<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER: 1-9724
SPECTRAVISION, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2182004
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
1501 NORTH PLANO ROAD, RICHARDSON, TEXAS 75081
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(214) 234-2721
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
APPLICABLE ONLY TO 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
------- -------
Number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Outstanding at
Title of each Class November 3, 1994
-------------------------------------- ----------------
<S> <C>
Class A Common Stock, $0.001 Par Value 4,593,526
Class B Common Stock, $0.001 Par Value 19,390,379
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<PAGE> 3
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Statements of Financial Position
as of September 30, 1994 and December 31, 1993 . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Operations
for the three months ended September 30, 1994 and 1993 . . . . . . . . . 4
Condensed Consolidated Statements of Operations
for the nine months ended September 30, 1994 and 1993 . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1994 and 1993 . . . . . . . . . . 6
Notes to the Condensed Consolidated Financial Statements . . . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
i
<PAGE> 4
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 2,434 $ 14,285
Accounts Receivable 20,987 18,060
Debt Issuance Costs (net) 7,106 8,058
Prepaids and Other Assets 13,429 9,569
Video Systems
Installations In-Process 54,642 28,157
Completed Systems 232,106 211,781
------------ ------------
286,748 239,938
Less accumulated depreciation and amortization (159,087) (141,253)
------------ ------------
Total Video Systems 127,661 98,685
Building and Equipment
Building 4,268 4,241
Furniture, fixtures and other equipment 5,785 5,260
------------ ------------
10,053 9,501
Less accumulated depreciation (5,344) (4,747)
------------ ------------
Total Building and Equipment 4,709 4,754
Land 2,559 2,559
Hotel Contracts (net) 244,134 253,508
------------ ------------
TOTAL ASSETS $ 423,019 $ 409,478
============ ============
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
2
<PAGE> 5
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable $ 18,297 $ 12,348
Accrued Liabilities
Interest 11,947 2,598
Other 28,207 20,700
Income Taxes 1,003 660
Deferred Income Taxes 30,925 35,229
Debt
Revolving Credit Facility 12,500 -
Canadian Bank Credit Facility 7,350 7,350
11.5% Senior Disount Notes 167,478 154,055
11.65% Senior Subordinated Reset Notes 277,264 260,795
Capitalized Lease Obligations 18,200 14,028
Other Debt 177 329
------------ ------------
Total Debt 482,969 436,557
------------ ------------
Total Liabilities 573,348 508,092
Contingent Value Rights 20,000 20,000
Stockholders' Deficit
Class A Common Stock - $0.001 par value, authorized
6,000,000 shares, issued and outstanding 4,593,526
and 4,745,526 shares at September 30, 1994 and
December 31, 1993, respectively. 5 5
Class B Common Stock - $0.001 par value, authorized
144,000,000 shares, issued and outstanding 19,390,379
and 19,238,379 shares at September 30, 1994 and
December 31, 1993, respectively. 19 19
Paid in Capital 385,808 385,808
Class B Common Stock Warrants 6,377 6,377
Retained Deficit (563,388) (511,445)
Foreign Currency Translation Adjustment 850 622
------------ ------------
Total Stockholders' Deficit (170,329) (118,614)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 423,019 $ 409,478
============ ============
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
3
<PAGE> 6
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1994 1993
------------- -------------
<S> <C> <C>
REVENUES:
Pay-Per-View $ 29,147 $ 34,214
Free-To-Guest 3,679 3,956
Other 1,776 2,087
------------- -------------
TOTAL REVENUES 34,602 40,257
DIRECT COSTS:
Pay-Per-View 10,014 10,770
Free-To-Guest 3,008 3,243
Other 768 674
------------- -------------
TOTAL DIRECT COSTS 13,790 14,687
DEPRECIATION AND AMORTIZATION 11,453 10,504
TECHNOLOGY AND FIELD SERVICE CHARGE - 2,135
CONTRACTED SERVICE COSTS 5,422 -
OPERATING EXPENSES 1,956 6,247
SELLING AND MARKETING EXPENSES 2,611 1,212
GENERAL AND ADMINISTRATIVE EXPENSES 6,122 4,907
RESEARCH AND DEVELOPMENT (NET) 1,047 382
EXCHANGE LOSS 74 632
------------- -------------
TOTAL COSTS AND EXPENSES 42,475 40,706
------------- -------------
OPERATING LOSS (7,873) (449)
INTEREST EXPENSE, NET 14,697 11,438
------------- -------------
LOSS BEFORE INCOME TAXES (22,570) (11,887)
INCOME TAXES
State and Foreign Provision 61 461
Deferred Benefit - (671)
------------- -------------
TOTAL INCOME TAX (BENEFIT) 61 (210)
------------- -------------
NET LOSS $ (22,631) $ (11,677)
============= =============
NET LOSS PER COMMON SHARE $ (0.95) $ (0.72)
============= =============
AVERAGE COMMON SHARES OUTSTANDING 23,983,905 16,333,905
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
4
<PAGE> 7
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1994 1993
-------------- -------------
<S> <C> <C>
REVENUES:
Pay-Per-View $ 91,828 $ 102,396
Free-To-Guest 11,254 13,963
Other 6,320 7,966
-------------- -------------
TOTAL REVENUES 109,402 124,325
DIRECT COSTS:
Pay-Per-View 31,340 31,287
Free-To-Guest 8,827 9,703
Other 1,890 2,665
-------------- -------------
TOTAL DIRECT COSTS 42,057 43,655
DEPRECIATION AND AMORTIZATION 33,982 32,957
TECHNOLOGY AND FIELD SERVICE CHARGE - 7,000
CONTRACTED SERVICE COSTS 13,521 -
OPERATING EXPENSES 10,407 18,397
SELLING AND MARKETING EXPENSES 6,154 3,656
