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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K 405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-9724
SPECTRAVISION, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 75-2182004
(State of Incorporation) (I.R.S. Employer Identification No.)
1501 NORTH PLANO ROAD, RICHARDSON, TEXAS 75081
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code: (214) 234-2721
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Class B Common Stock,
$0.001 Par Value American Stock Exchange
Contingent Value Rights American Stock Exchange
11.65% Senior Subordinated
Reset Notes, due 2002 American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Registrant's Class B Common Stock held by
non-affiliates of the Registrant as of February 15, 1996: $3,635,696. There is
no established public trading market for the Registrant's Class A Common Stock.
As of March 1, 1996, there were 19,390,379 shares of the Registrant's Class B
Common Stock outstanding and 4,593,526 shares of Class A Common Stock
outstanding.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
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TABLE OF CONTENTS
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Page
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Item 1. Business......................................................... 1
General.......................................................... 2
Pay-Per-View Services............................................ 2
Free-to-Guest Services........................................... 3
Interactive and Other Services................................... 3
Programming...................................................... 4
The EDS Service and Technology Agreement......................... 4
Markets and Customers............................................ 5
Hotel Contracts.................................................. 5
Manufacturing.................................................... 6
Competition...................................................... 6
Regulation....................................................... 6
Patents, Trademarks and Copyrights............................... 7
Employees........................................................ 7
Item 2. Properties....................................................... 7
Item 3. Legal Proceedings................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.............. 8
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.......................................................... 9
Item 6. Selected Financial Data.......................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 12
Item 8. Financial Statements and Supplementary Data...................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 58
Item 10. Directors and Executive Officers of the Registrant............... 58
Item 11. Executive Compensation........................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and Management... 65
Item 13. Certain Relationships and Related Transactions................... 67
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 68
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PART I
ITEM 1. BUSINESS
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In early 1995, SpectraVision, Inc. (the "Company" or "SpectraVision")
determined that a financial restructuring would be required to ensure the
Company's long-term survival. The Company conducted restructuring negotiations
with representatives of its secured and unsecured creditors during April and May
1995, working toward the development of an overall restructuring plan. In June
1995, the Company concluded that a filing for reorganization under Chapter 11 of
the United States Bankruptcy Code ("Chapter 11") should be made in order to
preserve the value of its assets and to ensure that the business had sufficient
cash resources to continue operations while it completed the financial
restructuring process.
On June 8, 1995 (the "Petition Date"), SpectraVision, Inc., together with
SPI Newco, Inc., Spectradyne, Inc., Spectradyne International, Inc., and
Kalevision Systems, Inc. - USA, filed voluntary petitions for reorganization
under Chapter 11 in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") and are currently operating their respective
businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the
Bankruptcy Code. On June 23, 1995, a single unsecured creditors' committee (the
"Creditors' Committee") was appointed by the U.S. Trustee for the District of
Delaware pursuant to Section 1102 of the Bankruptcy Code. The Creditors'
Committee has the right to review and object to certain business transactions
and is expected to participate in the negotiation of the Company's plan of
reorganization.
The Company has been actively pursuing several avenues of restructuring its
financial position to achieve the maximum return for all parties involved. In
January 1996 the Company solicited bids from third parties for financial
restructuring proposals which would allow the Company to emerge from bankruptcy
pursuant to a business combination with the third party. It is the Company's
intent to select one or more such proposals and, with the Bankruptcy Court's
approval, emerge from bankruptcy in 1996. However, there can be no assurance
that any agreement for a business combination will be reached or that any
agreement will be approved by the creditors or the Bankruptcy Court.
During 1995, the Company experienced a net loss of $74.6 million as
compared to a net loss of $254.3 million in 1994. The decrease in the net loss
is largely due to the write-down of hotel contracts (an intangible asset) in the
amount of $196.3 million which occurred in 1994. Additionally, the Company's
EBITDA (earnings before interest, taxes, reorganization items, depreciation,
amortization, write-down of hotel contracts and certain other non-cash charges)
was $.9 million for 1995 as compared to $19.1 million during 1994. The decrease
in EBITDA was primarily due to lower revenues from the loss of hotel contracts
and lower margins resulting from higher direct costs as a percentage of revenues
and other cost increases in operating expenses. See Part II, Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The Company had total liabilities of approximately $633.2 million and
assets of $205.6 million at December 31, 1995. The Company's cash flow from
operations in 1995 was not sufficient to satisfy its demands for cash, and the
Company made up the deficiency by borrowing under its revolving line of credit.
