<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1994
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________________ TO_________________
COMMISSION FILE NUMBER: 1-9724
SPI HOLDING, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2182004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 NORTH PLANO ROAD, RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip Code)
(214) 234-2721
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes X No
----- -----
Number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Outstanding at
Title of each Class May 6, 1994
-------------------------------------- --------------
Class A Common Stock, $0.001 Par Value 4,593,526
Class B Common Stock, $0.001 Par Value 19,390,379
<PAGE> 2
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Statements of Financial Position
as of March 31, 1994 (unaudited) and December 31, 1993 . . . . . . 2
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1994 and 1993 (unaudited) . . 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1994 and 1993 (unaudited) . . 5
Notes to the Condensed Consolidated Financial Statements . . . . . 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 7
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 11
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<PAGE> 4
SPI HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 9,951 $ 14,285
Accounts Receivable 19,095 18,060
Prepaids and Other Assets 10,385 9,569
Video Systems
Installations In-Process 33,057 28,157
Completed Systems 223,238 211,781
----------- -----------
256,295 239,938
Less accumulated depreciation and amortization (147,228) (141,253)
----------- -----------
Total Video Systems 109,067 98,685
Building and Equipment
Building 4,242 4,241
Furniture, fixtures and other equipment 5,289 5,260
----------- -----------
9,531 9,501
Less accumulated depreciation (4,899) (4,747)
----------- -----------
Total Building and Equipment 4,632 4,754
Land 2,559 2,559
Hotel Contracts (net) 250,383 253,508
----------- -----------
TOTAL ASSETS $ 406,072 $ 401,420
=========== ===========
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
2
<PAGE> 5
SPI HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
--------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable $ 16,506 $ 12,348
Accrued Liabilities
Interest 11,178 2,598
Other 21,149 20,700
Income Taxes 683 660
Deferred Income Taxes 33,077 35,229
Debt
Canadian Bank Credit Facility 7,350 7,350
11.5% Senior Disount Notes 158,369 154,055
11.65% Senior Subordinated Reset Notes 260,795 260,795
Capitalized Lease Obligations 18,550 14,028
Other Debt 279 329
Debt Issuance Costs (net) (7,724) (8,058)
--------- ---------
Total Debt 437,619 428,499
--------- ---------
Total Liabilities 520,212 500,034
Contingent Value Rights 20,000 20,000
Stockholders' Deficit
Class A Common Stock - $0.001 par value,
authorized 6,000,000 shares, issued and
outstanding 4,593,526 and 4,745,526 shares
at March 31, 1994 and December 31, 1993,
respectively. 5 5
Class B Common Stock - $0.001 par value,
authorized 144,000,000 shares, Issued and
outstanding 19,390,379 and 19,238,379 shares
at March 31, 1994 and December 31, 1993,
respectively. 19 19
Paid in Capital 390,885 390,885
Contingent Value Rights Valuation Adjustment (5,077) (5,077)
Class B Common Stock Warrants 6,377 6,377
Retained Deficit (526,663) (511,445)
Foreign Currency Translation Adjustment 314 622
--------- ---------
Total Stockholders' Deficit (134,140) (118,614)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 406,072 $ 401,420
========= =========
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
3
<PAGE> 6
SPI HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31,
1994 1993
----------- -----------
<S> <C> <C>
REVENUES:
Pay-Per-View $ 31,614 $ 33,807
Free-To-Guest 3,868 5,077
Interactive Services 460 834
Other 1,158 1,854
----------- -----------
TOTAL REVENUES 37,100 41,572
DIRECT COSTS:
Pay-Per-View 10,719 10,259
Free-To-Guest 3,130 3,274
Other 370 1,039
----------- -----------
TOTAL DIRECT COSTS 14,219 14,572
DEPRECIATION AND AMORTIZATION 11,469 11,404
CONTRACTED SERVICE COSTS 2,571
OPERATING EXPENSES 6,245 6,113
SELLING AND MARKETING EXPENSES 1,359 1,211
GENERAL AND ADMINISTRATIVE EXPENSES 3,792 3,635
RESEARCH AND DEVELOPMENT (NET) 775 310
EXCHANGE (GAIN) LOSS 62 (112)
----------- -----------
TOTAL COSTS AND EXPENSES 40,492 37,133
----------- -----------
OPERATING INCOME (LOSS) (3,392) 4,439