GENERAL AND ADMINISTRATIVE EXPENSES 13,909 12,133
RESEARCH AND DEVELOPMENT (NET) 2,590 992
EXCHANGE LOSS 210 944
-------------- -------------
TOTAL COSTS AND EXPENSES 122,830 119,734
-------------- -------------
OPERATING INCOME (LOSS) (13,428) 4,591
INTEREST EXPENSE, NET 42,057 35,495
-------------- -------------
LOSS BEFORE INCOME TAXES (55,485) (30,904)
INCOME TAXES
State and Foreign Provision 762 1,570
Deferred Benefit (4,304) (2,971)
-------------- -------------
TOTAL INCOME TAX BENEFIT (3,542) (1,401)
-------------- -------------
NET LOSS $ (51,943) $ (29,503)
============== =============
NET LOSS PER COMMON SHARE $ (2.17) $ (1.81)
============== =============
AVERAGE COMMON SHARES OUTSTANDING 23,983,905 16,333,905
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
5
<PAGE> 8
SPECTRAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1994 1993
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (51,943) $ (29,503)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 33,982 32,957
Other non-cash items:
Conversion of non-cash interest to secondary notes 16,469 -
Technology and field service charge - 7,000
Deferred income tax benefit (4,304) (2,971)
Amortization of debt issuance costs 952 684
Accretion of discount on senior notes 13,423 -
Exchange loss 210 944
Other items (net) (743) 41
Increase in:
Accounts payable 5,949 8,922
Accrued interest 9,349 6,809
Other accrued liabilities 7,013 3,396
Income taxes payable 343 974
Decrease (increase) in:
Accounts receivable (2,932) 77
Prepaids and other assets (3,182) 1,801
------------ -----------
Net cash provided by operating activities 24,586 31,131
INVESTING ACTIVITIES:
Increase in raw materials - (191)
Cost of in-process systems and capital expenditures (45,989) (24,757)
------------ -----------
Net cash used in investing activities (45,989) (24,948)
FINANCING ACTIVITIES:
Borrowing under revolving credit facility 12,500 -
Repayment of bank credit facility - (17,500)
Borrowing under supplemental bank credit facility - 23,000
Repayment of supplemental bank credit facility - (11,000)
Repayment of other debt and capitalized leases (2,938) (976)
Payment of debt restructuring costs - (9,050)
------------ -----------
Net cash provided by (used in) financing activities 9,562 (15,526)
Effect of exchange rate changes on cash (10) (23)
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,851) (9,366)
Cash and cash equivalents at beginning of period 14,285 9,593
------------ -----------
Cash and cash equivalents at end of period $ 2,434 $ 227
============ ===========
</TABLE>
See Accompanying Notes to the Condensed Consolidated Financial Statements
6
<PAGE> 9
SPECTRAVISION, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
1. GENERAL
These consolidated financial statements should be read in the context of
the financial statements and notes thereto filed with the Securities Exchange
Commission ("SEC") in the 1993 Annual Report on Form 10-K of SpectraVision,
Inc. ("SpectraVision," or the "Company"). The accompanying unaudited condensed
consolidated financial statements include SpectraVision and all of its
subsidiaries. Intercompany transactions have been eliminated. Certain prior
period amounts have been reclassified to conform with the current period
presentation. In the opinion of management, these financial statements include
all adjustments, consisting only of normal recurring adjustments, 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 in North America. Founded in 1971, the Company originally
developed and patented a system, known as "Spectravision," which provides
in-room television viewing of recently released major and other motion pictures
on a pay-per-view ("PPV") basis.
Unless the context otherwise requires, all references herein to the Company
are not intended to imply exact corporate relationships and include
SpectraVision, SPI Newco, Inc., its direct subsidiary, Spectradyne, Inc., the
direct subsidiary of SPI Newco, Inc., and the foreign subsidiaries.
3. DEBT
Revolving Credit Facility: The Company has 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
Company's Canadian bank credit facility. The Revolving Credit Facility matures
October 5, 1997. All outstanding loans bear interest at the Company's option
at either the higher of (i) prime rate plus 1.25%, CD rate plus 2.25% and
federal funds rate plus 1.75% or (ii) Eurodollar rate plus 2.5%. 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 earlier of either three months or the end of the applicable interest
period. At November 3, 1994 the Company had no borrowing availability under
the Revolving Credit Facility.
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 Company is
currently not in technical compliance with certain financial covenants and does
not expect to be in compliance with the required financial ratios as well as
its annual operating cash flow requirement at December 31, 1994. The Company
is actively negotiating with the lenders to amend the Revolving Credit Facility
to provide for a modification of these covenants, and expects to obtain an
amendment in the fourth quarter of 1994. However, there can be no assurance
that the lenders will modify these covenants. In the event that the Company is
not successful in obtaining the necessary amendments to the Revolving Credit
Facility and the lenders accelerate the maturity of the loans outstanding, the
Company would not have the financial or capital resources to repay the amounts
outstanding under the Revolving Credit Facility and other indebtedness and may
be forced under such circumstances to seek protection under applicable
bankruptcy laws.