At December 31, 1995, the Company had $11.8 million available borrowing capacity
under its revolving line of credit and $3.4 million in cash on hand to meet its
continuing cash flow needs. The Company's cash on hand and cash flow from
operations in 1996 will not be sufficient to satisfy its current demands for
cash. There can be no assurance that the amount the Company can borrow under
its revolving line of credit will be sufficient to meet its cash requirements
for 1996. The Company's independent public accountants included in their report
on the Company's consolidated financial statements an explanatory paragraph that
describes the uncertainty about the Company's ability to continue as a going
concern. See Part II, Item 8. "Financial Statements and Supplementary Data".
If the Company is unable to reach agreement with a potential bidder or
bidders on a business combination, the strategy of the Company is to shrink the
room base to profitable hotels, renew contracts, add new hotels only on a
profitable basis and reduce the administrative structure to efficiently support
the smaller, more profitable room base. There can be no assurance that the
Company will have adequate capital resources to fulfill this strategy.
If the Company cannot borrow or otherwise obtain the cash necessary to
operate throughout 1996 or the Company is unable to obtain confirmation of a
plan of reorganization, its creditors, equity security holders or the United
States Trustee may seek a liquidation of the Company by conversion to a
Chapter 7 bankruptcy proceeding.
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The Company was not in compliance with certain of its financial covenants
related to the revolving line of credit with Foothill Capital Corporation, which
is providing debtor-in-possession financing to the Company, on December 31,
1995. On March 22, 1996, the Company obtained a waiver from Foothill Capital
Corporation for the December 31, 1995 covenant violations. However, the Company
does not expect that it will be in compliance with the financial covenants
relating to its operating cash flow and its fixed charges to cash flow ratios in
1996. Accordingly, in April 1996, Foothill Capital Corporation could elect to
terminate the revolving line of credit, demand immediate payment of all
outstanding balances and foreclose on the Company's assets securing the
revolving line of credit if payment is not made. In this event, if the Company
cannot obtain alternative financing, it may be forced to liquidate in a
Chapter 7 bankruptcy proceeding.
GENERAL
The Company is a leading provider of interactive in-room video
entertainment services to the lodging industry. Founded in 1971, the Company
originally developed and patented a system, known as "SpectraVision," which
provides in-room television viewing of recently released major and other motion
pictures on a pay-per-view ("PPV") basis. The Company subsequently expanded its
services to include providing PPV movies in an on-demand format, delivering
free-to-guest programming (such as HBO, ESPN, CNN and WTBS) and providing
interactive services that capitalize on the Company's proprietary two-way
communications equipment. The Company has been a major provider of these
services to the lodging industry since 1971 and as of December 31, 1995,
provided PPV services to 550,406 rooms in 1,888 hotels, including 224,697 rooms
in 492 hotels with on-demand PPV service.
The Company currently has a significant share of the market in the United
States and is also a leading provider in Australia, the Pacific Rim, Canada and
Mexico. The Company provides its services under contracts to corporate-owned
hotel chains such as Hyatt, hotel management companies such as Interstate and
individually owned and franchised hotel properties.
In the fall of 1993, the Company and Electronic Data Systems ("EDS")
initiated the installation of a compressed digital video ("CDV"), satellite
delivered PPV system in the Company's U.S. hotel sites. This system replaces
the scheduled videotape and videocassette player-based technology used by the
Company since its inception in 1971 and is the first digital video system in the
hotel PPV industry. At December 31, 1995, the Company had installed the CDV
service in 1,200 hotels containing a total of 371,845 rooms. The Company does
not currently intend to install more of these systems.