INTEREST EXPENSE, NET 13,647 12,570
----------- -----------
LOSS BEFORE INCOME TAXES (17,039) (8,131)
INCOME TAXES
State and Foreign Provision 331 566
Deferred Benefit (2,152) (1,870)
----------- -----------
TOTAL INCOME TAX BENEFIT (1,821) (1,304)
----------- -----------
NET LOSS $ (15,218) $ (6,827)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.63) $ (0.42)
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING 23,983,905 16,333,905
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
4
<PAGE> 7
SPI HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1994 1993
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (15,218) $ (6,827)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 11,469 11,404
Other non-cash items:
Increase in accrued interest paid in kind 11,088 -
Deferred income tax benefit (2,152) (1,870)
Amortization of debt issuance costs 334 228
Accretion of discount on senior notes 4,314 -
Exchange (gain) loss 62 (112)
Other items (net) - 459
Increase (decrease) in:
Accounts payable 4,167 (91)
Accrued cash interest (2,508) 7,589
Other accrued liabilities 477 655
Income taxes payable 23 236
Decrease (increase) in:
Accounts receivable (1,125) (2,322)
Prepaids and other assets (1,017) 6,151
--------- --------
Net cash provided by operating activities 9,914 15,500
INVESTING ACTIVITIES:
Increase in raw materials - (990)
Cost of in-process systems and capital
expenditures (13,435) (8,422)
--------- --------
Net cash used in investing activities (13,435) (9,412)
FINANCING ACTIVITIES:
Borrowing under supplemental bank credit facility - 12,000
Repayment of supplemental bank credit facility - (9,000)
Repayment of bank credit facility - (11,000)
Repayment of other debt and capilized leases (803) (238)
Payment of debt restructuring costs - (7,381)
--------- --------
Net cash used in financing activities (803) (15,619)
Effect of exchange rate changes on cash (10) 1
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,334) (9,530)
Cash and cash equivalents at beginning of period 14,285 9,593
--------- --------
Cash and cash equivalents at end of period $ 9,951 $ 63
========= ========
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
5
<PAGE> 8
SPI HOLDING, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
1. GENERAL
These consolidated financial statements should be read in the context
of the financial statements and notes thereto filed with the Securities
Exchange Commission in the 1993 Annual Report on Form 10-K of SPI Holding, Inc.
("SPI", or the "Company"). The accompanying unaudited condensed consolidated
financial statements include SPI and all of its subsidiaries. Intercompany
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform with the current period presentation. In the opinion
of management, these financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the Company's
financial position and results of its operations for the periods presented.
The results of operations for such interim periods are not necessarily
indicative of results of operations for the entire year.
2. ORGANIZATION AND BASIS OF PRESENTATION
The Company is the leading provider of in-room entertainment services
to the lodging industry. Founded in 1971, the Company originally developed and
patented a system, known as "Spectravision," which provides in-room television
viewing of recently released major and other motion pictures on a pay-per-view
("PPV") basis.
Unless the context otherwise requires, all references herein to the
Company are not intended to imply exact corporate relationships and include SPI
and its subsidiaries, including SPI Newco, Inc., its direct subsidiary, and
Spectradyne, the direct subsidiary of SPI Newco, Inc. 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.
3. DEBT
Senior Subordinated Reset Notes: The Company currently has
outstanding $260,795,000 principal amount of 11.65% Senior Subordinated Reset
Notes due December 1, 2002 (the "Reset Notes"). Interest is payable
semi-annually on June 1 and December 1.
Subject to the provisions of the Reset Note indenture, the Company has
the option to 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 is increased by 100 basis points over the then
existing annual interest rate. The Company has elected to exercise the PIK
Option for the interest period ending June 1, 1994 and, accordingly, additional
interest expense of $876,000 is included in the results of operations for the
quarter ended March 31, 1994.