7
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NEW TECHNOLOGY
In accordance with the terms of the Company's ten-year exclusive contract
with Electronic Data Systems Corporation ("EDS"), EDS (a) is installing and
maintaining 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)
provides and operates a primarily satellite-based distribution network, the
"CDV Satellite Network," to supply pay-per-view in-room video entertainment
services to most of the Company's North American hotel sites. The new
technology, "STARPATH(TM)," will replace the Company's existing analog
technology, which relies exclusively on videotape players located at each hotel
or studio location. As of September 30, 1994, the CDV Satellite Network has
been installed in 1,242 hotels with a total of 369,008 rooms. EDS and the
Company are also installing a new satellite delivered on-demand movie service,
"Digital Guest Choice(TM)" to certain hotel sites in 1994. During the third
quarter of 1994, the Company had completed ten site installations of its
Digital Guest Choice system, the industry's first digital video-on-demand
product. Included in the STARPATH technology is the Company's development of a
sophisticated UNIX based integrated computer system ("SPEXIS(TM)") which is
being installed in conjunction with the Company's PPV systems and enables the
Company to provide additional enhanced interactive services. As of September
30, 1994, the Company had 919 sites equipped with SPEXIS. Additionally, under
this agreement, the Company has contracted with EDS to perform field service
and management information services.
Under the terms of the agreement with EDS the Company pays EDS (i) a fixed
fee for network services which includes satellite uplink, customer assistance
service and management information services; (ii) a fixed fee (which fee only
increases as the Company's room base grows) for field services and maintenance
of the Company's hotel systems; (iii) a fixed monthly fee for transponder
access, time and related services for transmission of movies. The Company also
has committed to purchase certain system components, such as PC's, integrated
receiver/decoders and antenna from EDS or its affiliates in connection with
deployment of the CDV Satellite Network in North America.
As of September 30, 1994 the Company's PPV service was provided to 2,352
hotels with a total of 647,599 rooms. The CDV Satellite Network is installed
in 1,242 hotels with 369,008 rooms. Guest Choice, the Company's tape based
on-demand product, is installed in 435 hotels with 205,690 rooms, some of which
also have the CDV technology. Additionally, the Company had 10 hotels with a
total of 4,498 rooms installed and operating with Digital Guest Choice, all of
which also have the CDV Satellite Network and SPEXIS installed.
SENIOR MANAGEMENT CHANGES
In September 1994, Gary G. Weik replaced Albert D. Jerome as Chief
Executive Officer and Danny G. Hair resigned from the Company and was replaced
by Richard M. Gozia as Executive Vice President and Chief Financial Officer.
Mr. Jerome continues to be a director of the Company. Prior to joining the
Company, Mr. Weik was president and chief operating officer of KBLCOM, one of
the nation's largest cable TV multiple system operators. During 1988 and 1989,
Mr. Weik owned and operated WGA Communications, an independent cable company.
Prior to 1988, he was president and chief executive officer of Harte-Hanks
Cable Company, a subsidiary of Harte-Hanks Communications, Inc. Mr. Gozia was
previously president and chief executive officer of Wyatt Cafeterias, Inc. from
1991 to 1994. From 1986 to 1991 Mr. Gozia was president and chief executive
officer of Gozia-Driver Media, Inc., a media investment company. From 1982 to
1986 he was vice president and chief financial officer of Harte-Hanks
Communications, Inc.
8
<PAGE> 11
RESULTS OF OPERATIONS
The following discussion and analysis addresses the results of operations
for the three month periods ended September 30, 1994 (the "1994 Third Quarter")
and September 30, 1993 (the "1993 Third Quarter") and the nine month periods
ended September 30, 1994 (the "1994 Nine Months") and September 30, 1993 (the
"1993 Nine Months").
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 foreign 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1994 1993 1994 1993
------- ------- ------- --------
<S> <C> <C> <C> <C>
Hotels Served at September 30 2,352 2,557 2,352 2,557
Rooms Served at September 30 647,599 702,181 647,599 702,181
Average Price per View $7.69 $7.72 $7.70 $7.75
Revenue per Equipped Room per Day ("RER") $0.49 $0.53 $0.51 $0.54
</TABLE>
THIRD QUARTER ENDED SEPTEMBER 30, 1994 COMPARED
TO THIRD QUARTER ENDED SEPTEMBER 30, 1993
Total revenues decreased to $34.6 million in the 1994 Third Quarter from
$40.3 million in the 1993 Third Quarter, a decrease of $5.7 million or 14.0%.
Of the total revenues reported in the 1994 Third Quarter, 84.2% were revenues
from pay-per-view, 10.6% were from free-to-guest and 5.2% were from other
sources.
