maintenance. The PAL Movie Converter
("PMC") is manufactured for use in foreign markets such as Hong Kong and
Australia where PAL ("Phase Alternate Line") is the standard television
required. Substantially all of the Company's pay-per-view rooms are equipped
with units which have both remote control and interactive capability.
9
<PAGE> 12
During 1992, the Company's research and development team began the
design and programming of a new enhanced hotel system software program
("Spexis") to be installed on non-proprietary UNIX based personal computers
("PCs"). Consequently, the Company ceased manufacturing its proprietary
microprocessor control units on January 1, 1993, and will purchase PCs for all
future pay-per-view and interactive systems computing needs.
FIELD SERVICE OPERATIONS
The Company's field service operations at December 31, 1993 consisted
of 394 field service personnel in 72 field service locations in the United
States, Puerto Rico, Canada, Mexico, Hong Kong and Australia. The Company's
field service personnel are responsible for supervising the installation of new
systems, maintaining systems and distributing and collecting movie cassettes.
In accordance with the EDS Strategic Alliance, EDS will assume the
Company's field service and MIS operations. EDS has agreed to perform these
functions for a fixed fee during the first year of service equal to the
Company's actual cost of field service in 1992. As compared to the first year,
the fixed fee declines in the second year of service after the transition
period by $2 million, in the third year by $4 million, and in the fourth year
and thereafter at $6 million per year (excluding, in each case, net rooms
growth). The Company expects its field service cost savings to increase as it
implements its expansion plans. EDS field service consists of 1,100 employees
in 90 field service locations and over 1,800 technically certified
subcontractors throughout the U.S., Canada, Puerto Rico and Mexico.
RESEARCH AND DEVELOPMENT
The Company's research and development staff has historically designed
most of the Company's products and services except for products and services
designed by outside parties pursuant to the EDS Strategic Alliance. Research
and development expense was $1.6 million, $1.3 million and $1.8 million in
1993, 1992 and 1991, respectively. The research and development staff together
with the Company's marketing department combine efforts to develop products to
meet the hotel and guest demands and to develop new products. The Company
recently completed the development of a new UNIX based integrated computer
system, Spexis, which will enable the Company to provide superior service to
its customers and to collect data necessary to fully capitalize on the
technological capabilities of the new satellite delivery system. The Spexis
computer system will enable the Company to provide new interactive services and
continue to monitor viewing patterns on a room and customer basis. The Company
will use this information to more actively manage its programming. The Company
continues to devote additional resources to research and development to enhance
its competitive position. Additionally, the Company intends to focus on
product development and maximize systems integration and technology expertise
through the EDS Strategic Alliance in an effort to target and develop new
markets. The Company's ability to compete effectively in its industry is
highly dependent upon its ability to develop or otherwise procure technological
product innovations.
COMPETITION
The Company has experienced increasing competition on a national scale
in its primary (large hotel) markets, including competition for contract
renewals at hotels operated by certain of the major hotel chains served by the
Company. During the first quarter of 1993, after several months of
negotiations with Hilton Hotels Corporation for a renewal of a contract
covering 43 hotels with a total of approximately 34,000 rooms, Hilton specified
certain terms and conditions that upon extensive review, the Company's
management decided would have yielded an unacceptable return on investment and
severely restricted the Company's capital resources and impaired the Company's
strategic plans. Additionally, contracts covering 17,756 rooms of the Marriott
Courtyard chain were not renewed upon expiration at December 31, 1993.
10
<PAGE> 13
The principal components of the increased competition in the large
hotel market are both advanced technological products, customer incentives and
significant reductions in prices for other non-PPV services and/or increasing
the portion of PPV revenues retained by the hotel. The new STARPATH technology
will enable the Company to more effectively compete by offering services that
are in demand by the hotel industry, such as video conferencing, voice mail and
other interactive services. See "EDS Strategic Alliance" and "Managements'
Discussion and Analysis of Financial Condition and Results of Operations."
Approximately 16.3%, 16.1% and 15.1% of the 684,599 rooms served by
the Company at December 31, 1993 are subject to contracts that expire during
1994, 1995 and 1996, respectively. The remaining number of rooms in the
upscale hotel market in which the Company's pay-per-view movie service can
operate profitably, that are not presently served by the Company, has not grown
in recent years as the room base served by the Company and other pay-per-view
providers has expanded. The Company believes that slower expansion of new
hotel rooms is due to recent general economic conditions and has contributed to
increasing competition in its pay-per-view and other services, especially in
the large hotel market. 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. Competitor cable companies are also able to offer pay-per-view
programming, and are now attempting to market to hotels on a limited basis in
certain areas.
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. However, by marketing a customized
free-to-guest service to its pay-per-view hotel customers, the Company has
become one of the largest distributors in this business with favorable
long-term programming rates.
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 expects that its primary competitors in the
interactive services market will be 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 timely provide equivalent services at
a competitive cost. The Company believes the STARPATH technology and its
exclusive agreement with EDS has significantly reduced its short-term risk to
technological changes in the industry and will provide the Company with a
competitive advantage over other PPV providers, although there can be no
assurance as to the duration of such effect.
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 the 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. The STARPATH technology is a private network and therefore
is not currently subject to regulation.
11
<PAGE> 14
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company has three issued patents 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 several registered trademarks
and servicemarks, including "Spectravision," "SpectraMate," "Guest Choice" and
"Guest Touch," pending trademark applications for "STARPATH" and "Spexis," and
registered copyrights covering the computer interface between the Company's
computer and the hotel's property management system computer ("PMS") in hotels
served by the Company. The Company has filed suit against certain lodging
industry pay-per-view providers in defense of its patents and copyrights. See
"Item 3. Legal Proceedings."
EMPLOYEES
As of December 31, 1993, the Company had 595 employees worldwide. Of
that total, 160 employees were covered by two collective bargaining agreements.
In connection with the EDS Strategic Alliance, approximately 348 employees,
primarily field service personnel, will no longer be employed by the Company.
This transition of field employees, including union employees, will be complete
by the end of the second quarter of 1994. See "EDS Strategic Alliance" and
"Field Service Operations". 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. As a result of the Company's sale of its manufacturing
operations, approximately 45,000 square feet of the headquarters is leased to
Certech under a five year lease. 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
$384,000. The Company also leases office space throughout the United States,
Canada, Mexico, Puerto Rico, Hong Kong and Australia for its field service
operations which will be reduced as EDS assumes the field service
responsibility. The Company believes its properties are suitable and adequate
for the Company's business operations.
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 recently amended its original lawsuit to, in part, assert
copyright infringement regarding the PMS software protocol against OCV and CVE.
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 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.
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 1993.
12
<PAGE> 15
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 4,
1994.
The Company's Class B Common Stock was available for public trading on
November 24, 1992 on the American Stock Exchange under the ticker symbol "SPH
B." The high and low closing prices for the Company's Class B Common Stock
from date of issuance to December 31, 1992 and for the year ended December 31,
1993 are as follows:
Quarter ended High Low
------------- ---- ---
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
December 31, 1992 $ 7 3/4 $6
The Class B Common Stock price as of March 25, 1994 was $5.875 As of
March 25, 1994, there were 19,390,379 shares of Class B Common Stock outstanding
held by approximately 200 stockholders of record.
No dividends have been paid on the Company's Class A Common Stock or
Class B Common Stock during either of the years ended December 31, 1993 or
1992. Provisions of the Company's indebtedness agreements limit payment of
dividends on the Common Stock. See Note 9 and Note 13 to the Consolidated
Financial Statements included in "Item 8. Financial Statements and
Supplementary Data."
13
<PAGE> 16
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. Separate financial statements of
Spectradyne and SPI Newco, Inc. ("Newco") are not included herein because
Spectradyne and Newco are jointly and severally liable on the guaranteed debt,
and the aggregate net assets, earnings and equity of Spectradyne and Newco when
combined with SPI Holding, Inc. are substantially equivalent to the net assets,
earnings and equity of the consolidated entity. The financial activities prior
to the 1989 Acquisition are referred to as "Predecessor" and after the 1989
Acquisition are referred to as "Successor".
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ---------------------------
From April 13 To April 12
(Successor) (Successor) (Successor) (Successor) (Successor) (Predecessor)
----------- ----------- ----------- ----------- ------------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Pay-Per-View $ 134,830 $ 136,541 $ 138,695 $ 119,489 $ 75,641 $ 26,742
Free-to-Guest 17,875 21,275 23,118 22,515 14,791 5,541
Interactive 2,656 4,083 4,796 4,608 2,555 857
Other 7,632 6,722 6,484 5,876 2,655 1,130
--------- --------- --------- --------- --------- ---------
Total Revenues 162,993 168,621 173,093 152,488 95,642 34,270
Direct Costs:
Pay-Per-View 42,195 41,217 42,268 37,809 25,491 8,684
Free-to-Guest 12,804 12,085 13,142 13,702 8,735 3,200
Other 3,835 3,226 3,187 2,631 1,738 661
--------- --------- --------- --------- --------- ---------
Total Direct Costs 58,834 56,528 58,597 54,142 35,964 12,545
Write off of Goodwill - 218,453 - - - -
Loss Before Extraordinary Items and Cumulative
Effect of Change in Accounting Principle (43,057) (270,242) (60,003) (72,472) (53,560) (17,543)
Extraordinary Gain (Loss) (2,699) 23,378 - - (4,152) -
Cumulative Effect of Change in Accounting Principle - (28,498) - - - -
--------- --------- --------- --------- --------- ---------
Net Loss (45,756) (275,362) (60,003) (72,472) (57,712) (17,543)
Preferred Stock Dividend - (21,878) (38,157) (32,622) (20,419) (7,468)
--------- --------- --------- --------- --------- ---------
Loss Applicable to Common Stockholders $ (45,756) $(297,240) $ (98,160) $(105,094) $ (78,131) $ (25,011)
========= ========= ========= ========= ========= =========
Loss per Common Share before Extraordinary Items
and Cumulative Effect of Accounting Change $ (2.37) $ (166.31) $ (655.88) $ (702.24) $ (525.65) $ (179.96)
</TABLE>
Other selected Data
(In thousands except hotel and room data)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1993 1992 1991 1990 1989
(Successor) (Successor) (Successor) (Successor) (Successor)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Assets $ 401,420 $ 397,674 $ 610,434 $ 644,573 $ 675,036
Total Debt $ 428,499 $ 455,081 $ 505,698 $ 489,669 $ 447,603
Stockholders' Equity (Deficit) $(118,614) $(150,923) $ 59,899 $ 116,635 $ 189,084
Pay-Per-View Hotels 2,442 2,543 2,554 2,408 2,154
Pay-Per-View Rooms 684,599 722,571 758,710 729,487 659,996
Free-to-Guest Hotels 1,006 998 1,018 995 916
Free-to-Guest Rooms 330,138 336,295 363,116 357,160 338,411
Interactive Hotels 489 480 491 458 355
</TABLE>
<PAGE> 17
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, 1993, 1992 and 1991.
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.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1991 1992 1993
---- ---- ----
<S> <C> <C> <C>
Hotels Served . . . . . . . . . . . . . . . . . 2,554 2,543 2,442
Rooms Served . . . . . . . . . . . . . . . . . . 758,710 722,571 684,599
Hotels Average Occupancy Rate . . . . . . . . . 63.1% 64.9% 65.9%
Viewing Level per Occupied Room ("VLO") . . . . 10.9% 9.8% 10.4%
Average Price per View . . . . . . . . . . . . . $7.46 $7.78 $7.73
Revenue per Equipped Room per Day ("RER") . . . $0.51 $0.49 $0.53
</TABLE>
______________________
The number of hotels and rooms served for the year ended December 31, 1993
includes the effect of the non-renewal of the Company's contract with
Marriott Courtyard Hotels and the corresponding reduction of 121 hotels
and 17,756 rooms.
During 1993, 1992 and 1991, revenues from the Company's pay-per-view
movie services accounted for 82.7%, 81.0% and 80.1%, 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, hotel room
occupancy, 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 or cable television
exhibition.
Pay-per-view systems installed. The net number of rooms in which
pay-per-view systems have been installed decreased during 1993 by 37,972 rooms
to 684,599 rooms as of December 31, 1993. The majority of this decrease was
the result of the non-renewal of a pay-per-view service contract with Marriott
Courtyard Hotels that expired on December 31, 1993 as well as non-renewal of
certain corporately owned Marriott hotels. In 1993, the Company entered into
contracts to renew pay-per-view service with several chains including Sheraton
Hawaii, Wyndham, Ramada Renaissance, Interstate, Stouffer and Loews, and to
provide new pay-per-view service to Four Seasons. Also during 1993, the
Company signed an agreement with Hospitality Franchise Systems ("HFS"), which
has 360,000 hotel rooms under various brand names, to be the preferred provider
of PPV services. The Holiday Inn chain also designated the Company as a
co-preferred provider for 180,000 rooms operated by its domestic franchisors.