6
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NEW TECHNOLOGY
In accordance with the terms of the Company's ten-year exclusive
contract with Electronic Data Systems ("EDS"), EDS will (a) install and
maintain a satellite delivery PPV system throughout most of the Company's North
American hotel sites utilizing San Jose, California-based Compression Labs,
Inc.'s ("CLI") Compressed Digital Video (CDV(TM)) technology, and (b) provide
and operate a primarily satellite-based distribution network to supply
pay-per-view in-room video entertainment services to most of the Company's
hotel sites. Under this agreement, EDS and the Company have begun installing
a Compressed Digital Video satellite movie transmission system, the
"CDV Satellite Network," throughout most of the Company's current and future
North American hotel sites. The new technology, "STARPATH," 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. EDS also has
entered into a contract with the Company to perform field service and
management information services, which contract is expected to generate
substantial operating cost savings commencing in 1995, for the Company over
1992 levels.
RESULTS OF OPERATIONS
The following discussion and analysis addresses the results of
operations for the three month periods ended March 31, 1994 (the "1994 First
Quarter") and March 31, 1993 (the "1993 First Quarter").
The Company's operations consist primarily of its pay-per-view and
free-to-guest services through its ownership of Spectradyne, Inc. and the
Company's other operating subsidiaries. The following table sets forth certain
information regarding the Company's pay-per-view customer base and certain
statistical data affecting pay-per-view revenues.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1994 1993
------ ------
<S> <C> <C>
Hotels Served at March 31* 2,432 2,528
Rooms Served at March 31* 680,099 709,733
Average Price per View $7.70 $7.76
Revenue per Equipped Room per Day ("RER") $0.51 $0.53
</TABLE>
* Subsequent to March 31, 1994, Marriott Hotels and Resorts
informed the Company they will not renew PPV contracts representing
44 corporate owned hotels with 17,500 rooms expiring during 1994
and 12 hotels with 4,800 rooms expiring after 1994.
FIRST QUARTER ENDED MARCH 31, 1994 COMPARED
TO FIRST QUARTER ENDED MARCH 31, 1993
Total revenues decreased to $37.1 million in the 1994 First Quarter
from $41.6 million in the 1993 First Quarter, a decrease of $4.5 million or
10.7%. Of the total revenues reported in the 1994 First Quarter, 85.2% were
revenues from pay-per-view, 10.4% were from free-to-guest, 1.3% were from
interactive services and 3.1% were from other sources.
7
<PAGE> 10
Pay-per-view revenues decreased to $31.6 million in the 1994 First
Quarter from $33.8 million in the 1993 First Quarter, a decrease of $2.2
million or 6.5%. This decrease in pay-per-view revenues primarily reflects the
decline in the number of rooms served which resulted in a decrease in revenue
of approximately $1.4 million. The decline in the number of revenue producing
rooms during the quarter includes the discontinuation of the services provided
under a pay-per-view service contract with Hilton Hotels Corporation that
expired December 31, 1992, including 43 hotels with a total of approximately
34,000 rooms deinstalled in February 1993 as well as a loss of rooms due to
non-renewal of certain other hotel PPV contracts including the Marriott
Courtyard properties with approximately 121 hotels with a total of 17,756
rooms. Additionally, RER declined from $0.53 in the 1993 First Quarter to
$0.51 in the 1994 First Quarter, reflecting slightly lower viewing levels.
Although the Company has no control over the popularity of major
studio films, the Company can employ certain strategies and enhancements to the
Spectravision operating system which may increase viewing levels. The Company's
strategies for increasing RER include continually upgrading movie equipment to
offer the latest technology, (such as is involved in the new STARPATH
technology), utilizing variable pricing and price packaging and installing
Guest Choice, which allows on demand viewing from a wide variety of
entertainment selections. As of March 31, 1994, Guest Choice was installed in
404 hotels with a total of 193,025 rooms, which is an increase of 156 hotels
with 66,658 rooms over the number of Guest Choice installed sites at March 31,
1993. As of March 31, 1994 the CDV Satellite Network was installed in 735
sites, an increase of 528 sites since December 31, 1993.
Free-to-guest revenues decreased to $3.9 million in the 1994 First
Quarter from $5.1 million in the 1993 First Quarter, a decrease of $1.2 million
or 23.8%. This decrease primarily reflects negotiated price reductions in the
1993 Third Quarter in connection with certain PPV contract renewals.
Interactive revenues decreased to $460,000 in the 1994 First
Quarter from $834,000 in the 1993 First Quarter, a decrease of $374,000 or
44.8%. This decline primarily reflects negotiated price reductions in the 1993
Third Quarter in connection with certain PPV contract renewals.