Pay-per-view revenues decreased to $29.1 million in the 1994 Third Quarter
from $34.2 million in the 1993 Third Quarter, a decrease of $5.1 million or
14.8%. This decrease in pay-per-view revenues reflects the decline in the
number of rooms served as well as a decline in RER. The decline in the number
of revenue producing rooms during the 1994 Third Quarter as compared to the
1993 Third Quarter of 54,582 or 7.8%, includes the loss of rooms due to
non-renewal of certain hotel PPV contracts including hotels owned and operated
by Marriott Hotels and its affiliates. The non-renewal of hotel contracts
during 1994 is primarily the result of increased competition in the Company's
pay-per-view business, which competition the Company expects to continue. The
reduction in the number of pay-per-view rooms served resulted in a decrease in
pay-per-view revenues of approximately $2.6 million.
RER declined from $0.53 in the 1993 Third Quarter to $0.49 in the 1994
Third Quarter resulting in an approximate $2.5 million decline in pay-per-view
revenues for the 1994 Third Quarter. The lower RER is attributable to the two
primary factors discussed below:
-- Refit of base rooms with new technology equipment and technical
services: The rapid change-out of existing analog tape based PPV equipment
to the new STARPATH technology and field services transition to EDS,
beginning in April 1994, has caused some PPV systems to be off-line during
the equipment change to compressed digital video. The transition of the
Company's field service to EDS and EDS's major sub-contractor, Granada,
continues to involve some transition and training difficulties for field
service personnel from all three companies in maintaining the normal level
of repairs and maintenance of existing PPV rooms concurrently with the
rapid installations of the CDV sites. The Company, working with EDS, is
actively monitoring and evaluating response times to hotels with PPV
maintenance requests to reduce down time of PPV systems.
9
<PAGE> 12
-- Poorly performing movie product: The decline in RER is also attributed
to the lower viewing levels of the major movie lineup on the PPV system in
the 1994 Third Quarter as compared to the major movies showing in the 1993
Third Quarter. Theater box office results generally were lower for the
selection of major movies exhibited during the 1994 Third Quarter than for
the movies exhibited during the 1993 Third Quarter. Currently, the Company
is only changing movies once per month because of the cost to duplicate and
distribute videotapes and printed movie schedule cards in its tape-based
hotels. In the CDV installed sites, that are also equipped with the SPEXIS
computer, the Company will be able to quickly replace movies with better
performing movie product by transmitting a new schedule to the on-screen
movie card on the SPEXIS computer and changing-out the movie master at the
EDS uplink facility in Plano, Texas. Completion of deployment of the CDV
Satellite Network and the SPEXIS computer system is expected during 1995.
Free-to-Guest revenues decreased to $3.7 million in the 1994 Third Quarter
from $4.0 million in the 1993 Third Quarter, a decrease of $277,000 or 7.0%.
This decrease primarily reflects the decline in the number of revenue producing
rooms.
Other revenues decreased to $1.8 million in the 1994 Third Quarter from
$2.1 million in the 1993 Third Quarter, a decrease of $311,000 or 14.9%. Other
revenues include interactive services in addition to revenues from other
sources. This decrease primarily reflects the decrease in the number of hotels
with interactive services.
Pay-per-view direct costs decreased to $10.0 million in the 1994 Third
Quarter from $10.8 million in the 1993 Third Quarter, a decrease of $756,000 or
7.0%. As a percentage of pay-per-view revenues, pay-per-view direct costs
increased to 34.4% in the 1994 Third Quarter from 31.5% in the 1993 Third
Quarter. This increase as a percentage of pay-per-view revenue primarily
reflects the duality of costs of both the old analog technology with videotapes
and movie schedule cards and the new digital technology costs of the
transponder lease required for the implementation of the STARPATH technology.
Reductions in costs of videotapes and movie schedule cards are expected to be
realized upon full rollout of the CDV Satellite Network and the SPEXIS computer.
Free-to-guest direct costs decreased to $3.0 million in the 1994 Third
Quarter from $3.2 million in the 1993 Third Quarter, a decrease of $235,000 or
7.2%. The decrease is due to the decline in the number of free-to-guest hotels
served. As a percentage of free-to-guest revenues, free-to-guest direct costs
were 81.8% in the 1994 Third Quarter compared to 82.0% in the 1993 Third
Quarter.
Other direct costs representing costs of revenues from sources other than
pay-per-view, increased to $768,000 in the 1994 Third Quarter from $674,000 in
the 1993 Third Quarter, an increase of $94,000 or 13.9%. As a percentage of
other revenues, other direct costs increased to 43.2% in the 1994 Third Quarter
from 32.3% in the 1993 Third Quarter. The 1994 Third Quarter other revenues
include lower interactive revenues than the 1993 Third Quarter.
Technology and Field Service Charge of $2.1 million was recorded in the
1993 Third Quarter to increase the estimation of costs to a total of $7.0
million. This charge reflected costs due to changes in technology and field
service management in connection with the service contract with EDS. The $7.0
million charge included $4.9 million attributable to the write-off of obsolete
equipment, solely due to the change in technology (primarily videotape players
and computers), and $2.1 million for cash charges for personnel related costs
associated with the transition of the Company's field service operations to
EDS. As of September 30, 1994, $2.1 million had been paid.