In September 1993, the Company signed a seven-year exclusive contract renewal
with Hyatt Hotels & Resorts to provide the chain's in-room pay-per-view movies
and
15
<PAGE> 18
interactive video services. This contract covers 105 hotels with a total of
approximately 57,000 rooms. Hyatt Hotels will be equipped with the Digital
Guest Choice system and will become the first hotel chain to completely install
the CDV Satellite Network with all of STARPATH's benefits. At February 28,
1994, the Company had deliverable orders for systems (not including Guest
Choice installations) to be installed in approximately 29,500 additional rooms,
which are expected to be filled during 1994, as compared to approximately
23,000 rooms at February 28, 1993. Using the 1993 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.
Occupancy rates. Hotel occupancy rates, which vary from area to area,
fluctuate according to general economic conditions and seasonal travel
patterns. Occupancy rates have been provided directly to the Company by the
individual hotels served on a hotel-by-hotel basis and are not independently
verified by the Company. Hotel occupancy rates are calculated by accumulating
the number of rooms reported as occupied and dividing by the total number of
rooms available for occupancy. Using the 1993 operating statistics and
assuming no change in any other variable component of the Company's business,
for every full percentage point change in the average occupancy rate,
pay-per-view revenues would have increased or decreased by approximately $2.0
million on an annualized basis.
Viewing level per occupied room ("VLO"). VLO is sensitive to a number
of factors, some of which the Company cannot control, including the popularity
of available movies. The Company believes the higher viewing levels in 1993
were due to a combination of the level of availability of popular movies and
lack of competition from free television programming such as the Winter and
Summer Olympic Games during 1992. Although the Company has no control over the
popularity of major studio films, the Company can employ certain strategies and
product enhancements, as discussed below, which may increase viewing levels.
The higher viewing levels in 1993 can also be attributed to higher viewing
levels from the increased installations of the Guest Choice system (in which
the Company has averaged an approximate 30% increase in VLO). Using the 1993
operating statistics and assuming no change in any other variable component of
the Company's business, for every full percentage point change in VLO,
pay-per-view revenues would have increased or decreased by approximately $12.7
million on an annualized basis.
Price per view. The average price per view decreased to $7.73 in 1993
from $7.78 in 1992 and increased from $7.46 in 1991. During 1993, the average
price per view was $7.84 in the United States, US$6.58 in Canada, US $9.05 in
Hong Kong and US$6.75 in Australia. Foreign exchange rate fluctuations impact
the consolidated average price per view. Declines in the Canadian dollar
during 1993 contributed $0.04 of the $0.05 decrease in average price per view.
The Company increased the price per view charged from $6.95 to $7.95 in June
1991 for the majority of its U.S. hotels. The ability of the Company to raise
movie prices is subject to notice and certain other provisions in the terms of
the contracts with the hotels. The implementation of the Company's STARPATH
technology will allow the Company to employ variable pricing.
Revenue per equipped room per day ("RER"). RER represents total
pay-per-view revenues earned per equipped room per day. The Company believes
this is a more relevant and useful indicator than VLO to measure performance of
the pay-per-view service in relation to returns on capital investment. As the
Company begins implementing variable and package pricing in association with
the STARPATH technology, RER will become a more reliable indicator of
performance than VLO due to the fact that not every view will yield the same
amount of revenue. The Company's strategies for increasing VLO and RER include
the implementation of its STARPATH technology, including Digital Guest Choice,
which can deliver state of the art broadcast and on-demand viewing of PPV
entertainment.
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Direct costs. Direct costs incurred with the offering of pay-per-view
services include film licensing costs, hotel commissions, videotapes and
in-room cards. With the STARPATH technology, monthly distribution of in-room
cards will be reduced and replaced with on-screen video graphics for help in
customer selections. Costs of duplication and distribution of videotapes will
be greatly reduced (although videotapes will continue to be provided to
supplement the Guest Choice product). The savings from the reduction of
in-room cards and video tapes will be partially offset by the direct cost of
the monthly transponder lease which is necessary to provide signals to
transmit the digitized movies to the hotels. These savings will not be fully
realized until the completion of the CDV Satellite Network in mid-1994.
SV Guest Choice. The Company's current on-demand service is
SpectraVision Guest Choice, a pay-per-view service which provides on-demand
viewing of a variety of motion picture entertainment and informational tapes
from a library of up to 200 videotapes. As of December 31, 1993, 363
pay-per-view hotels with a total of 176,918 rooms were equipped with the Guest
Choice system, an increase of 132 hotels with a total of approximately 55,801
rooms over the number of Guest Choice systems installed at December 31, 1992.
The Company has experienced an average increase of approximately 30% in
viewership levels in hotels with the on-demand Guest Choice system than in
comparable hotels equipped with only scheduled PPV systems.
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 pays the Company a fixed monthly fee per room for each
programming channel selected.
During the fiscal years 1993, 1992 and 1991, revenues from the
Company's free-to-guest services accounted for 11.0%, 12.6% and 13.4% 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 336,295 rooms as of December 31, 1992 to 330,138 rooms as of
December 31, 1993. 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 1993. Due to the decreased rooms served as
well as lower prices granted in connection with contract renewals, the revenues
from free-to-guest services for 1994 will be less than those earned in 1993.
As of December 31, 1993 the Company provided free-to-guest services to 1,006
hotels as compared to 998 hotels as of December 31, 1992. At February 28,
1994, the Company had deliverable orders for systems to be installed in
approximately 9,500 additional rooms, which are expected to be filled during
1994, as compared to approximately 7,100 rooms outstanding at February 28,
1993. 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,
sales of the Company's proprietary systems for utilization in the hospital
industry and sales of various other products and services, such as remote
control units, satellite dishes, master antennae system upgrades and licensing
agreements. The Company anticipates the implementation of the STARPATH
technology will provide increased revenues from additional interactive services
and other sources of revenue, in particular sales of advertising over the
satellite network.
RESULTS OF OPERATIONS
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 reduction of
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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, 1.6% were from interactive services and 4.7% were from
other 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
that was partially offset by an increase in VLO to 10.4% in 1993 from 9.8% in
1992 contributing $8.3 million in 1993 PPV revenues. Average hotel occupancy
increased to 65.9% in 1993 from 64.9% in 1992 contributing approximately $2.0
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.
Interactive revenues decreased to $2.7 million in 1993 from $4.1
million in 1992, a decrease of $1.4 million or 34.9%. This decrease resulted
primarily from price reductions granted in connection with certain PPV contract
renewals.
Other revenues increased to $7.6 million in 1993 from $6.7 million in
1992, an increase of $910,000 or 13.5%, principally due to increased sales of
the Company's proprietary systems to the healthcare industry.
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. Significant declines in costs of video tape
duplication and distribution and in-room cards will be realized upon full
roll-out of the STARPATH technology, which is not expected until mid-1994.
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
Strategic Alliance. The Company has recorded estimated 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
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<PAGE> 21
field service operations. Approximately $4.9 million is attributable to the
write-off of obsolete equipment and $2.1 million is due to anticipated costs of
severance and incentives to field operation personnel to be granted during the
transition of field service operations to EDS. The cash charges for the
provision related to personnel are expected to be completed during 1994.
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. Total field service labor employed
by the Company, which is primarily operating expenses of maintenance of hotel
systems, will be eliminated by the end of the second quarter of 1994 and will
be provided by EDS at a negotiated cost to the Company pursuant to the terms of
the EDS Strategic Alliance. The Company's newly created Customer Service
department will be primarily responsible for hotel customer relations and will
work closely with both the Company's sales force and EDS to enhance the quality
of customer services.
Contracted Service Costs were $1.7 million in 1993 representing
charges under the EDS Strategic Alliance for field service and network service
(in connection with the implementation of the CDV Satellite Network) during the
fourth quarter of 1993. The charges for these services coupled with the
Company's employed field service will continue through the transition period
through the second quarter of 1994. After the transition is complete, EDS
Service costs will approximate the 1992 level of field service costs with a
fixed price reduction of $2.0 million per year for the next three years. These
costs do not include the Company's Customer Service costs.
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 the promotion and public relations of new products
and the EDS Strategic Alliance and agreements with the Hyatt and Holiday Inn
hotel chains.
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
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<PAGE> 22
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. Average total
debt outstanding during 1993 was $447.7 million with an effective interest rate
of 11.0% as compared to $514.8 million average debt outstanding with an
effective interest rate of 13.0% during 1992.
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. As a result of the adoption of
Statement 109 in 1992, the Company recognized deferred tax benefits in the
amount of $4.5 million in 1993 and $7.5 million in 1992. 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. In connection with Statement 109, 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. The Company does not expect to be liable for U.S. federal
income taxes in the near future.
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.
YEAR ENDED DECEMBER 31, 1992 ("1992") COMPARED TO YEAR ENDED DECEMBER 31, 1991
("1991")
Total revenues decreased to $168.6 million in 1992 from $173.1 million
in 1991, a decrease of $4.5 million or 2.6%. Of the total revenues reported in
1992, 81.0% were revenues from pay-per-view, 12.6% were from free-to-guest,
2.4% were from interactive services and 4.0% were from other sources.
Pay-per-view revenues decreased to $136.5 million in 1992 from $138.7
million in 1991, a decrease of $2.2 million or 1.6%. This decrease in
pay-per-view revenues in part reflected the decrease in VLO to 9.8% in 1992
from 10.9% in 1991, which resulted in an approximate $15.2 million decrease
in revenue. This decrease was partially offset by an increase in average hotel
occupancy to 64.9% in 1992 from 63.1% in 1991. In addition, average price per
view increased to $7.78 in 1992 from $7.46 in 1991, an increase of $0.32 or
4.3% due to the full year impact of the price increase effective in June 1991.
Free-to-guest revenues decreased to $21.3 million in 1992 from $23.1
million in 1991, a decrease of $1.8 million or 8.0%. This decrease primarily
reflects negotiated price reductions in connection with hotel contract
renewals.
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Interactive revenues decreased to $4.1 million in 1992 from $4.8
million in 1991, a decrease of $713,000 or 14.9%. This decrease resulted
primarily from a reduction in the number of interactive services provided per
hotel and certain price reductions granted in connection with contract
renewals, which decreases were partially offset by an increase in the total
number of hotels with interactive services.
Other revenues increased to $6.7 million in 1992 from $6.5 million in
1991, an increase of $238,000 or 3.7%, principally due to increased sales of
the Company's proprietary systems to the healthcare industry.
Pay-per-view direct costs decreased to $41.2 million in 1992 from
$42.3 million in 1991, a decrease of $1.1 million or 2.5%. As a percentage of
pay-per-view revenues, pay-per-view direct costs decreased slightly to 30.2% in
1992 from 30.5% in 1991. The decrease resulted primarily from reductions in
film licensing fees, which were partially offset by higher cost of video tape
duplication and in-room cards.
Free-to-guest direct costs decreased to $12.1 million in 1992 from
$13.1 million in 1991, a decrease of $1.0 million or 8.0%, primarily due to
negotiated price reductions from programming suppliers. As a percentage of
free-to-guest revenues, free-to-guest direct costs stayed constant at 56.8% in
1992 and 1991.
Other direct costs increased to $3,226,000 in 1992 from $3,187,000 in
1991, an increase of $39,000 or 1.2%.
Depreciation and amortization expense decreased to $54.1 million in
1992 from $61.2 million in 1991, a decrease of $7.1 million or 11.7%. The
decrease in depreciation in the amount of $3.1 million resulted from the slower
growth rate in the installed base of pay-per-view and other hotel systems and a
greater percentage of the equipped room base becoming fully depreciated in 1992
as compared to 1991. The decrease in amortization of $4.1 million is due
primarily to the elimination of the amortization of goodwill subsequent to the
write-off of goodwill at June 30, 1992.
Operating expenses increased to $25.3 million in 1992 from $24.6
million in 1991, an increase of $702,000 or 2.9%, primarily due to increased
material and labor costs of repairs and maintenance. In addition,
telecommunications costs in 1992 were greater than in 1991.
Selling and marketing expenses increased to $4.2 million in 1992 from
$3.6 million in 1991, an increase of $578,000 or 16.0%, primarily due to
increased advertising and promotion of new products.
General and administrative expenses increased to $15.9 million in 1992
from $14.6 million in 1991, an increase of $1.3 million or 9.2%. This increase
primarily resulted from changes in executive management. Approximately $1.2
million of the increase is due to (i) severance payments to former executives,
which payments ended during the fourth quarter of 1992, (ii) an increase in
executive management compensation, and (iii) recruiting costs associated with
new executives. This increase is partially offset by the absence of
performance bonuses in 1992 compared to a $600,000 incentive bonus payment in
1991. Additionally, directors and officers insurance expense increased
$587,000 over 1991 primarily due to the highly leveraged position of the
Company and the uncertainty associated with the restructuring process during
late 1991 and 1992. In November 1992, the Company obtained a renewal policy
for directors and officers insurance for approximately a 33% reduction in
annual cost. The remaining increase is attributable to increases in various
administrative costs such as equipment leases and telecommunications costs.
Research and development expenses decreased to $1.3 million in 1992
from $1.8 million in 1991, a decrease of $456,000 or 25.7%.
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Losses on foreign exchange transactions increased to $1,404,000 in
1992 from a gain of $11,000 in 1991, an increase of $1,415,000. The increase
resulted primarily from a decline in the Canadian dollar exchange rate.