Other revenues decreased to $1.2 million in the 1994 First Quarter
from $1.9 million in the 1993 First Quarter, a decrease of $696,000 or 37.5%.
The 1993 First Quarter included approximately $565,000 in revenues from the
sale of pay-per-view systems to its strategic partner in the hospital industry
and no such sales in the 1994 First Quarter.
Pay-per-view direct costs increased to $10.7 million in the 1994
First Quarter from $10.3 million in the 1993 First Quarter, an increase of
$460,000 or 4.5%. As a percentage of pay-per-view revenues, pay-per-view
direct costs increased to 33.9% in the 1994 First Quarter from 30.3% in the
1993 First Quarter. This increase primarily reflects the duplication of costs
of both videotapes and in-room cards along with costs of the transponder lease
required for the implementation of the STARPATH technology. Significant
reductions in costs of videotapes and in-room cards are expected to be realized
upon full roll-out of the CDV Satellite Network, which is not expected until
mid-1994.
Free-to-guest direct costs decreased to $3.1 million in the 1994
First Quarter from $3.3 million in the 1993 First Quarter, a decrease of
$144,000 or 4.4%. As a percentage of free-to-guest revenues, free-to-guest
direct costs increased to 80.9% in the 1994 First Quarter from 64.5% in the
1993 First Quarter. The increase in free-to-guest direct costs as a percentage
of free- to-guest revenues primarily reflects the price reductions previously
described.
Other direct costs decreased to $370,000 in the 1994 First Quarter
from $1.0 million in the 1993 First Quarter, a decrease of $669,000 or 64.4%,
primarily due to lower revenues. Net profit margin from other revenue sources
was $788,000 and $815,000 for the 1994 First Quarter and the 1993 First
Quarter, respectively.
8
<PAGE> 11
Contracted Service Costs were $2.6 million for the 1994 First
Quarter. These costs primarily include contracted fees paid to EDS for
maintenance of the Company's North American hotel sites which have been
converted to the CDV technology. As of March 31, 1994 there were 735 sites
with the CDV product installed as compared to 195 sites as of December 31,
1993.
Operating expenses increased slightly to $6.2 million in the 1994
First Quarter from $6.1 million in the 1993 First Quarter, an increase of
$132,000 or 2.2%. At March 31, 1994 the majority of the Company's field labor
force ceased to be employees of the Company. Therefore, the 1994 First Quarter
includes a comparable level of costs to the 1993 First Quarter; however, future
periods will not reflect the internal costs of a field service organization in
addition to the fees paid to EDS for field services.
Selling and marketing expenses increased slightly to $1.4 million
in the 1994 First Quarter from $1.2 million in the 1993 First Quarter, an
increase of $148,000 or 12.2%. This increase is due to costs associated with
new business development and the introduction of new products.
General and administrative expenses increased to $3.8 million in
the 1994 First Quarter from $3.6 million in the 1993 First Quarter, an increase
of $157,000 or 4.3%. This slight increase includes increases in shipping,
receiving and warehouse management fees paid to the Company's outsource
manufacturer of certain of its system components.
Research and development costs increased to $775,000 in the 1994
First Quarter from $310,000 in the 1993 First Quarter. Certain development
costs of approximately $218,000 were capitalized in the 1993 First Quarter, and
there were no capitalized projects in the 1994 First Quarter. Additionally,
research and development spending increased in the 1994 First Quarter compared
to the 1993 First Quarter.
Interest expense (net) increased to $13.7 million in the 1994 First
Quarter from $12.6 million in the 1993 First Quarter, an increase of $1.1
million or 8.6%. The Company has elected to exercise the PIK Option under the
Reset Notes for the interest period ending June 1, 1994. In accordance with
the Reset Note indenture, the annual interest rate for the interest period
ending June 1, 1994 was increased by 100 basis points and, accordingly, the
1994 First Quarter results reflect an increase of $876,000 of additional
accrued interest.
State and foreign income tax expense decreased to $331,000 in the
1994 First Quarter from $566,000 in the 1993 First Quarter, a decrease of
$235,000 or 41.5%, primarily due to lower income in the 1994 First Quarter.