10
<PAGE> 13
Contracted Service Costs and Operating Expenses were $5.4 million and $2.0
million in the 1994 Third Quarter, respectively. Contracted service costs
primarily include the contracted fixed fees (which change on a per site basis
concurrently with expansion or contraction of the number of pay-per-view rooms)
paid to EDS for service and maintenance of the Company's North American hotel
sites. Operating expenses in the 1994 Third Quarter consist of repair costs of
certain PPV components and the field service costs currently incurred by the
Company in its international operations. Operating expenses combined with
Contracted Service Costs increased to $7.4 million in the 1994 Third Quarter as
compared to $6.2 million in the 1993 Third Quarter, an increase of $1.2 million
or 18.1%. Operating expenses in the 1993 Third Quarter consist primarily of
maintenance of hotel systems. At April 30, 1994, the majority of the Company's
field service labor force ceased to be employees of the Company as the internal
field service labor force transitioned to EDS for maintenance of the Company's
hotel sites. The increase in the combined Contracted Service Costs and
Operating Expenses as compared to the 1993 Third Quarter is largely due to
higher freight and repairs of PPV components and partially due to increased
operating expenses as a result of growth in the Company's foreign markets.
Selling and marketing expenses increased to $2.6 million in the 1994 Third
Quarter from $1.2 million in the 1993 Third Quarter, an increase of $1.4
million. This increase is primarily due to the addition of the customer
services group which is responsible for the administration of the maintenance
services provided to hotels by EDS. The increase also includes increased costs
associated with new business development and the introduction of new products.
General and administrative expenses increased to $6.1 million in the 1994
Third Quarter from $4.9 million in the 1993 Third Quarter, an increase of $1.2
million or 24.8%. This increase primarily reflects the recording of certain
costs under the employment agreement between the Company and Mr. Jerome
recorded in the 1994 Third Quarter and higher legal expenses which were
partially offset by lower bad debt expense and lower premiums for directors'
and officers' liability insurance.
Research and development costs increased to $1.1 million in the 1994 Third
Quarter from $382,000 in the 1993 Third Quarter, an increase of $665,000.
Certain development costs of approximately $296,000 were capitalized in the
1993 Third Quarter, and there were no capitalized projects in the 1994 Third
Quarter. Additionally, research and development spending increased in the 1994
Third Quarter compared to the 1993 Third Quarter as the Company continues to
devote additional resources to the development of new products in a continuing
effort to maintain and enhance its competitive position.
Interest expense (net) increased to $14.7 million in the 1994 Third Quarter
from $11.4 million in the 1993 Third Quarter, an increase of $3.3 million or
28.5%. This increase is due to non-cash accretion of discount on the Senior
Notes. Cash interest expense decreased from $11.2 million in the 1993 Third
Quarter to $9.7 million in the 1994 Third Quarter as a result of the public
debt and equity offerings in the fourth quarter of 1993. Average total debt
outstanding during the 1994 Third Quarter was $479.7 million with an effective
interest rate of 12.2% as compared to $457.5 million average debt outstanding
with an effective interest rate of 9.9% during the 1993 Third Quarter.
State and foreign income tax expense decreased to $61,000 in the 1994 Third
Quarter from $461,000 in the 1993 Third Quarter, a decrease of $400,000 or
86.8%, primarily due to lower taxable income in the 1994 Third Quarter.
Deferred income tax benefits were $671,000 in the 1993 Third Quarter. No
benefit was recorded for the 1994 Third Quarter because of a change in estimate
as required under Statement of Finacial Accounting Standards No. 109 -
"Accounting for Income Taxes." 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 $22.6 million in the 1994 Third Quarter from $11.7
million in the 1993 Third Quarter, an increase of $10.9 million. The increased
net loss for the 1994 Third Quarter as compared to the 1993 Third Quarter is
primarily due to $5.7 million lower revenues, an increase of $1.8 million in
total operating expenses and a $3.3 million increase in interest expense.
11
<PAGE> 14
NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 1993
Total revenues decreased to $109.4 million in the 1994 Nine Months from
$124.3 million in the 1993 Nine Months, a decrease of $14.9 million or 12.0%.
Of the total revenues reported in the 1994 Nine Months, 83.9% were revenues
from pay-per-view, 10.3% were from free-to-guest and 5.8% were from other
sources.
Pay-per-view revenues decreased to $91.8 million in the 1994 Nine Months
from $102.4 million in the 1993 Nine Months, a decrease of $10.6 million or
10.3%. This decrease in pay-per-view revenues primarily reflects the decline
in the number of rooms served which resulted in a decrease in revenues of
approximately $5.4 million. Additionally, RER declined from $0.54 in the 1993
Nine Months to $0.51 in the 1994 Nine Months. The Company believes the lower
RER is in part due to the transition and rapid change-out of the current PPV
equipment to the new STARPATH technology which has caused some systems to be
off-line during the installation of new equipment and other factors as
described in the three-month comparison. The decline in RER contributed
approximately $5.2 million to the decrease in the pay-per-view revenues for the
1994 Nine Months.
Free-to-guest revenues decreased to $11.3 million in the 1994 Nine Months
from $14.0 million in the 1993 Nine Months, a decrease of $2.7 million or
19.4%. This decrease reflects negotiated price reductions granted in the third
quarter of 1993 in connection with certain PPV contract renewals and the
decline in the number of revenue producing rooms for the comparable periods.
Other revenues decreased to $6.3 million in the 1994 Nine Months from $8.0
million in the 1993 Nine Months, a decrease of $1.7 million or 20.7%. Other
revenues include interactive services in addition to revenues from other
sources. This decrease is primarily due to the decline in revenues from
interactive services. In addition, the 1993 Nine Months included insurance
claim proceeds from losses due to the hurricanes in Florida and Hawaii in 1992.