Interest expense (net) decreased to $66.9 million in 1992 from $67.1
million in 1991, a decrease of $214,000 or 0.3%. Cash interest expense
decreased to $23.1 million in 1992 from $33.2 million in 1991, a decrease of
$10.1 million or 30.4%. Non-cash interest expense, including $9.9 million of
unpaid interest on the previously outstanding 14.75% debentures increased to
$44.0 million in 1992 from $34.1 million in 1991. In addition, the effective
borrowing rate on the senior bank debt decreased to 8.9% in 1992 from 9.2% in
1991. Average total debt outstanding during 1992 was $514.8 million compared
with $514.2 million in 1991.
Current income tax expense, comprised of state and foreign income tax
expense, increased to $2.2 million in 1992 from $1.5 million in 1991, an
increase of $700,000 or 45.2%, primarily due to increased state income taxes.
Loss before extraordinary items and cumulative effect of change in
accounting principle increased to $270.2 million in 1992 from a loss of $60.0
million in 1991, an increase of $210.2 million. The net loss for 1992 includes
one-time charges totaling $223.6 million comprised of the write-off of goodwill
in the amount of $218.5 million and a loss from a change in accounting
principle of $28.5 million, partially offset by the extraordinary gain from
extinguishment of debt in the amount of $23.4 million.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents were $14.3 million and $9.6 million at
December 31, 1993 and 1992, respectively. At December 31, 1993 the cash
balance of $14.3 million included the remaining unused net proceeds from the
Offerings in October 1993. This cash availability is reserved for the capital
expenditures required for the installation of the CDV Satellite Network. At
December 31, 1992, the cash balance of $9.6 million was used to pay accrued
Restructure costs of $9.9 million outstanding at December 31, 1992. Raw
materials were reduced to zero in connection with the sale of the Company's
manufacturing operations in December 1993. Installations in process have
increased from $14.9 million at December 31, 1992 to $28.2 million at December
31, 1993 or by $13.3 million. Included in this increase are $7.4 million of
televisions under capital lease obligations and $2.7 million of installation
components for the CDV Satellite Network and $4.3 million for increased Guest
Choice installations and refits to the SpectraMate room unit. Other Accrued
Liabilities increased $5.4 million over the balance at December 31, 1992
primarily due to accrued customer incentives in conjunction with long-term PPV
contract renewals and accrued costs of the Offerings. Capitalized Lease
Obligations increased by $12 million during 1993 due to the deployment of
approximately 39,000 televisions in conjunction with certain 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.
Capital expenditures for 1993 were $31.2 million, of which 24% was
expended for new installations of pay-per-view rooms, 9% was expended for the
first phase of the CDV Satellite Network, and 63% was expended for upgrades and
refits due to the demand for Guest Choice and the SpectraMate room unit. The
balance of capital expenditures includes the cost of installing free-to-guest
service, interactive service, development and testing of new hotel system
software and miscellaneous purchases in support of the Company's business
needs. The Company expects its maintenance capital expenditures (other than
for
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<PAGE> 25
deployment of upgraded on-demand technology) to decline substantially following
implementation of the CDV Satellite Network.
The Company began installation of the CDV Satellite Network in the
fourth quarter of 1993 and expects this network to be completely installed by
mid-1994. At February 28, 1994 the Company had 469 hotels with a total of
117,488 hotel rooms equipped with the CDV technology. The Company will require
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 $2.7 million was incurred in
1993. The Company will fund capital expenditures from operating cash flow,
proceeds of the Offerings and availability under the Revolving Credit Facility.
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. The Company does, however,
expect to benefit from both increased PPV profit margins and other sources of
revenue once the STARPATH technology is fully deployed. 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. 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. PPV
revenues are dependent upon the viewing levels in its PPV systems such as the
availability of popular movies and competing programming. In turn, the success
of marketing initiatives and other efforts of 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, along with the Company's new Spexis UNIX
interactive system, together with STARPATH will 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.
In connection with the EDS Strategic Alliance and pursuant to the
agreement, the Company began certain fixed payments in October 1993. The
Company expects these payments to cause an initial increase in operating
expenses through the second quarter of 1994 while the improvement in PPV
revenues and cost savings will gradually escalate during the conversion of the
Company's existing hotel systems to the STARPATH system. This duplication of
costs and the concessions granted for certain PPV contract renewals will have a
continuing impact on the Company's operating income for 1994. However, this
outsourcing of field service operations is expected to result in substantial
savings, commencing in 1995, over the 1992 levels of field service costs. The
amount of these annual savings is expected to be $2 million by the middle of
1995, $4 million by the middle of 1996 and $6 million by the middle of 1997 and
every year thereafter for the life of the contract.
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On October 5, 1993 the Company issued 7,650,000 shares of its Class B
Common Stock and $209.5 million aggregate principal amount of 11.5% Senior
Discount Notes, due 2001 (the "Senior Discount Notes") through a public
offering, (the debt and equity offerings referred to herein as the "Offerings")
resulting in net proceeds to the Company of $223.8 million. The net proceeds
from the Offerings were used to refinance an aggregate principal of $182.6
million of outstanding obligations under the Bank Credit Facility and the
Supplemental Credit Facility and will also be used for general corporate
purposes, including the funding of capital expenditures required for the
implementation of the CDV Satellite Network and the Company's expansion plans.
As a result of the Offerings, as of December 31, 1993 the Company had $14.3
million in short-term liquid investments.
Concurrently with the Offerings the Company obtained the Revolving
Credit Facility with borrowing availability of $20 million with two financial
institutions. The Revolving Credit Facility matures October 5, 1997. 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. At
March 20, 1994 the Company had $12.5 million of borrowing availability under
the Revolving Credit Facility.
In connection with the EDS Strategic Alliance, EDS made a commitment
to finance through capital leases the Company's purchase of the UNIX based
computer equipment associated with the installation of the Spexis systems.
Historically the Company's earnings have been inadequate to cover
fixed charges. However, as a result of the Offerings and the application of
the net proceeds therefrom, the Company's cash debt service requirements have
declined significantly below their historical levels. The Company has been
relieved of the amortization requirements under the old Bank Credit Facility
and will not begin to accrue cash interest payments on the Senior Discount
Notes until 1996. In addition, the instruments governing the Senior Notes,
Revolving Credit Facility and the Reset Notes limit payments of dividends on
both the Class A and Class B Common Stock. The Company believes that funds
generated from operations, cash on hand as a result of the proceeds from the
Offerings, $12.5 million of available borrowings under the Revolving Credit
Facility and lease financing available from EDS and others will be sufficient
to meet its liquidity and capital expenditure requirements through 1994,
including installation of the first phase of the STARPATH technology and the
beginning of the rollout of Digital Guest Choice.
24
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
Consolidated Statements of Financial Position at December 31, 1993
and 1992
Consolidated Statements of Operations for the years ended December 31,
1993, 1992 and 1991
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1992 and 1991
Notes to the Consolidated Financial Statements
Separate financial statements of Spectradyne and SPI Newco are not
included herein because Spectradyne and SPI Newco are jointly and
severally liable on the Senior Notes and the aggregate net assets,
earnings and equity of Spectradyne and SPI Newco when combined with
SPI Holding, Inc., are substantially equivalent to the net assets,
earnings and equity of the consolidated entity.
25
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SPI Holding, Inc.:
We have audited the accompanying consolidated financial statements of SPI
Holding, 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 schedules as listed in the index at Item
14. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules 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 SPI Holding, Inc.
and subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1993, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.
As discussed in note 10 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1992.
KPMG Peat Marwick
Dallas, Texas
March 11, 1994
26
<PAGE> 29
SPI HOLDING, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------
1993 1992
----------- -----------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 14,285 $ 9,593
Accounts Receivable (net of allowance for doubtful accounts
of $967 and $524 for 1993 and 1992, respectively) 18,060 18,714
Prepaids and Other Assets 9,569 11,940
Video Systems
Raw materials - 3,839
Installations in-process 28,157 14,894
Completed systems 211,781 190,809
---------- ----------
239,938 209,542
Less accumulated depreciation and amortization (141,253) (125,424)
---------- ----------
Total Video Systems 98,685 84,118
Building and Equipment
Building 4,241 4,232
Furniture, fixtures and other equipment 5,260 5,074
---------- ----------
9,501 9,306
Less accumulated depreciation (4,747) (4,562)
---------- ----------
Total Building and Equipment 4,754 4,744
Land 2,559 2,559
Hotel Contracts (net) 253,508 266,006
---------- ----------
TOTAL ASSETS $ 401,420 $ 397,674
========== ==========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
27
<PAGE> 30
SPI HOLDING, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------
1993 1992
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable $ 12,348 $ 10,815
Accrued Liabilities
Interest 2,598 3,848
Technology and Field Service Charge 6,629 -
Compensation 3,122 3,123
Restructure Costs - 9,940
Other 10,949 5,474
Income Taxes 660 620
Deferred Income Taxes 35,229 39,696
Debt
Bank Credit Facility - 180,120
Canadian Bank Credit Facility 7,350 7,350
Supplemental Credit Facility - 8,000
11.5% Senior Discount Notes 154,055 -
11.65% Senior Subordinated Reset Notes 260,795 260,795
Capitalized Lease Obligations 14,028 2,153
Other Debt 329 482
Debt Issuance Costs (net) (8,058) (3,819)
---------- ----------
Total Debt 428,499 455,081
---------- ----------
Total Liabilities 500,034 528,597
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 4,745,526 and 5,145,526 shares
at December 31, 1993 and 1992, respectively. 5 5
Class B Common Stock - $0.001 par value, authorized 144,000,000
shares, issued and outstanding 19,238,379 and 11,188,379 shares
at December 31, 1993 and 1992, respectively. 19 11
Paid in Capital 390,885 313,244
Contingent Value Rights Valuation Adjustment (5,077) (5,077)
Class B Common Stock Warrants 6,377 6,377
Retained Deficit (511,445) (465,689)
Foreign Currency Translation Adjustment 622 206
---------- ----------
Total Stockholders' Deficit (118,614) (150,923)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 401,420 $ 397,674
========== ==========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
28
<PAGE> 31
SPI HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 162,993 $ 168,621 $ 173,093
Costs and Expenses
Direct costs 58,834 56,528 58,597
Depreciation and amortization 44,103 54,050 61,226
Write-off of goodwill - 218,453 -
Technology and field service charge 7,000 - -
Loss on sale of manufacturing assets and inventory 649 - -
Operating expenses 24,583 25,282 24,580
Contracted service costs 1,716 - -
Selling and marketing expenses 5,054 4,199 3,621
General and adminstrative expenses 15,431 15,990 14,643
Research and development (net) 1,585 1,319 1,775
Exchange (gain) loss 833 1,404 (11)
---------- ---------- ----------
Total costs and expenses 159,788 377,225 164,431
---------- ---------- ----------
Operating Income (Loss) 3,205 (208,604) 8,662
Interest expense (net) 48,990 66,905 67,119
---------- ---------- ----------
Loss Before Income Taxes, Extraordinary Items and
Cumulative Effect of Change in Accounting Principle (45,785) (275,509) (58,457)
Income Taxes
State and foreign provision 1,739 2,247 1,546
Deferred benefit (4,467) (7,514) -
---------- ---------- ----------
Total Income Taxes (Benefit) (2,728) (5,267) 1,546
---------- ---------- ----------
Loss Before Extraordinary Items and Cumulative
Effect of Change in Accounting Principle (43,057) (270,242) (60,003)
Extraordinary Items
Loss from debt extinguishment (2,699) - -
Gain on debt restructuring - 23,378 -
---------- ---------- ----------
Total Extraordinary Items (2,699) 23,378 0
---------- ---------- ----------
Cumulative Effect of Change in Accounting Principle - (28,498) -
Net Loss (45,756) (275,362) (60,003)
Preferred Stock Dividend - (21,878) (38,157)
---------- ---------- ----------
Loss Applicable to Common Stockholders $ (45,756) $(297,240) $ (98,160)
========== ========== ==========
Loss Per Common Share:
Before extraordinary items and cumulative
effect of accounting change $ (2.37) $ (166.31) $ (655.88)
Extraordinary items (0.15) 13.31 -
Cumulative effect of accounting change - (16.22) -
---------- ---------- ----------
Net Loss $ (2.52) $ (169.22) $ (655.88)
========== ========== ==========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
29
<PAGE> 32
SPI HOLDING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
16% Cumulative Preferred Stock
Beginning balance $ - $ 105 $ 90
Stock dividend - 9 15
Exchange of preferred stock for common stock - (114) -
---------- ---------- ----------
Ending Balance $ - $ - $ 105
---------- ---------- ----------
Class A Common Stock
Beginning balance 5 - -
Issued in restructuring - 5 -
---------- ---------- ----------
Ending Balance $ 5 $ 5 $ -
---------- ---------- ----------
Class B Common Stock
Beginning balance 11 - -
Issued in public offering 8 11 -
---------- ---------- ----------
Ending Balance $ 19 $ 11 $ -
---------- ---------- ----------
Paid in Capital
Beginning balance 313,244 334,797 293,424
Issued in public offering 77,641 - -
Preferred stock dividends - 21,860 38,088
Capital contribution - 1,800 3,285
Issued in restructuring - 67,723 -
Cancellation of preferred stock in restructuring - (112,936) -
---------- ---------- ----------
Ending Balance $ 390,885 $ 313,244 $ 334,797
---------- ---------- ----------
Contingent Value Rights Valuation Adjustment
Beginning balance (5,077) - -