Deferred income tax benefits increased to $2.2 million in the 1994
First Quarter from $1.9 million in the 1993 First Quarter. These benefits are
primarily due to the reversal of future temporary differences relating to
intangible assets and net operating loss carryforwards.
Net loss increased to $15.2 million in the 1994 First Quarter from
a loss of $6.8 million in the 1993 First Quarter, an increase of $8.4 million.
The net loss for the 1994 First Quarter includes the effect of the transition
of the Company's technology and service agreement with EDS without the benefit
of anticipated future cost savings. Additional losses are a result of lower
revenues from negotiated price reductions of other non-PPV services in the 1993
Third Quarter in connection with certain PPV contract renewals.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the 1994 First Quarter, the Company used net funds generated
from operations and short-term invested cash deposits primarily for capital
purchases of $13.4 million, which includes $5.7 million of purchases for the
new CDV Satellite Network.
9
<PAGE> 12
The Company's primary uses of cash are for funding of the Company's
capital expenditure requirements, debt service on outstanding borrowings and
working capital needs. The Company's growth capital expenditures are incurred
to expand its base of rooms with installed pay-per-view systems. The Company's
maintenance capital expenditures are incurred to upgrade installed systems,
primarily in connection with contract renewals.
The Company began installation of the CDV Satellite Network in the
fourth quarter of 1993 and expects this network to be completely installed by
mid-1994. At March 31, 1994 the Company had 735 hotels with a total of 212,045
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 $8.4 million has been
incurred through March 31, 1994. Due to the rapid rollout of this project the
Company will fund capital expenditures in part from operating cash flow, cash
on hand and availability under the Revolving Credit Facility. Additionally,
the Company has elected to pay interest on the Reset Notes in additional Reset
Notes under the PIK Option for the interest period ending June 1, 1994. The
Company also has the ability to pay interest on the Reset Notes in additional
Reset Notes for each of the interest periods ending December 1, 1994 and June
1, 1995. If the PIK Option is exercised, the annual interest rate on the Reset
Notes for the applicable interest period is increased by 100 basis points over
the existing rate. The Company has made no decision regarding the use of the
PIK options available on December 1, 1994 or June 1, 1995.
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 have declined from previous periods.
The Company expects 1994 to be a transition year in implementation
of the STARPATH technology and therefore does not anticipate realizing the full
benefits of the technology until 1995 including increased PPV margins and cost
savings under the EDS agreement. Pay-per-view margins are expected to be
enhanced by the Company's ability to (i) actively manage its pay-per-view
programming by quickly replacing poorly-performing movies; (ii) convert to a
twenty-movie program equipped hotel rooms which currently have only a six,
seven or eight movie program; (iii) provide Digital Guest Choice; (iv) offer
packaged and variable movie pricing to guests and (v) substantially reduce
videotape and movie card schedule production, duplication and distribution
costs. The Company's ability to increase revenues and operating cash flow
after completion of the rollout of the STARPATH technology is highly sensitive
to a number of factors. The Company's PPV revenues are historically dependent,
in large part, 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. To date the Company has not yet converted sufficient operations to
the new STARPATH technology to enable the Company to quantify the benefit the
technology will have on revenues or PPV margins. The CDV Satellite Network,
along with the Company's new Spexis UNIX interactive system, together with
STARPATH will be able to provide other revenue opportunities through new
interactive and communication services, including voice mail, fax mail, video
teleconferencing and interactive distance learning as well as the introduction
of national advertising on its free-to-guest system.
10
<PAGE> 13
PART II
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to various lawsuits and
claims arising in the ordinary course of business. While the outcome
of such claims, lawsuits or other proceeding against the Company cannot
be predicted with certainty, management expects that such liability, to
the extent not provided for through insurance or otherwise, will not
have a material adverse effect on the operating results or financial
condition of the Company. (See Item 3 in the Company's 1993 Annual
Report on Form 10-K).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed with the Commission on March 17, 1994 a Form 8-K
report dated March 14, 1994 to attach a press release announcing
the Company's 1993 earnings and announce the date of the 1994
annual shareholders' meeting.
11
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SPI HOLDING, INC.
May 13, 1994 /s/ DANNY G. HAIR
(Date) DANNY G. HAIR
VICE PRESIDENT
(Chief Financial Officer and officer
duly authorized to sign on behalf
of the Registrant)
12