Pay-per-view direct costs were $31.3 million in both the 1994 Nine Months
and the 1993 Nine Months. As a percentage of pay-per-view revenues,
pay-per-view direct costs increased to 34.1% in the 1994 Nine Months from 30.6%
in the 1993 Nine Months. This increase primarily reflects the duality of costs
of both the old analog technology with videotapes and movie schedule cards and
the new digital technology costs of the transponder lease required for the
implementation of the STARPATH technology. Reductions in the costs of
videotapes and movie schedule cards are expected to be realized upon full
roll-out of the CDV Satellite Network and the SPEXIS computer system.
Free-to-guest direct costs decreased to $8.8 million in the 1994 Nine
Months from $9.7 million in the 1993 Nine Months, a decrease of $876,000 or
9.0%. As a percentage of free-to-guest revenues, free-to-guest direct costs
increased to 78.4% in the 1994 Nine Months from 69.5% in the 1993 Nine Months.
This increase in free-to-guest direct costs as a percentage of free-to-guest
revenues primarily reflects the price reductions in free-to-guest revenues in
connection with certain PPV contract renewals, offset somewhat by negotiated
price reductions from programming suppliers for certain hotels served.
Other direct costs decreased to $1.9 million in the 1994 Nine Months from
$2.7 million in the 1993 Nine Months, a decrease of $775,000 or 29.1%. As a
percentage of other revenues, other direct costs decreased to 29.9% in the 1994
Nine Months from 33.5% in the 1993 Nine Months.
12
<PAGE> 15
Contracted Service Costs and Operating Expenses were $13.5 million and
$10.4 million in the 1994 Nine Months, respectively. Contracted Service Costs
in the 1994 Nine Months consist of the contracted fixed fees paid to EDS from
January through September 1994. Operating expenses in the 1994 Nine Months
consist of repair costs of certain PPV components and the field service costs
currently incurred by the Company in its international operations in addition
to costs from January 1994 through April 1994 of the Company's internal field
service operations. Operating expenses combined with Contracted Service Costs
increased to $23.9 million in the 1994 Nine Months as compared to $18.4 million
in the 1993 Nine Months, an increase of $5.5 million or 30.1%. The increase in
the combined Contracted Service Costs and Operating Expenses as compared to the
1993 Nine Months is largely due to the duality of costs of the internal field
service organization and the fees paid to EDS. The increase is also due, to a
lesser extent, to higher freight and repairs of PPV components.
Selling and marketing expenses increased to $6.2 million in the 1994 Nine
Months from $3.7 million in the 1993 Nine Months, an increase of $2.5 million
or 68.3%. This increase primarily reflects the addition of the customer
services group beginning in April 1994 as well as increased costs associated
with new business development and the introduction of new products.
General and administrative expenses increased to $13.9 million in the 1994
Nine Months from $12.1 million in the 1993 Nine Months, an increase of $1.8
million or 14.6%. This increase is primarily due to the recording of the
remaining costs under the employment agreement between the Company and Mr.
Jerome and higher legal expenses which were partially offset by lower bad debt
expense and lower premiums for directors' and officers' liability insurance.
Research and development costs increased to $2.6 million in the 1994 Nine
Months from $992,000 in the 1993 Nine Months. In the 1993 Nine Months certain
development costs of approximately $830,000 were capitalized and there were no
capitalized projects in the 1994 Nine Months. Additionally, research and
development spending increased in the 1994 Nine Months compared to the 1993
Nine Months as the Company continues to devote additional resources to the
development of new products in a continuing effort to maintain and enhance its
competitive position.
Interest expense (net) increased to $42.0 million in the 1994 Nine Months
from $35.5 million in the 1993 Nine Months, an increase of $6.5 million or
18.5%. This increase is primarily due to non-cash accretion of discount on the
Senior Notes. Cash interest expense decreased from $34.7 million in the 1993
Third Quarter to $13.7 million in the 1994 Third Quarter. This decrease is
primarily due to the Company exercising the PIK option on the Reset Notes for
the interest period ended June 1, 1994 and the elimination of interest on the
old Bank Credit Facility as a result of the public debt and equity offerings in
the fourth quarter of 1993. Average total debt outstanding during the 1994
Nine Months was $459.7 million with an effective interest rate of 12.3% as
compared to $453.3 million with an effective interest rate of 10.5% during the
1993 Nine Months.
State and foreign income taxes decreased to $762,000 in the 1994 Nine
Months from $1.6 million in the 1993 Nine Months, a decrease of $808,000 or
51.5% due to lower taxable income in the 1994 Nine Months.
Deferred income tax benefits increased to $4.3 million in the 1994 Nine
Months from $3.0 million in the 1993 Nine Months. These benefits are primarily
due to the reversal of future temporary differences relating to intangible
assets and net operating loss carryforwards.
Net loss increased to $51.9 million in the 1994 Nine Months from $29.5
million in the 1993 Nine Months, an increase of $22.4 million. The increased
net loss for the 1994 Nine Months as compared to the 1993 Nine Months is
primarily due to a $14.9 million decline in total revenues, an increase of $3.1
million in total operating expenses, $6.6 million increased interest expense,
slightly offset by a $1.3 million increased tax benefit.