Valuation adjustment - (5,077) -
---------- ---------- ----------
Ending Balance $ (5,077) $ (5,077) $ -
---------- ---------- ----------
Class B Common Stock Warrants
Beginning and ending balance $ 6,377 $ 6,377 $ 6,377
---------- ---------- ----------
Retained Deficit
Beginning balance (465,689) (281,385) (183,225)
Net loss (45,756) (275,362) (60,003)
Preferred stock dividend - (21,878) (38,157)
Cancellation of preferred stock in restructuring - 112,936 -
---------- ---------- ----------
Ending Balance $ (511,445) $ (465,689) $ (281,385)
---------- ---------- ----------
Translation Adjustment
Beginning balance 206 5 (31)
Translation adjustment 416 201 36
---------- ---------- ----------
Ending Balance $ 622 $ 206 $ 5
---------- ---------- ----------
Total Stockholders' Equity (Deficit) $ (118,614) $ (150,923) $ 59,899
========== ========== ==========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
30
<PAGE> 33
SPI HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (45,756) $(275,362) $ (60,003)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 44,103 54,050 61,226
Loss on sale of manufacturing assets and inventory 649 - -
Other non-cash items:
Write-off of goodwill - 218,453 -
Technology and field service charge 7,000 - -
Cumulative effect of accounting change - 28,498 -
Deferred income tax benefit (4,467) (7,514) -
Extraordinary loss from debt extinguishment 2,699 - -
Extraordinary gain on debt restructuring - (23,378) -
Increase (decrease) in accrued
interest paid in kind - (8,226) 1,099
Conversion of non-cash interest
to secondary notes - 39,611 29,537
Accretion of discount on senior notes 4,074 - -
Amortization of debt issuance costs 1,055 2,536 3,108
Exchange (gain) loss 833 1,404 (11)
Other items (net) 86 283 347
Increase (decrease) in:
Accounts payable 1,377 (6,146) 6,447
Accrued interest (1,248) 10,884 (493)
Other accrued liabilities 2,374 (556) 456
Income taxes payable (124) (341) (433)
Decrease (increase) in:
Accounts receivable 559 675 (1,532)
Prepaids and other assets 2,282 (178) (100)
---------- ---------- ----------
Total adjustments 61,252 310,055 99,651
---------- ---------- ----------
Net cash provided by operating activities $ 15,496 $ 34,693 $ 39,648
---------- ---------- ----------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
31
<PAGE> 34
SPI HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Investing Activities:
Proceeds from sale of manufacturing assets
and inventory $ 5,201 - -
Decrease (increase) in raw materials (313) $ 43 $ (986)
Cost of in-process systems and capital
expenditures (36,097) (27,195) (22,755)
---------- ---------- ----------
Net cash used in investing activities $ (31,209) $ (27,152) $ (23,741)
---------- ---------- ----------
Financing Activities:
Borrowing under Supplemental Bank
Credit Facility $ 23,000 $ 13,000 $ 42,000
Repayment of Supplemental Bank
Credit Facility (31,000) (15,000) (40,000)
Repayment of Bank Credit Facility (180,120) (20,000) (17,380)
Repayment of other debt (1,432) (930) (687)
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 - -
Debt issuance costs (8,417) - -
Preferred stock dividend - fractional shares - (9) (54)
Payment of Restructuring costs (9,236) (7,802) (440)
---------- ---------- ----------
Net cash provided by (used in) financing activities $ 20,425 $ 2,057 $ (16,561)
---------- ---------- ----------
Effect of exchange rate changes on cash (20) (54) 24
---------- ---------- ----------
Net Increase (Decrease) in cash and cash equivalents 4,692 9,544 (630)
Cash and cash equivalents at beginning of period 9,593 49 679
---------- ---------- ----------
Cash and cash equivalents at end of period $ 14,285 $ 9,593 $ 49
========== ========== ==========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
32
<PAGE> 35
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
SPI Holding, Inc., (the "Company" or "SPI") 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.
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, SPI
acquired all of the outstanding stock of Spectradyne, through the merger of its
newly formed, wholly owned subsidiary with and into Spectradyne, 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 SPI (the "1989 Acquisition"). In December, 1990,
DP was dissolved into its parent, Rainbow Company ("Rainbow"), a partnership
controlled by Mr. Marvin Davis. 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 on September 17, 1992 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 "Restructuring"). The 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"). In October 1993 the Company successfully completed a
public offering of Class B Common Stock and senior discount notes. See Note 5
- - Debt and Equity Offerings.
Unless the context otherwise requires, all references herein to the
Company are not intended to imply exact corporate relationships and include SPI
and its subsidiaries, including SPI Newco, its direct subsidiary, and
Spectradyne, the direct subsidiary of SPI Newco.
33
<PAGE> 36
SPI HOLDING, 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 and
Australia. The consolidated financial statements include the accounts of SPI
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 at December
31, 1993 include approximately $8,650,000 of equipment under capital leases.
Accumulated amortization of such leased equipment was $1,134,000 at December 31,
1993. 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 $31,226,000 for 1993, $36,269,000 for 1992 and $39,273,000 for
1991. Prior to installation, in-process video systems and raw materials are
stated at cost, and depreciation of video systems begins when the system is
installed and activated.
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 continually assesses the propriety of the
carrying amount of hotel contracts 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 $58,950,000 and $46,452,000 at December 31, 1993 and 1992, respectively.
Amortization expense was $12,498,000 for 1993, $12,498,000 for 1992 and
$11,659,000 for 1991. 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).
MAINTENANCE AND REPAIRS: Maintenance and repairs are charged to
expense as incurred. Renewals and betterments are capitalized. When assets
are sold, retired or otherwise disposed of, the applicable costs and
accumulated depreciation are removed from the accounts, and the resulting gains
or losses are included in results of operations.
INCOME TAXES: In February 1992, the Financial Accounting Standards
Board issued Statement No. 109. 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.
34
<PAGE> 37
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of the foreign
subsidiaries are translated at the rate of exchange in effect at year 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' equity (deficit). 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.
NOTE 3 - EDS STRATEGIC ALLIANCE
On July 28, 1993, the Company entered into a ten year exclusive
agreement with Electronic Data Systems ("EDS") to install the most
technologically advanced PPV system in the industry. Under this agreement, EDS
and the Company will install a Compressed Digital Video ("CDV(TM)") satellite
movie transmission system, the "CDV Satellite Network," throughout most of the
Company's current and future North American hotel sites. This new technology,
"STARPATH," will replace 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 will also install a new satellite delivered on-demand movie
service, " Digital Guest Choice." Included in the STARPATH technology is the
Company's development of a sophisticated UNIX based integrated computer system
("Spexis") which will be installed in conjunction with the Company's PPV
systems and will enable the Company to provide additional enhanced interactive
services. Management believes the STARPATH technology will enable the Company
to generate higher revenues and cash flows from its existing installed and
future room base. In accordance with the EDS Strategic Alliance, EDS will
assume the Company's field service and management information services. EDS
has agreed to perform these functions for a fixed fee during the first year of
service equal to the Company's actual cost of field service in 1992. As
compared to the first year, the fixed fee declines in the second year of
service after the transition period by $2 million, in the third year by $4
million, and in the fourth year and thereafter at $6 million per year
(excluding, in each case, net rooms growth).
The Company began installing the CDV Satellite Network in the fourth
quarter of 1993 and expects this network to be completely installed into
substantially all of its North American hotels by mid-1994. The Company will
install Digital Guest Choice on a selective basis in connection with contract
renewals and extensions and expects to equip most of its major hotels with this
service within three to five years of commencement of installation. As the
STARPATH technology is being fully installed, the Company expects, among other
things, to be able to: (i) actively manage its pay-per-view programming by
quickly replacing poorly-performing movies; (ii) convert to a twenty-movie
program those 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; (v) provide new interactive services,
including voice mail, fax mail, video teleconferencing and interactive distance
learning; (vi) introduce national advertising on its free-to-guest system; (vii)
substantially reduce videotape and movie card schedule production, duplication
and distribution costs; (viii) reduce unbillable views; and (ix) reduce field
service costs as provided in connection with the EDS Strategic Alliance through
the improved reliability of the STARPATH digital technology over the moving
parts requirements of the videotape players.
35
<PAGE> 38
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As a result of the changes in technology and field service operations
the Company has recorded estimated 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 $4.9 million is a non-cash
charge attributable to the write-down of obsolete equipment and $2.1 million is
due to anticipated costs of severance and incentives to field operation
personnel to be granted during the transition of field service operations to
EDS. This transition and the related payout of the cash charges is expected to
be completed during 1994.
NOTE 4 - SALE OF MANUFACTURING OPERATIONS
Effective December 17, 1993 the Company sold its manufacturing
operations to The Cerplex Group. The sale included all production raw
materials, work-in-process and certain manufacturing equipment. Additionally,
the Company entered into a five-year technology production services agreement
with Certech Technology, Inc., ("Certech"), a wholly-owned subsidiary of The
Cerplex Group. Certech will manufacture and sell to the Company those hotel
entertainment system components previously manufactured by the Company. The
transaction resulted in cash proceeds to the Company of $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.
NOTE 5 - DEBT AND EQUITY OFFERINGS
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 "Offerings") resulting in net
proceeds to the Company of $223.8 million. The net proceeds from the 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 will also be used for general corporate purposes,
including to fund capital expenditures required for the implementation of the
EDS Strategic Alliance and the Company's expansion plans. 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.
As a result of the Offerings and the application of the net proceeds
therefrom, the Company's cash debt service requirements have declined
significantly below their historical levels. The Company has been relieved of
the amortization requirements under the old Bank Credit Facility and will not
begin to accrue cash interest payments on the Senior Notes until 1996. The
Company believes that funds generated from operations, cash on hand as a result
of the proceeds from the Offerings, $12.5 million of available borrowings under
the Revolving Credit Facility and lease financing available from EDS and others
will be sufficient to meet its liquidity and capital expenditure requirements
through 1994, including installation of the first phase of the STARPATH
technology and the beginning of the rollout of Digital Guest Choice. See Note
3 - EDS Strategic Alliance.
36
<PAGE> 39
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6 - STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1993 1992 1991
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Cash interest paid $ 43,854 $ 22,075 $ 33,688
State and foreign income taxes paid $ 2,191 $ 2,699 $ 1,246
Non-cash investing and financing activities:
Bank Credit Facility amendment fee $ - $ - $ 563
Accrued liabilities exchanged for equity $ - $ 1,800 $ 3,285
Payment of preferred stock dividend in kind $ - $ 21,878 $ 38,157
Issuance of common stock and CVRs in exchange for debt
pursuant to the Restructuring $ - $ 32,084 $ -
Capital lease obligation incurred on lease of equipment $ 12,915 $ 2,511 $ -
Accrued proceeds from sale of notes for common stock $ - $ 6,269 $ -
</TABLE>
NOTE 7 - EXTRAORDINARY ITEMS
In connection with the Offerings in October 1993, a portion of the
proceeds was used to extinguish the Company's 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 Restructuring in November 1992, the Company
issued 6,253,004 shares of Class B Common Stock in exchange for the 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 Restructuring of $14.7 million was
recorded, resulting in a net gain from debt restructuring of $23.4 million.
NOTE 8 - 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 adjusted for 1992 and 1991 to reflect the effect of the 1-for-20 reverse
stock splits effective on September 13, 1991 and June 30, 1992. See Note 13 -
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
-------------- ------------------
1993: 18,178,289 $ -
1992: 1,756,518 $ 21,878
1991: 149,662 $ 38,157
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
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 Offerings as of the beginning of the year, was $45.3
million and $1.89 per share, respectively.
37
<PAGE> 40
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 - DEBT
REVOLVING CREDIT FACILITY: Concurrent with the 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 11, 1994, the Company had $12.5 million borrowing
availability under the Revolving Credit Facility. The Revolving Credit Facility
matures October 5, 1997. All outstanding loans will bear interest at the
Company's option at either (i) the highest of prime rate, CD rate plus 1% and
federal funds rate plus 0.5% or (ii) Eurodollar rate plus 2.5%, in each case
plus 1.25%. 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.
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.
The Revolving Credit Facility is secured by all of the outstanding
stock 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 carrying amount of the Revolving Credit Facility at December 31,
1993 approximates the fair value because the facility bears interest at current
market rates.
CANADIAN BANK CREDIT FACILITY: The Canadian Bank Credit Facility
provides borrowings 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 3/4 of 1%, 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, 1993, the Company had $7.35 million in 60-day Eurodollar loans
at 4.0%. The loan is secured by the $7.5 million Standby Letter of Credit
provided by the Revolving Credit Facility.
The carrying amount of the Canadian Bank Credit Facility at December
31, 1993 and 1992 approximates its fair value because the borrowings bear
interest at current market rates.
SENIOR DISCOUNT NOTES: The Senior Notes were issued on October 5,
1993 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.
38
<PAGE> 41
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 secured on a subordinated basis to
the Revolving Credit Facility by a pledge of all of the outstanding stock of
SPI Newco and Spectradyne and certain other assets. The Senior Notes are
guaranteed by SPI Newco and Spectradyne and are senior to the Reset Notes and
CVRs and pari passu in right of payment to the Revolving Credit Facility.
The carrying amount of the Senior Notes at December 31, 1993
approximates the fair value because the borrowings bear interest at current
market rates and were recently originated through the Offerings.
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: Pursuant to the Restructuring, 100%
of the outstanding principal amount of reset notes plus accrued interest at
14.875% per annum through November 23, 1992, were exchanged for an equal amount
in principal of 11.50% Senior Subordinated Reset Notes due December 1, 2002.
The Reset Notes initially carried an interest rate of 11.50% per annum payable
semi-annually in cash on June 1 and December 1 beginning June 1, 1993. 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 connection with the Restructuring, the Company may pay interest on
the Reset Notes on June 1, 1994, 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 will be
increased by 100 basis points over the then existing annual interest rate. The
Company is prohibited from exercising the PIK Option on any such interest
payment date if the Company has paid the "Requisite Cash Proceeds" as
amortization of the principal of the Company's senior debt on or prior to such
interest payment date. "Requisite Cash Proceeds" is defined as $45 million in
cash derived from either or both of a public offering of the Company's Class B
Common Stock and cash that otherwise would have been paid in interest on the
Reset Notes on such interest payment dates.
39
<PAGE> 42
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
The fair value of the Reset Notes at December 31, 1993 is
approximately $265.2 million because the interest rate of the Reset Notes was
recently reset to cause the market value of the Reset Notes to equal 101.7% of
the principal amount. The carrying amount of the Reset Notes at December 31,
1992 approximates the fair value because the Reset Notes were issued on
November 23, 1992 through an exchange in the Restructuring.
INTEREST RATE PROTECTION AGREEMENT: On June 30, 1990, the Company
entered into an interest rate protection agreement with Wells Fargo Bank for a
period of three years under the terms of the previous Bank Credit Facility 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 receives compensation when the 90 day LIBOR (London Interbank Offered
Rate) exceeds 10.5% (ceiling) and the Company pays compensation when LIBOR is
less than 7.93% (floor). Compensation to be paid or received is recognized as
interest rates deviate beyond the stated rates. The Interest Rate Protection
Agreement was renewed for one year expiring June 30, 1994 with a ceiling of
6.00% and a floor of 3.31%. At the time of renewal, the Company had an
outstanding balance with Wells Fargo Bank; accordingly, the interest through
June 30, 1994 is computed using a $75 million base amount. The Company is
exposed to credit loss in the event of nonperformance by other parties to the
interest rate protection agreement. However, the Company does not anticipate
nonperformance by the counterparties. For the twelve months ended December 31,
1993, 1992 and 1991 additional interest expense under this agreement was
$1,741,000, $3,006,000 and $1,049,000, respectively.
The fair value of the Interest Rate Protection Agreement approximates
the carrying amount at December 31, 1993. The fair value of the Interest Rate
Protection Agreement was an obligation in the amount of $1.7 million at
December 31, 1992.
40
<PAGE> 43
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table indicates future maturities of all debt excluding
minimum annual rentals under capital lease obligations (dollars in thousands):
1994 . . . . . . . . . $ 171
1995 . . . . . . . . 7,408
1996 . . . . . . . . . 50
1997 . . . . . . . . . 50
1998 . . . . . . . . . -
After 1998 . . . . . . 414,850
----------
$ 422,529
==========
NOTE 10 - 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.
Financial statements for periods prior to January 1, 1992 have not been
restated to apply the provisions of Statement 109.
The extraordinary gain recognized on the extinguishment of debt in the
Restructuring is not recognized as taxable income as the 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 expense (benefit) attributable to continuing operations for the
years ended December 31, 1993, 1992 and 1991 consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
CURRENT:
--------
U.S. Federal $ - $ - $ -
State and local 1,275 2,087 1,382
Foreign 464 160 164
--------- --------- ---------
$ 1,739 $ 2,247 $ 1,546
========= ========= =========
DEFERRED
--------
U.S. Federal $ (3,325) $ (6,651) $ -
State and local (1,044) (818) -
Foreign (98) (45) -
--------- --------- ---------
$ (4,467) $ (7,514) $ -
========= ========= =========
</TABLE>
41
<PAGE> 44
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income tax expense (benefit) for the years ended December 31, 1993,
1992, and 1991 differed from the amount computed by applying the U.S. Federal
income tax rate of 35 percent in 1993 and 34 percent in 1992 and 1991 to the
loss before income taxes, extraordinary items and cumulative effect of
accounting change as a result of the following (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1993 1992 1991
--------- --------- ----------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (16,025) $ (93,673) $ (19,875)
Change in income tax benefit resulting from:
Amortization and write-off of goodwill - 75,979 7,374
State income taxes 829 1,377 912
Current year losses for which no benefit is recognized 10,112 10,451 9,510
Other, net 2,356 599 3,625
--------- --------- ----------
$ (2,728) $ (5,267) $ 1,546
========= ========= ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1993 and 1992 are presented below (in thousands):
<TABLE>
<CAPTION>
1993 1992
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . $ 91,279 $ 78,156
Tax benefit of deferred state taxes . . . . . . . . . . . . . . . . . 4,557 4,770
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,571 3,870
-------- ---------
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . 112,407 89,796
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . (38,240) (14,584)
-------- ---------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . $ 74,167 $ 72,212
-------- ---------
Deferred tax liabilities:
Intangible assets, principally due to differences in basis . . . . . $101,657 $ 103,742
Video systems and fixed assets, principally due to
differences in depreciation . . . . . . . . . . . . . . . . . . 6,603 5,883
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,136 2,283
-------- ---------
Total gross deferred tax liabilities . . . . . . . . . . . . . . . 109,396 111,908
-------- ---------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . $ 35,229 $ 39,696
======== =========
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1993 and 1992 were increases of $23,656,000 and $14,584,000,
respectively. The Company has recognized deferred tax assets to the extent such
assets can be realized through future reversals of existing taxable temporary
differences. Subsequently recognized tax benefits, relating to the valuation
allowance for deferred tax assets as of December 31, 1993, will be reported in
the consolidated statement of operations
42
<PAGE> 45
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 1993, SPI had an unused net operating loss ("NOL")
carryforward for federal income tax purposes of $254 million which will expire
in years 2002 through 2008. However, because the consummation of the
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 it's pre-ownership
change NOLs (approximately $220 million) in each taxable year following the
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.
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 11 - STOCK OPTIONS
All outstanding options for 3,060 shares under the 1988 stock option
plan became fully vested upon the change of control of the Company 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, 1993.
The following table summarizes transactions under the Company's 1988
stock option plan:
Number Shares Under Options 1993 1992 1991
--------------------------- ---- ---- ----
Outstanding, beginning of year 3,010 3,010 3,010
Granted during the year - - -
Canceled during the year - - -
Exercised during the year - - -
Outstanding, end of year 3,010 3,010 3,010
43
<PAGE> 46
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 12 - CONTINGENT VALUE RIGHTS
Upon consummation of the Restructuring, 3,269,544 CVRs were issued to
the former holders of Preferred Stock. 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, at the date of issuance of the CVRs, of the Mandatory Redemption
Payment. Based on the quoted market price for these securities, the estimated
fair value of the aggregate outstanding CVR's as of December 31, 1993 and 1992
was $11.9 million and $10.6 million, respectively.
NOTE 13 - STOCKHOLDERS' DEFICIT
CLASS A AND CLASS B COMMON STOCK. Upon consummation of the
Restructuring, the Company's Common Stock was reclassified into Class A and
Class B Common Stock, each par value of $0.001. The Company has authorized
6,000,000 shares of Class A Common Stock and 144,000,000 shares of Class B
Common Stock. Except as described below, 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.
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.
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 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.
44
<PAGE> 47
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table shows capital stock transactions in share amounts
during 1993, 1992 and 1991:
<TABLE>
<CAPTION>
16% CUMULATIVE PREFERRED STOCK 1993 1992 1991
------------------------------ ---- ---- ----
<S> <C> <C> <C>
Beginning of the year - 10,510,441 8,986,317
Stock dividend - 874,772 1,524,124
Canceled in Restructuring - (11,385,213) -
End of year - - 10,510,441
CLASS A COMMON STOCK 1993 1992 1991
-------------------- ---- ---- ----
Beginning of the year 5,145,526 149,662 149,662
Issued in Restructuring - 4,995,864 -
Converted to Class B Common Stock (400,000) - -
End of year 4,745,526 5,145,526 149,662
CLASS B COMMON STOCK 1993 1992 1991
-------------------- ---- ---- ----
Beginning of the year 11,188,379 - -
Issued in Restructuring - 11,188,379 -
Shares issued in equity offering 7,650,000 - -
Converted from Class A Common Stock 400,000 - -
End of year 19,238,379 11,188,379 -
</TABLE>
On September 13, 1991 and June 30, 1992, the Company authorized
1-for-20 reverse stock splits 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.
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, 1993 there were 4,322,260 warrants outstanding.
45
<PAGE> 48
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 14 - COMMITMENTS AND CONTINGENCIES
SPI leases certain office space, vehicles 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 $4,038,000,
$2,934,000 and $3,001,000 in 1993, 1992 and 1991, respectively. Future minimum
annual rentals under lease arrangements are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1994 . . . . . . . . . . . . . . $ 4,405 $ 5,142
1995 . . . . . . . . . . . . . . 4,418 4,092
1996 . . . . . . . . . . . . . . 3,136 3,806
1997 . . . . . . . . . . . . . . 2,712 3,697
1998 . . . . . . . . . . . . . . 2,104 3,486
Thereafter . . . . . . . . . . . 1,147 13,185
-------- --------
$ 17,922 $ 33,408
========
Less imputed interest 3,893
--------
$ 14,028
========
</TABLE>
In connection with the EDS Strategic Alliance and the assumption by
EDS of field service operations, certain office and automobile operating leases
will be terminated by the Company or assumed by EDS. Estimated amounts of
reduced commitments included above are $1,195,000, $624,000, $479,000,
$388,000, $257,000 and $727,000 for 1994, 1995, 1996, 1997, 1998 and
thereafter, respectively.
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 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
<PAGE> 49
SPI HOLDING, 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 1993 and 1992 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1993 (a)
- ----
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)
1992 (b)
- ----
Revenues $ 38,836 $ 43,113 $ 45,407 $ 41,265
Operating income (loss) (898) (216,462) 5,000 3,756
Income tax benefit (1,521) (1,293) (1,320) (1,133)
Loss before extraordinary item and
cumulative effect of accounting change (15,811) (232,430) (11,394) (10,607)
Net income (loss) (44,309) (232,430) (11,394) 12,771
Preferred stock dividends 10,510 11,368 - -
Net income (loss) applicable
to common stockholders (54,819) (243,798) (11,394) 12,771
Loss per common share
before extraordinary item and
cumulative effect of accounting change $ (175.87) $(1,628.99) $ (76.13) $ (1.62)
</TABLE>
(a) The fourth quarter of 1993 includes an extraordinary loss resulting from
extinguishment of debt.
(b) Quarterly results for 1992 have been restated to reflect the full impact
of the adoption of Statement 109 as a first quarter adjustment. The
first quarter of 1992 reflects a charge in the amount of $28,498,000 for
the cumulative effect of adopting Statement 109. Additionally, pursuant
to Statement 109, the Company increased the recorded value of hotel
contracts effective January 1, 1992 resulting in additional amortization
expense. Accordingly, operating income is $210,000 per quarter less than
previously reported. The restatements for all the 1992 quarters also
reflect the treatment of tax benefits totaling $7,514,000 for 1992
recorded in accordance with Statement 109.
The second quarter of 1992 includes the write-off of goodwill in the
amount of $218,453,000.
The fourth quarter of 1992 includes an extraordinary gain, net of losses,
resulting from the Restructuring in the amount of $23,378,000.