13
<PAGE> 16
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $14.3 million as of December 31,
1993 to $2.4 million as of September 30, 1994. During the 1994 Nine Months,
the Company used net funds generated from operating cash flow (earnings before
interest, taxes, depreciation and amortization) of $20.8 million, funds
generated from working capital of $3.8 million, borrowings, net of repayments,
of $9.5 million and short-term invested cash deposits to fund capital
expenditures of $46.0 million, which includes $17.8 million of expenditures for
the rollout of the CDV Satellite Network and $17.1 million for the upgrades of
existing systems to on-demand and refit of room units to the boxless
SpectraMate and in-room televisions in connection with PPV contract renewals.
Total capital additions for the 1994 Nine Months were $53.0 million of which
$46.0 million was funded with cash and $7.0 million was funded through capital
leases, primarily for in-room televisions. As of September 30, 1994, the
Company had 1,242 hotels with a total of 369,008 hotel rooms equipped with the
CDV technology.
Accounts payable increased from $12.3 million at December 31, 1993 to $18.3
million at September 30, 1994 as the Company continues to utilize working
capital sources for its cash requirements. Other accrued liabilities increased
from $20.7 million at December 31, 1993 to $28.2 million at September 30, 1994.
The increase includes accrued costs for services rendered and equipment
provided by EDS.
The Company borrowed $12.5 million available under the Revolving Credit
Facility during the 1994 Nine Months and $7.0 million under a capital lease
line of credit. As of September 30, 1994 the Company has no borrowing
availability under the Revolving Credit Facility or through current capital
lease sources. The Company is currently not in technical compliance with
certain financial covenants and does not expect to be in compliance with the
required financial ratios as well as its annual operating cash flow requirement
at December 31, 1994. The Company is actively negotiating with the lenders to
amend the Revolving Credit Facility to provide for a modification of these
covenants and expects to obtain an amendment in the fourth quarter of 1994.
However, there can be no assurance that the lenders will modify these
covenants. In the event that the Company is not successful in obtaining the
necessary amendments to the Revolving Credit Facility and the lenders
accelerate the maturity of the loans outstanding, the Company would not have
the financial or capital resources to repay the amounts outstanding under the
Revolving Credit Facility and other indebtedness and may be forced under such
circumstances to seek protection under applicable bankruptcy laws.
Operating cash flow for the 1994 Nine Months was $20.8 million as compared
to $45.5 million in the 1993 Nine Months. The Company does not anticipate
improvements in operating cash flow for the fourth quarter of 1994 as the
Company continues to be impacted by the transition through the end of 1994.
The Company's primary uses of cash are for funding of the Company's capital
expenditure requirements in support of the rollout of the CDV Satellite Network
and the installation of Digital Guest Choice in selected sites. As of
September 30, 1994 the Company would require $2.4 million to fund the
completion of the CDV Satellite Network throughout its targeted North American
sites, delaying sites previously planned in Canada. Additionally, as of
September 30, 1994 the Company has installed Digital Guest Choice in 10 sites
and plans to install an additional 88 sites with Digital Guest Choice by
December 31, 1994. The Digital Guest Choice installations planned for the
remainder of 1994 will require approximately $9.0 million. An additional $2.8
million of cash is required for refit of room units to the boxless SpectraMate
and purchase of guest room televisions in connection with PPV contract
renewals.
The Company's current requirements for cash debt service include (i)
interest on the Revolving Credit Facility and the Canadian Bank Credit Facility
and (ii) interest and principal on capital leases. The Company has the option
of paying interest on the 11.65% Reset Notes in additional Reset Notes on
December 1, 1994 and June 1, 1995 (the "PIK Option") and cash payments on the
11.5% Senior Discount Notes do not begin until April 1, 1997. The Company
expects to exercise the PIK Option for the December 1, 1994 interest payment in
the amount of $17.5 million.
14
<PAGE> 17
The Company intends to fund capital expenditures in part from operating
cash flow and cash on hand. Currently, the Company does not have readily
available external sources of cash to satisfy all of its capital expenditure
commitments. The Company is actively pursuing options to fund capital
expenditure requirements in excess of its operating cash flow for the remainder
of 1994 and 1995. The Company has begun negotiations with lenders in Canada to
replace the Canadian Bank Credit Facility. This refinancing would release the
letter of credit securing the Canadian Bank Credit Facility and thereby
increase the availability under the Revolving Credit Facility. Additionally,
the Company is exploring potential joint venture opportunities with strategic
partners in its markets in the Pacific Rim and the sale of non-strategic
assets. The Company will continue to utilize working capital sources and seek
additional capital lease financing. On November 1, 1994 the Company reduced
its United States workforce by approximately 15% which is expected to reduce
operating expenses beginning in 1995 by an estimated $2 million annually. If
the Company is unable to satisfy its cash requirements from internal and
external sources, the Company will be required to reduce, eliminate or delay
certain of its capital expenditures, including further deployment of the
STARPATH technology. Decreased capital expenditures will delay realization of
the benefits of the technology and the Company will be unable to satisfy all
the commitments under certain hotel contracts which could potentially result in
a loss of PPV rooms and a corresponding decline in revenues. In addition, the
Company's future ability to satisfy its financial covenants under its Revolving
Credit Facility, as well as to meet future cash needs, is highly dependent upon
realizing certain benefits including significantly increased cash flows from
the technology.