47
<PAGE> 50
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 16 - OPERATIONS BY GEOGRAPHIC AREA
The following table presents the Company's revenues and operating
income (loss) before income taxes for the years ended December 31, 1993, 1992
and 1991 and identifiable assets net of accumulated depreciation and
amortization as of December 31, 1993, 1992 and 1991 by geographic area (dollars
in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States (1) $ 140,457 $ 148,795 $ 154,228
Canada 12,867 11,532 12,596
Other (2) 9,669 8,294 6,269
---------- ----------- ---------
Total Revenues $ 162,993 $ 168,621 $ 173,093
========== =========== =========
Operating Income (Loss)
Before Corporate Expenses:
United States (1) $ 13,562 $ 28,538 $ 32,261
Canada 1,518 (1,537) (1,198)
Other (2) 3,113 2,635 1,918
---------- ----------- ---------
18,193 29,636 32,981
Less corporate expenses:
Parent company expenses 2,105 2,846 2,366
Amortization of corporate
intangibles 12,883 16,941 21,953
Write-off of goodwill - 218,453 -
Interest expense 48,990 66,905 67,119
---------- ----------- ---------
Operating Loss Before
Income Taxes $ (45,785) $ (275,509) $(58,457)
========== =========== =========
Identifiable Assets, net:
United States (1) $ 129,093 $ 107,616 $ 104,146
Canada 10,958 9,984 13,434
Other (2) 7,650 7,337 6,639
---------- ----------- ---------
147,701 124,937 124,219
Goodwill and Hotel
Contracts, net 253,508 266,006 483,261
Corporate Assets 211 6,731 2,954
---------- ----------- ---------
Total Assets, net $ 401,420 $ 397,674 $ 610,434
========== =========== =========
PPV Rooms: (unaudited)
United States (1) 584,354 628,568 667,167
Canada 74,777 71,436 73,702
Other (2) 25,468 22,567 17,841
---------- ----------- ---------
684,599 722,571 758,710
========== =========== =========
</TABLE>
(1) Includes branch operations in Puerto Rico and the U.S. Virgin Islands.
(2) Includes operations in Hong Kong, Australia and Mexico.
48
<PAGE> 51
SPI HOLDING, 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 consideration for these
management services, the Company accrued to Rainbow an annual fee of $400,000,
increasing at a compounded rate per annum equal to the consumer price index. In
connection with the Restructuring, the Old Management agreement was terminated
on November 23, 1992. Fees expensed under this agreement were $364,000 and
$414,000 for the years ended December 31, 1992 and 1991, respectively.
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 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 Restructuring, the Supplemental Fee Agreement was
terminated on November 23, 1992. Expenses under the Supplemental Fee Agreement
charged to interest expense were $174,000 and $109,000 for the years ended
December 31, 1992 and 1991, respectively.
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 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 years ended December 31, 1992 and 1991 obligations under
the Agreements in the amount of $1,800,000 and $3,285,000, respectively, were
converted and contributed to the Company's paid-in-capital. In connection with
the Restructuring, the Company terminated the Agreements on the Effective Date
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 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 Offerings and Revolving Credit Facility, the Management Agreement was
terminated.
49
<PAGE> 52
SPI HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In connection with the 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
Spectradyne 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. This agreement expires in April 1995. Payments under this
agreement were $167,250 for the year ended December 31, 1993. 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. 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 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
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 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 $564,000,
$492,000, and $333,000 for 1993, 1992, and 1991, respectively.
NOTE 19 - GOODWILL
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.
50
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
51
<PAGE> 54
PART III
Information called for by Items 10-13 is incorporated by reference
from the SPI Holding, Inc. - 1994 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.
52
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of SPI Holding, Inc.
are included in Item 8:
Independent Auditors' Report
Consolidated Statements of Financial Position at December 31, 1993
and 1992
Consolidated Statements of Operations for the years ended December 31,
1993, 1992 and 1991
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1992 and 1991
Notes to the Consolidated Financial Statements
Separate financial statements of Spectradyne, Inc. and SPI Newco, Inc.
are not included in this Annual Report on Form 10-K because
Spectradyne, Inc. and SPI Newco, Inc. are jointly and severally liable
on the guaranteed debt, and the aggregate net assets, earnings and
equity of Spectradyne, Inc. and SPI Newco, Inc. when combined with SPI
Holding, Inc. are substantially equivalent to the net assets, earnings
and equity of the consolidated entity.
(A)(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules of SPI
Holding, Inc. are included:
Schedule V - Property, plant and equipment
Schedule VI - Accumulated depreciation and amortization of property,
plant and equipment
Schedule VIII -- Valuation Accounts
Schedule IX -- Short-term borrowings
Schedule X -- Supplementary income statement information
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.
53
<PAGE> 56
(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)
3.2 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 Designation of the 16% Cumulative
Preferred Stock of SPI Holding, Inc. (Filed as
Exhibit 3(c) to the Company's 1988 Form 10-K
(Commission File No. 1-9724) and incorporated herein
by reference)
3.4 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)
3.5 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)
54
<PAGE> 57
(A)(3) 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, including form of note, 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 Amended and Restated Securities Purchase Agreement,
dated as of March 20, 1989 by and among SPI Holding,
Inc., Acadia Partners, L.P., Hicks & Haas Holdings,
Ltd. and the other purchasers of securities of SPI
listed therein (Filed as Exhibit 4 to the Company's
Report on Form 8-K dated April 26, 1989 (Commission
File No. 1-9724) and incorporated herein by
reference)
4.3 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)
4.4 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 4.2 to the Company's Report
on Form 10-Q for the period ended September 30, 1993
(Commission File No. 1-9724) and incorporated herein
by reference)
10.1 Third Amended and Restated Loan Agreement dated as
of November 23, 1992 among SPI Holding, Inc., Wells
Fargo Bank, N.A., as Agent, and certain financial
institutions party thereto (Filed as Exhibit 10.4 to
the Company's 1992 Form 10-K (Commission File No.
1-9724) and incorporated herein by reference)
10.2 Amended and Restated Loan Agreement dated as of
November 23, 1992 among SPI Holding, Inc. and Wells
Fargo Bank, N.A., as Agent (Filed as Exhibit 10.5 to
the Company's 1992 Form 10-K (Commission File No.
1-9724) and incorporated herein by reference)
10.3 Second Amended and Restated Security Agreement dated
as of November 23, 1992 made by SPI Holding, Inc. in
favor of Wells Fargo Bank, N.A., as Agent (Filed
as Exhibit 10.6 to the Company's 1992 Form 10-K
(Commission File No. 1-9724) and incorporated herein
by reference)
55
<PAGE> 58
(A)(3) EXHIBITS (CONTINUED)
Exhibit No. Description
----------- -----------
10.4 Amended and Restated Parent Pledge Agreement dated
as of November 23, 1992 among SPI Holding, Inc., SPI
Newco, Inc., and Wells Fargo Bank, N.A., as
Collateral Agent (Filed as Exhibit 10.7 to the
Company's 1992 Form 10-K (Commission File No.
1-9724) and incorporated herein by reference)
10.5 Amended and Restated Intercreditor Agreement dated
as of November 23, 1992 among Wells Fargo Bank,
N.A., as Agent, U.S. Trust Company of Texas, N.A.,
as Trustee, and Wells Fargo Bank, N.A., as
Collateral Agent (Filed as Exhibit 10.8 to the
Company's 1992 Form 10-K (Commission File No.
1-9724) and incorporated herein by reference)
10.6 Credit Agreement dated October 5, 1993 among SPI
Holding, Inc., Texas Commerce Bank, N.A., as Agent,
and certain financial institutions party thereto
(Filed as Exhibit 10.18 to the Company's Report on
Form 10-Q for the period ended September 30, 1993
(Commission File No. 1-9724) and incorporated herein
by reference)
10.7 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)
10.8 Note Purchase and Guaranty Termination Agreement
dated as of April 12, 1989, by and between SPI
Holding, Inc. and Acadia Partners, L.P. (Filed as
Exhibit 10(c) to the Company's Report on Form 8-K
dated April 26, 1989 (Commission File No. 1-9724)
and incorporated herein by reference)
10.9 Acquiror Pledge Agreement dated as of April 12, 1989
by and among DP Acquisition Corp. and Wells Fargo
Bank, N.A. (Filed as Exhibit 10(f) to the Company's
Report on Form 8-K dated April 26, 1989 (Commission
File No. 1-9724) and incorporated herein by
reference)
56
<PAGE> 59
(A)(3) EXHIBITS (CONTINUED)
Exhibit No. Description
----------- -----------
10.10 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)
10.11 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)
10.12 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)
10.13 Amendment and Assumption of Employment Agreement
dated October 16, 1991, between Spectradyne, Inc.
and Seamus McGill (Filed as Exhibit 10.21 to the
Company's 1991 Form 10-K (Commission File No.
1-9724) and incorporated herein by reference)
10.14 Personal Services Agreement dated as of April 5,
1993 between Spectradyne, Inc. and Harry S. Budow
10.15 Amendment to the Personal Services Agreement dated
March 24, 1994 between Spectradyne, Inc. and Harry
S. Budow
10.16 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)
10.17 Management Incentive Bonus Plan of SPI Holding, Inc.
dated February 2, 1994
21 Subsidiaries of SPI Holding, Inc.
25.1 Power of Attorney (included on Page 58).
_______________
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by SPI Holding, Inc. during
the last quarter of the period covered by this report.
57
<PAGE> 60
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 MARCH 29, 1994.
SPI HOLDING, INC.
By: /s/ ALBERT D. JEROME
------------------------
Albert D. Jerome
President
POWER OF ATTORNEY
We, the undersigned, directors and officers of SPI Holding, Inc. (the
"Company"), do hereby severally constitute and appoint Albert D. Jerome and
Danny G. Hair and each or either of them, our true and lawful attorneys and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, and to file the same with all exhibits thereto, and
all other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys and agents, and each or either of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys and agents, and each of them, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALBERT D. JEROME President and Director March 29, 1994
- ----------------------------------- (Principal Executive Officer)
(Albert D. Jerome)
/s/ DANNY G. HAIR Vice President - Finance March 29, 1994
- ----------------------------------- (Principal Financial Officer)
(Danny G. Hair)
/s/ NANCY J. DEEMER Controller March 29, 1994
- ----------------------------------- (Principal Accounting Officer)
(Nancy J. Deemer)
</TABLE>
58
<PAGE> 61
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN F. BERARDI Director March 29, 1994
- -----------------------------------
John F. Berardi
/s/ ROBERT D. BEYER Director March 29, 1994
- -----------------------------------
Robert D. Beyer
/s/ HOWARD T. BUCHANAN Director March 29, 1994
- -----------------------------------
Howard T. Buchanan
/s/ MICHAEL C. COLLERAN Director March 29, 1994
- -----------------------------------
Michael C. Colleran
/s/ JOHN DAVIS Director March 29, 1994
- -----------------------------------
John Davis
/s/ MARVIN DAVIS Director March 29, 1994
- -----------------------------------
Marvin Davis
Director
- -----------------------------------
Leonard Goldberg
/s/ GERALD S. GRAY Director March 29, 1994
- -----------------------------------
Gerald S. Gray
</TABLE>
59
<PAGE> 62
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SIDNEY POITIER Director March 29, 1994
- ----------------------------------
Sidney Poitier
/s/ MICHAEL J. SEIBERT Director March 29, 1994
- ----------------------------------
Michael J. Seibert
/s/ SKIP VICTOR Director March 29, 1994
- ----------------------------------
Skip Victor
/s/ JEFFREY I. WERBALOWSKY Director March 29, 1994
- ----------------------------------
Jeffrey I. Werbalowsky
/s/ KENNETH ZIFFREN Director March 29, 1994
- ----------------------------------
Kenneth Ziffren
</TABLE>
60
<PAGE> 63
SPI HOLDING, INC.
Schedule V
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Other Changes - Add Balance at
Classification Beginning of Period Additions At Cost Retirements (Deduct) - Describe End of Period
-------------- ------------------- ----------------- ----------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Building $ 4,232,000 $ 11,000 $ (2,000) $ - $ 4,241,000
Land 2,559,000 - - - 2,559,000
Completed Video Systems 190,809,000 35,968,000 (1) (13,970,000) (1,026,000)(2) 211,781,000
Furniture, fixtures and other equipment 5,074,000 954,000 (723,000) (45,000) 5,260,000
------------ ----------- ------------ ----------- ---------------
Totals $202,674,000 $36,933,000 $(14,695,000) $(1,071,000) $ 223,841,000
============ =========== ============ =========== ===============
Year Ended December 31, 1992
Building $ 4,207,000 $ 25,000 $ - $ - $ 4,232,000
Land 2,559,000 - - - 2,559,000
Completed Video Systems 175,206,000 23,433,000 (1) (5,015,000) (2,815,000)(2) 190,809,000
Furniture, fixtures and other equipment 4,946,000 646,000 (400,000) (118,000) 5,074,000
------------ ----------- ------------ ----------- ---------------
Totals $186,918,000 $24,104,000 $ (5,415,000) $(2,933,000) $ 202,674,000
============ =========== ============ =========== ===============
Year Ended December 31, 1991
Building $ 3,988,000 $ 219,000 $ - $ - $ 4,207,000
Land 2,559,000 - - - 2,559,000
Completed Video Systems 154,483,000 21,878,000 (1) (1,369,000) 214,000 175,206,000
Furniture, fixtures and other equipment 4,646,000 275,000 (67,000) 92,000 4,946,000
------------ ----------- ------------ ----------- ---------------
Totals $165,676,000 $22,372,000 $ (1,436,000) $ 306,000 $ 186,918,000
============ =========== ============ =========== ===============
</TABLE>
- ---------------
(1) Additions primarily represent installations in hotels.
(2) Principally due to foreign exchange rate fluctuations.
<PAGE> 64
SPI HOLDING, INC.
Schedule VI
ACCUMULATED DEPRECIATION AND AMORTIZATION
OF
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Additions
Beginning Charged to Costs Other Changes - Add Balance at
Description (1) of Period & Expense Retirements (Deduct) - Describe End of Period
--------------- --------- ---------------- ----------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Video Systems, building, equipment and fixtures $129,986,000 $31,226,000 $(13,019,000) $(2,193,000)(2) $146,000,000
Year Ended December 31, 1992
Video Systems, building, equipment and fixtures $100,752,000 $36,269,000 $ (4,187,000) $(2,848,000)(3) $129,986,000
Year Ended December 31, 1991
Video Systems, building, equipment and fixtures $ 62,561,000 $39,273,000 $ (965,000) $ (117,000) $100,752,000
</TABLE>
_______________
(1) Disclosure by asset classification is not practicable.
(2) Principally due to obsolete equipment write-offs and foreign exchange rate
fluctuations.
(3) Principally due to foreign exchange rate fluctuations.
<PAGE> 65
SPI HOLDING, INC.
Schedule VIII
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
Additions
---------
Balance at Charged to
Description Beginning of Period Costs & Expenses Charged to Other Deductions
----------- ------------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
From January 1, 1993 To December 31, 1993
Deferred tax asset valuation allowance $ 14,584,000 $ 23,656,000 $ -- $ --
Bad debt allowance 524,000 900,000 -- 457,000
From January 1, 1992 To December 31, 1992
Deferred tax asset valuation allowance $ 3,299,000 $ 11,285,000 $ -- $ --
Bad debt allowance 438,000 765,000 -- 679,000
</TABLE>
<TABLE>
<CAPTION>
COL. E
Balance at
End of Period
-------------
<S> <C>
From January 1, 1993 To December 31, 1993
Deferred tax asset valuation allowance $ 38,240,000
Bad debt allowance 967,000
From January 1, 1992 To December 31, 1992
Deferred tax asset valuation allowance $ 14,584,000
Bad debt allowance 524,000
</TABLE>
<PAGE> 66
SPI HOLDING, INC.
Schedule IX
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Maximum Amount Average Amount
Balance at Weighted Average Outstanding Outstanding
Category of Aggregate Short-term Borrowings End of Period Interest Rate During the Period During the Period (1)
- ------------------------------------------- ------------- ---------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
From January 1, 1993 To December 31, 1993
Supplemental Credit Facility $ - 6.00% $ 20,000,000 $ 10,916,666
From January 1, 1992 To December 31, 1992
Supplemental Credit Facility $ 8,000,000 6.25% $ 20,000,000 $ 17,583,333
From January 1, 1991 To December 31, 1991
Supplemental Credit Facility $ 10,000,000 8.47% $ 15,000,000 $ 10,333,333
</TABLE>
<TABLE>
<CAPTION>
COL. F
Weighted Average
Interest Rate
During the Period(2)
--------------------
<S> <C>
From January 1, 1993 To December 31, 1993
Supplemental Credit Facility 6.15%
From January 1, 1992 To December 31, 1992
Supplemental Credit Facility 6.41%
From January 1, 1991 To December 31, 1991
Supplemental Credit Facility 8.98%
</TABLE>
- ---------------
(1) The average amount outstanding during the period was computed by dividing
the total of month end balances by the number of months outstanding.
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense by average short term debt
outstanding - annualized.
<PAGE> 67
SPI HOLDING, INC.
Schedule X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
COL. A COL. B
ITEM CHARGE TO COSTS AND EXPENSES
---- ----------------------------
Year Ended December 31 1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Maintenance and repairs $ 4,208,000 $ 3,644,000 $ 3,634,000
Amortization of intangibles 12,883,000 17,780,000 21,953,000
Write-off of goodwill - 218,453,000 -
Taxes other than payroll and income taxes:
Property Tax 1,076,000 1,514,000 1,544,000
Other 351,000 566,000 699,000
--------------- --------------- ---------------
$ 1,427,000 $ 2,080,000 $ 2,243,000
=============== =============== ===============
Advertising Costs $ 2,688,000 $ 3,020,000 $ 2,483,000
</TABLE>
<PAGE> 1
EXHIBIT 10.14
April 5, 1993
Mr. Harry S. Budow
5904 Kensington
Plano, Texas 75093
Re: Personal Services Agreement
Dear Harry:
This letter will set forth the terms of our understanding regarding
your employment by Spectradyne, Inc. (hereinafter the "Company") as follows:
1. Employment Duties: You accept employment as the Senior Vice President
of Marketing and Business Development for the Company, or such other
comparable title and responsibilities as may be awarded and agreed
upon by the parties, reporting to the President and Chief Executive
Officer. You will perform such duties, functions and responsibilities
commensurate with and appropriate to your position as directed by the
President and Chief Executive Officer of the Company and you are
vested with the necessary power and authority to carry out and
discharge such duties, functions and responsibilities.
2. Term: The initial term of your personal services agreement with the
Company shall be for two (2) years commencing on the date hereof and
continuing through and including April 5, 1995. Unless either party
notifies the other in writing at least three (3) months prior to the
expiration of the then current term of this personal services
agreement, the term of the agreement shall be automatically extended
for an additional one (1) year period. This agreement may be
terminated by either party, at any time, upon thirty (30) days prior
written notice for breach of the terms of this Agreement by the party
receiving such notice of termination.
3. Compensation: As consideration for your services to be performed
hereunder, the Company shall pay you an annual base salary of One
Hundred Fifty Thousand and No/100 Dollars ($150,000.00), as same may
be increased from time to time during the term of this agreement in
accordance with the Company's approval requirements and procedures.
The annual base salary shall be paid to you in periodic installments
throughout the year in accordance with the Company's normal and
customary pay policy then in effect for executive officers of the
Company. In addition to the annual base salary, you may be awarded an
annual discretionary incentive bonus pursuant to the Company's
incentive bonus plan then in effect during the particular year of your
employment hereunder. The amount of the annual base salary and any
other amounts payable to you pursuant to this agreement are gross
amounts due by the Company to you hereunder, and the Company shall
have the right to deduct therefrom all taxes and other
<PAGE> 2
amounts which may be required to be deducted or withheld by law,
including, but not limited to, federal income tax withholdings and any
social security payments.
4. Benefits, Incentive Plans and Business Expenses: During the term of
this agreement, and in the event of the termination of this agreement
for so long as the Company pays you in accordance with the terms of
this agreement, and in accordance with the Company's approval
requirements and procedures, you shall be entitled to participate in
such employee benefit plans and programs maintained by the Company for
the benefit of its executive officers as set forth in Schedule A
attached hereto, as same may be amended or modified from time to time
hereafter, and to participate in applicable new or amended programs
established during the term of this agreement, including, but not
limited to, medical, dental, health, life, accident and disability
insurance programs, savings for retirement plans, incentive stock
option plans, and other equity participation programs; provided,
however, that in the event of the termination of this agreement for so
long as the Company pays you in accordance with the terms of this
agreement, in accordance with the Company's approval requirements and
procedures, you may be eligible to participate in new incentive stock
option plans and other equity participation programs which are created
by the Company after the termination of this agreement. You shall be
reimbursed for any business expenses reasonably incurred by you in
carrying out your duties, functions and responsibilities hereunder.
You shall be entitled to annual vacation and sick leave time pursuant
to the plan or policy then in effect which is available for other
executive officers of the Company.
5. Covenant Not to Compete: During the term of this agreement, and in
the event of the termination of this Agreement for so long as the
Company pays you in accordance with the terms of this agreement, you
covenant and agree that you will not, in the United States of America
or Canada, engage in as a principal, partner, agent or consultant, or
be employed by, any business or group of affiliated or unaffiliated
businesses (other than the Company) that engage in providing or
operating entertainment services to lodging, hospitality, healthcare,
education, military or residential markets and that are competitive
with any material line or business in which the Company or its
affiliates then currently engages or which the Company or its
affiliates are then currently developing, including, but without
limitation, applicable hardware or software systems, and guest
interactive services. You and the Company hereby agree that in the
event that either the length of time or geographical area set forth
herein is deemed too restrictive by any court of competent
jurisdiction, the court may reduce such restriction to those which it
deems reasonable under the circumstances.
6. Confidentiality, Proprietary Information and Trade Secrets: During
the term of this agreement and for two (2) years thereafter, you shall
not disclose, communicate or divulge to, or use for the direct or
indirect benefit of any third person, firm, association or company
other than the Company, the following confidential information
("Confidential Information"):
2
<PAGE> 3
(i) any proprietary information regarding
(a) the business methods;
(b) business policies, procedures, strategies, tactics or
techniques;
(c) research or development projects or results; or
(d) trade secrets;
(ii) any names and addresses of customers or clients or any data
on or relating to past, present or prospective customers or
clients; and
(iii) any other confidential and proprietary information relating
to or dealing with the business operations or activities of
the Company, made known to you or learned or acquired by you
while employed by the Company.
Further, you and the Company hereby agree that the following
information shall not be deemed Confidential Information and that you
shall have no obligation with respect to any information which:
(i) is now or which hereafter becomes publicly known or available
through no act or failure to act on your part;
(ii) is demonstrably known to you at the time of receipt and you
can establish such knowledge by documentary evidence in your
files;
(iii) is hereafter furnished to you by a third party who has
obtained Confidential Information rightfully without
restriction on its disclosure;
(iv) is disclosed by you pursuant to the requirement of a
governmental agency or when disclosure is permitted by
operation of law; or
(v) is demonstrably developed independently by you, provided that
you can establish by documentary evidence that the person or
persons developing it have not had access to any Confidential
Information received.
You may disclose such Confidential Information to any party provided
that it is made only in the normal course of business and for the
benefit of the Company. All advertising, sales and other materials,
including, but without limitation, data processing reports, customer
sales analysis, invoices, or any other materials or data of any kind
furnished to you by the Company or developed by you on behalf of the
Company or at the Company's direction or for the Company's use or
otherwise in connection with your employment hereunder, subject to the
limitations regarding Confidential Information set forth immediately
above, are and shall be deemed to be Confidential Information and are
to remain the sole, exclusive and confidential property of the
Company. Upon the termination of your employment hereunder, you shall
immediately deliver all such materials, and any and all copies
thereof, to the Company. You acknowledge and agree
3
<PAGE> 4
that the restrictions contained in this Section 6, in view of the
nature of the business in which the Company is engaged, are reasonable
and necessary in order to protect the legitimate business interests of
the Company , and that any violation thereof would result in
irreparable harm to the Company, and you therefore further acknowledge
and agree that, in the event you violate any of such restrictions, the
Company shall be entitled to obtain from any court of competent
jurisdiction, without the posting of any bond or other security,
preliminary and permanent injunctive or equitable relief as well as
damages and an equitable accounting of all earnings, profits and other
benefits arising from such violation, which rights shall be cumulative
and in addition to any other rights or remedies at law or in equity to
which the Company may be entitled.
7. Waiver: No waiver by either party to this agreement or any failure by
the other party to keep or perform any covenant or condition of this
agreement shall be deemed to be a waiver of any preceding or
succeeding breach of this agreement, or any other covenant or
condition.
8. Assignment: The Company may assign all or any part of its rights
under this agreement to any person or entity, but no such assignment
shall relieve the Company of its obligations hereunder. You shall not
have the right to assign this agreement or any of your rights
hereunder.
9. Entire Agreement, Governing Law: This agreement contains the entire
agreement between you and the Company relating to your personal
services agreement and supersedes all previous agreements and
understandings between you and the Company, whether written or oral,
with respect to the subject matter. This agreement may not be
modified, altered or amended except by a writing executed by both
parties. This Agreement shall be governed by, enforced and construed
in accordance with the laws of the State of Texas.
If the foregoing accurately reflects our agreement, please execute
each copy of this letter in the appropriate space set forth below.
Very truly yours,
SPECTRADYNE, INC.
By: /s/ ALBERT D. JEROME
Albert D. Jerome
President and Chief Executive
Officer
ACKNOWLEDGED AND AGREED TO
this 5th day of April, 1993:
BY: /S/ HARRY S. BUDOW
Harry S. Budow
4
<PAGE> 5
EXHIBIT A
1. Health insurance deductible waived for Harry Budow and
dependents.
2. Health insurance coverage fee waived for Harry Budow and
dependents.
3. Eligible medical expenses paid at 100% of the normal and
customary rate.
4. Eligible dental expenses paid at 100% up to the annual maximum
of $1,000 per family member.
5. Short term disability benefit - 26 weeks at full pay.
6. Long term disability benefit - 60% of base pay (maximum of
$10,000/month).
7. Life insurance coverage at 4 X annual salary (maximum of
$500,000).
8. A maximum of $1,200.00 for purposes of annual physical exam,
financial tax assistance, health/sports/country club
memberships, or home health equipment and apparatus. These
other benefits are to be paid by Harry Budow and submitted to
the Company for reimbursement.
9. Automobile allowance in an amount equal to $750.00 per month.
10. Reimbursement of annual American Airlines Admirals Club fees,
Delta Airlines Crown Room Club fees and airline upgrades.