15
<PAGE> 18
PART II
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to various lawsuits and
claims arising in the ordinary course of business. While the outcome of
such claims, lawsuits or other proceeding against the Company cannot be
predicted with certainty, management expects that such liability, to the
extent not provided for through insurance or otherwise, will not have a
material adverse effect on the operating results or financial condition of
the Company. (See Item 3 in the Company's 1993 Annual Report on Form 10-K.)
On October 2, 1992, Spectradyne, Inc. filed a lawsuit in federal
district court asserting patent infringement by On Command Video
Corporation ("OCV") and Comsat Video Enterprises, Inc. ("CVE").
Subsequently, OCV filed a counterclaim against the Company charging
violations of certain patent rights held by OCV. The counterclaim requests
an unspecified amount of damages and injunctive relief. OCV, however, was
forced to dismiss with prejudice its allegation of infringement in regard
to one of its two patents. Spectradyne amended its original lawsuit to, in
part, assert copyright infringement by OCV and CVE regarding two hotel
property management system ("PMS") software protocols developed by
Spectradyne and various PMS vendors.
On July 27, 1994, the court granted CVE's motion for partial summary
judgement ruling that neither CVE's or OCV's remote diagnostics and data
retrieval devices "literally" infringe Spectradyne's related patent. On
November 3, 1994, the court ruled that the CVE and OCV devices do not
infringe Spectradyne's patent under the "doctrine of equivalents".
Spectradyne has requested that the court certify its patent rulings for
appeal. The court will address that issue at a hearing to be held on
December 9, 1994. However, at the November 3, 1994 hearing the court
denied CVE's motion for partial summary judgement ruling that there were
factual issues for trial regarding the limited distribution of
Spectradyne's PMS software protocol II.
With respect to OCV's patent counterclaim against Spectradyne, on June
10, 1994, the court refused without prejudice to allow OCV to amend and
expand its counterclaim to assert its new, reissued patent claims against
Spectradyne and to include the Digital Guest Choice device in the case. On
August 3, 1994, OCV filed a motion to voluntarily dismiss its patent
counterclaims against Spectradyne. At that time, OCV filed a new lawsuit
in federal district court in San Francisco asserting that Spectradyne's
video on-demand devices, including Digital Guest Choice, infringe OCV's
new, reissued patent. However, prior to OCV's filing of the new lawsuit,
Spectradyne filed an action on July 22, 1994 for declaratory judgement in
federal district court in Dallas seeking a ruling that its video on-demand
devices do not infringe the new claims in OCV's new, reissued patent.
On October 20, 1994, a purported class action complaint was filed in
the United States District Court for the Northern District of Texas, Dallas
Division, styled Seth Stern v. SpectraVision Inc., Albert D. Jerome,
Michael C. Colleran, John Davis, Marvin Davis, Gerald S. Gray, Kenneth
Ziffren, John F. Berardi, Robert D. Beyer and Danny G. Hair. The complaint
alleges violations of Sections 11, 12(2) and 15 of the Securities Act of
1933, sections 10(b) and 20(a) of the Exchange Act of 1934, and Rule 10b-5
promulgated under the Exchange Act relating to alleged misrepresentations
and omissions concurrent with and following the Company's public offering
of Class B common shares and the Company's offering of 11 1/2% senior
discount notes, both on September 28, 1993, including but not limited to
alleged misrepresentations and omissions made in the Prospectuses. The
complaint asserts that it is brought on behalf of a class consisting of
purchasers of securities of the Company, including common stock and senior
discount notes, between September 28, 1993 and August 15, 1994. The
plaintiffs seek damages, prejudgment interest, and fees and costs of the
plaintiffs. Although the outcome of this lawsuit cannot be predicted with
certainty, the Company believes that the complaint is without merit, and
the Company will take all appropriate action to respond to such litigation.
16
<PAGE> 19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules for the nine months ended
September 30, 1994.
(b) Reports on Form 8-K
None.
17
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SPECTRAVISION, INC.
November 3, 1994 /s/ RICHARD M. GOZIA
(Date) RICHARD M. GOZIA
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Chief Financial Officer and Officer
duly authorized to sign on behalf
of the Registrant)
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
27 - Financial Data Schedules for the nine months ended
September 30, 1994.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q OF SPECTRAVISION, INC. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000819898
<NAME> SPECTRAVISION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 2,434
<SECURITIES> 0
<RECEIVABLES> 20,987
<ALLOWANCES> 950
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 299,360
<DEPRECIATION> 164,431
<TOTAL-ASSETS> 423,019
<CURRENT-LIABILITIES> 0
<BONDS> 444,742
<COMMON> 24
0
0
<OTHER-SE> (170,353)
<TOTAL-LIABILITY-AND-EQUITY> 423,019
<SALES> 109,402
<TOTAL-REVENUES> 109,402
<CGS> 42,057
<TOTAL-COSTS> 42,057
<OTHER-EXPENSES> 80,614
<LOSS-PROVISION> 159
<INTEREST-EXPENSE> 42,057
<INCOME-PRETAX> (55,485)
<INCOME-TAX> (3,542)
<INCOME-CONTINUING> (51,943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,943)
<EPS-PRIMARY> (2.17)
<EPS-DILUTED> (2.17)
</TABLE>