5
<PAGE> 1
EXHIBIT 10.15
March 24, 1994
Mr. Harry S. Budow
5904 Kensington
Plano, Texas 75093
Re: Amendment to the Personal Services Agreement dated April 5,
1993, between Spectradyne, Inc. and Harry S. Budow (the
"Amendment")
Dear Harry:
This Amendment is made in connection with the Personal Services
Agreement dated April 5, 1993 between you and Spectradyne, Inc. ("PSA"). In
connection with your employment by Spectradyne, Inc. (hereinafter the
"Company"), and in consideration of our mutual agreements contained in this
Amendment, we hereby agree to amend the PSA as follows:
1. Section 2 of the PSA is hereby deleted in its entirety and the
following is inserted in lieu thereof:
"Term: The initial term of your personal services agreement with the
Company shall commence on April 5, 1993 and continue through and
including December 31, 1996. Unless either party notifies the other
in writing at least five (5) months prior to the expiration of the
then current term of this personal services agreement, the term of the
agreement shall be automatically extended for an additional one (1)
year period. This agreement may be terminated by either party, at any
time, upon thirty (30) days prior written notice for breach of the
terms of this Agreement by the party receiving such notice of
termination."
2. Section 3 of the PSA is hereby deleted in its entirety and the
following is inserted in lieu thereof:
"Compensation: As consideration for your services to be performed
hereunder, the Company shall pay you an annual base salary of Two
Hundred Thousand and No/100 Dollars ($200,000.00), as same may be
increased from time to time during the term of this agreement in
accordance with the Company's approval requirements and procedures.
The annual base salary shall be paid to you in periodic installments
throughout the year in accordance with the Company's normal and
customary pay policy then in effect for executive officers of the
Company. In addition to the annual base salary, you may be
<PAGE> 2
awarded an annual discretionary incentive bonus pursuant to the
Company's incentive bonus plan then in effect during the particular
year of your employment hereunder. The amount of the annual base
salary and any other amounts payable to you pursuant to this agreement
are gross amounts due by the Company to you hereunder, and the Company
shall have the right to deduct therefrom all taxes and other amounts
which may be required to be deducted or withheld by law, including,
but not limited to, federal income tax withholdings and any social
security payments."
To the extent not amended by this Amendment, all other provisions of
the PSA are hereby ratified, confirmed and restated in all respects as if
copied herein in full and shall remain in full force and effect.
If the foregoing accurately reflects our agreement, please execute
each copy of this letter in the appropriate space set forth below.
Very truly yours,
SPECTRADYNE, INC.
By: /s/ ALBERT D. JEROME
Albert D. Jerome
President and Chief Executive
Officer
ACKNOWLEDGED AND AGREED TO
this 24th day of March, 1994:
By: /s/ HARRY S. BUDOW
Harry S. Budow
2
<PAGE> 1
EXHIBIT 10.17
MANAGEMENT INCENTIVE BONUS PLAN
OF SPI HOLDING, INC.
Section 1. Purpose. The Management Incentive Bonus Plan of SPI
Holding, Inc. is intended to further the attainment of the Company's profit and
growth objectives by providing incentives to those key executives whose
management and individual performance have a direct impact on achieving those
objectives. The Plan also is expected to encourage the continued employment of
the Company's key executives and to facilitate the recruiting of executive
personnel in the future.
Section 2. Definitions. As used herein, the following terms shall
have the following meanings:
(a) "Award Year" shall have the meaning set forth in Section 4.
(b) "Board of Directors" or "Board" shall mean the Board of
Directors of the Company, as constituted at any time.
(c) Chief Executive Officer" or "CEO" shall mean the person who at
the time shall be the Chief Executive Officer of the Company.
(d) "Committee" shall mean the Compensation Committee of the Board
of Directors of the Company, as constituted at any time.
(e) "Company" shall mean SPI Holding, Inc.
(f) "Eligible Employee" shall mean a senior management employee of
the Company or of a Subsidiary who is determined by the Committee to be in a
position to have a direct and significant impact on achieving the Company's
consolidated profit and growth objectives. The CEO shall not be an Eligible
Employee.
(g) "Net Operating Cash" shall mean the Company's earnings before
interest, taxes, depreciation and amortization, and without adjustment for
extraordinary transactions, determined in a consistent manner in accordance
with generally accepted accounting principles and calculated on a consolidated
basis for the Company and its Subsidiaries.
(h) "Participant" shall mean an Eligible Employee selected by the
Committee to participate in the Plan pursuant to Section 7.
(i) "Performance Pool" shall mean the amount determined pursuant to
Section 6.
<PAGE> 2
(j) "Plan" shall mean this Management Incentive Bonus Plan of SPI
Holding, Inc., as adopted by the Board of Directors on February 2, 1994,
as such Plan from time to time may be amended.
(k) "Subsidiary" shall mean any corporation 50% or more of whose
stock having general voting power is owned by the Company, or by another
Subsidiary as herein defined, of the Company.
(l) "Target" shall have the meaning set forth in Section 5.
Other terms shall have the respective meanings given them in
succeeding sections of the Plan.
Section 3. Administration of Plan.
(a) The Plan shall be administered by and in the discretion of the
Committee which may establish such rules and regulations as it deems necessary,
make amendments consistent with Section 12 herein, interpret the Plan and
otherwise make all determinations and take such action in connection with the
Plan as it deems appropriate.
(b) The decisions of the Committee shall be final, conclusive and
binding upon all parties. In administering the Plan, the Committee may employ
accountants and counsel (who may be the independent auditors and outside
counsel for the Company) and other persons to assist or render advice to it,
all at the expense of the Company.
(c) Notwithstanding the foregoing, any actions taken by the
Committee pursuant to Sections 5, 6, 7, 8, 11 and 12 shall be subject to the
Board's approval.
Section 4. Award Year. Awards provided for under this Plan shall be
determined annually, on the basis of the Company's fiscal year ("Award Year").
Section 5. Target. In consultation with the CEO, the Committee shall
establish a target (the "Target") for an Award Year at the time that the
Company's business plan or operating budget for such Award Year is determined
by the Board, or as soon as practicable thereafter, and the Target shall be a
derivative of the budget.
Section 6. Performance Pool.
(a) The Performance Pool shall be an amount equal to a percentage, as
shall be determined by the Committee, of the Company's Net Operating Cash for
the Award Year which is in excess of the Target. The Committee's determination
of the
-2-
<PAGE> 3
percentage hereunder shall be made at the time that the Target is established
pursuant to Section 5.
(b) If at least 80% of the Target is met for an Award Year, the
Committee may, in its discretion, lower the Target, in which event the
Performance Pool shall be determined in accordance with subsection (a) of this
Section 6 by reference to the revised Target.
Section 7. Selection of Participants and Allocation of the
Performance Pool for an Award Year.
(a) Upon the recommendation of the CEO, the Committee shall select
the Eligible Employees who will participate in the Plan for an Award Year and
shall determine the percentage of the Performance Pool that will be allocated
to each Participant for the Award Year, at the time that the Target is
established for such Award Year pursuant to Section 5.
(b) During an Award Year, the Committee may select (i) an Eligible
Employee who commences employment with the Company or a Subsidiary after the
commencement of the Award Year, or (ii) an employee of the Company or a
Subsidiary who is promoted to a position which makes him an Eligible Employee
after the commencement of the Award Year, to participate in the Plan during
such Award Year. If an Eligible Employee is selected to participate in the
Plan during an Award Year pursuant to this subsection (b), the allocation
percentage of the Performance Pool for each Participant selected in accordance
with subsection (a) of this Section 7 shall be reduced on a pro rata basis so
that a percentage of the Performance Pool can be allocated by the Committee,
upon the recommendation of the CEO, to such additional Participants.
Section 8. Discretionary Bonuses. The Committee may, in its
discretion, award bonuses for an Award Year to certain Eligible Employees under
demonstrated extraordinary circumstances pursuant to the recommendation of the
CEO, in an amount in the aggregate which does not exceed .5% of the Company's
Net Operating Cash for the Award Year. If any such bonus is awarded to an
Eligible Employee for an Award Year, such Eligible Employee shall be deemed to
be a Participant for such Award Year.
Section 9. Limitations on Awards. Notwithstanding any other provision
of the Plan to the contrary, in no event shall an award (or awards) under this
Plan to a Participant with respect to an Award Year exceed 100% of the base
salary payable to such Participant with respect to such Award Year.
Section 10. Payment of Awards. As soon as practicable after the
calculation of the amount of the Performance Pool achieved during an Award Year
and the resulting amount of
-3-
<PAGE> 4
bonuses as set forth in Sections 7 and 8, the Committee shall authorize payment
to each Participant of his respective award in an amount determined in
accordance with Sections 7 and 8 (subject to the limitation provided in Section
9 and to deduction or withholding of any taxes required by law with respect to
such amount). The payment of all awards under the Plan shall be made in cash.
The Company shall not be liable for interest upon any award.
Section 11. Termination of Employment. Except as is herein provided,
the payment of any award to a Participant is subject to the Participant
continuing in the employ of the Company or a Subsidiary from the date the award
is granted to him through the conclusion of the Award Year, provided, however,
that if the Participant is employed for at least 9 months during the Award
Year, the Committee may, in its discretion, authorize the payment to such a
Participant of an amount equal to his award determined pursuant to Section 7
or Section 8 multiplied by a fraction, the numerator of which is the number of
whole months the Participant was employed by the Company during the Award Year,
and the denominator of which is 12. Notwithstanding the preceding, if the
Board of Directors determines that a Participant's employment by the Company or
any Subsidiary has been terminated for "Cause" (as hereinafter defined) during
an Award Year, or after the end of an Award Year but before the payment of
awards hereunder has been made for such Award Year, such Participant's award
for such Award Year shall be forfeited. For purposes of this Section 11,
"Cause" shall mean a Participant's (a) fraud or intentional misrepresentation
in the course of his employment, (b) embezzlement, misappropriation or
conversion of assets or opportunities of the Company or any Subsidiary, (c)
willful damage to, or willful disclosure of any material confidential
information of, the Company or any Subsidiary, (d) willful or grossly negligent
engagement in any activity competitive with the business of the Company or a
Subsidiary as to which the Company has notified the Participant in writing and
the Participant has not ceased (other than for reasons beyond the control of
the Participant) within 3 business days following such notice of his or her
participation in such activity, (e) a failure to follow reasonable directions
or instructions of a more senior officer which are consistent with the
Participant's position and responsibilities as of the date of his or her
initial participation in the Plan (as such position and responsibilities may be
changed from time to time with the prior consent of the Participant), and such
failure shall have continued (other than for reasons beyond the control of the
Participant) for a period of 3 business days after receipt of written notice
thereof from the Company; or (f) willful or grossly negligent breach of any
stated material employment policy of the Company; provided that no act or
failure to act on the part of a Participant shall be deemed to be "willful" if
it was due primarily to an error in judgment or negligence.
-4-
<PAGE> 5
Section 12. Amendment. The Committee may from time to time amend,
modify or terminate, in whole or in part, any or all of the provisions of the
Plan.
Section 13. Miscellaneous.
(a) No awards under the Plan shall be subject in any manner to
anticipation, alienation, pledge, transfer, or assignment, except by will or by
the laws of descent and distribution and any attempt to anticipate, alienate,
pledge, transfer, or assign any such award shall be void and the interest of
the Participant shall be forfeited.
(b) Neither the granting of, nor any payment with respect to, any
award under the Plan shall limit a Participant's right to receive, or to be
eligible for, any other compensation or benefits.
(c) The selection of an Eligible Employee as a Participant for an
Award Year shall not constitute a contract of employment between the
Participant and the Company or otherwise entitle the Participant to remain in
the employ of the Company.
(d) If there is a forfeiture or termination of all or a portion of a
Participant's award pursuant to Sections 11 or 13(a), such amounts shall be
included in the Performance Pool for purposes of calculating the payment of
other awards pursuant to Section 10.
(e) Each cash payment of awards under this Plan shall be made from
the general assets of the Company. No special or separate fund shall be
established or other segregation of assets made to assure the payment of any
such awards. No Participant or other person shall have under any circumstances
any interest whatsoever in any particular property or assets of the Company.
Section 14. Governing Law. This Plan shall be subject to and
construed in accordance with the laws of the State of Texas.
Section 15. Effective Date. The Plan shall be effective as of
January 1, 1994, for Award Years commencing on or after such date.
-5-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF SPI HOLDING, INC.
<TABLE>
<CAPTION>
Subsidiary Place of Incorporation
------------------------------ ----------------------
<S> <C>
Hotelvision Systems, Inc. Ontario, Canada
Kalevision Systems, Inc. Ontario, Canada
Kalevision Systems, Inc. - USA New York
Spectradyne Asia Pacific Limited Hong Kong
Spectradyne Australia Pty. Limited New South Wales
Spectradyne of the Bahamas, Inc. Delaware
Spectradyne of Bermuda, Inc. Delaware
Spectradyne of Canada, Inc. Ontario, Canada
Spectradyne Gmbh Federal Republic of Germany
Spectradyne, Inc. Texas
Spectradyne International, Inc. Delaware
Spectradyne of Texas, Inc. Virginia
Spectravision of Barbados Inc. Barbados
Spectravision of Canada, Inc. Ontario, Canada
SPI Newco, Inc. Delaware
</TABLE>