In the fourth quarter of 1994, the Company began installation of its new
digital video on-demand service ("Digital Guest Choice"). At December 31,
1995, the Company had installed Digital Guest Choice systems in 102 hotels
containing a total of 53,844 rooms. The Company intends to install Digital
Guest Choice in conjunction with selected contract renewals, and in selected new
U.S. hotel sites for which it contracts to provide its PPV services.
PAY-PER-VIEW SERVICES
The Company's primary source of revenue is providing in-room television
viewing of recently released major movies and independently produced adult
motion pictures to hotel guests on a pay-per-view basis. This service is
attractive to hotel operators because it provides a service desired by the
guests at no cost to the hotel. The movie price is automatically charged to the
guest room in which the movie was viewed. At December 31, 1995, the Company
provided PPV service to 550,406 rooms in 1,888 hotels. The Company had
deliverable orders to install PPV systems in approximately 13,339 rooms at
February 29, 1996 compared to 10,973 rooms at February 28, 1995. Deliverable
orders for hotel movie systems consist of contracts which have been executed by
the hotel and the Company. In addition, the Company has currently identified
approximately 32,200 rooms in 115 hotels which it will discontinue PPV service
to in 1996 due to expired or rescinded contracts.
The Company provides its PPV service through several products including:
(i) SpectraVision, the Company's scheduled tape-based play system; (ii)
SpectraVision Guest Theater, the Company's scheduled play system utilizing
satellite delivery; (iii) Guest Choice, an analog tape system which provides on-
demand viewing of up to 200 videotapes; and (iv) Digital Guest Choice, the
industry's only digital video on-demand service.
SpectraVision. The Company's tape-based SpectraVision system typically
offers a hotel guest eight movies per day at predetermined times. The movie
schedule typically consists of a mix of major motion pictures available
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after commencing first-run theatrical exhibition and before release on cable or
home video, and adult movies from independent producers. On the first day of
each month, the Company typically replaces a majority of the movies on each
schedule with new features. At December 31, 1995 the Company had SpectraVision
installed in 621 hotels with a total of 142,216 rooms.
Guest Theater. The Company's Guest Theater system utilizing the STARPATH
technology was introduced in the fourth quarter of 1993. Guest Theater
increases the number of movies available in a SpectraVision system from 8 to 20
by varying movie selections on a nightly basis. At December 31, 1995 the
Company had Guest Theater installed in 1,200 hotels with a total of 371,845
rooms.
Guest Choice. In 1991, the Company introduced Guest Choice to provide
hotel guests with on-demand viewing from a library of up to 200 videotapes per
hotel. As of December 31, 1995, Guest Choice was installed in 224,697 rooms in
492 hotels, substantially all of which also offer either SpectraVision or Guest
Theater services. The on-demand capability significantly increases usage of the
PPV service by the hotel guests, and the Company has experienced increases in
viewership on average of approximately 40% in the hotels in which Guest Choice
systems have been installed. Through Guest Choice, the Company provides on-
demand viewing of major motion pictures, adult features, and a variety of other
topics, such as exercise programs, business information, children's programming
and other special interest tapes. The Guest Choice system includes the
Company's proprietary equipment and software, and utilizes a patented video rack
designed and manufactured by a third party.
Digital Guest Choice. During 1994, the Company introduced its new digital
video on-demand service, Digital Guest Choice, that provides on-demand viewing
of digitally stored movies. Digital Guest Choice utilizes satellite technology
to deliver digitized movies to high capacity disk arrays. The digitized movies
are stored at the hotel site and then decoded and forwarded to the guest
instantaneously and on-demand. Digital Guest Choice allows multiple users to
access the same digitally stored movie image at the same time. This on-demand
system virtually eliminates lost views due to another guest already viewing a
particular videotape or if all tape players are in use. At December 31, 1995,
the Company had installed Digital Guest Choice in 102 hotels with a total of
53,844 rooms. As costs of digital systems become more economical, the Company
intends to upgrade additional hotels to digital on-demand systems. The Company
believes this may occur within the next two years. Until that time, most hotel
system upgrades will be to tape-based on-demand systems.
FREE-TO-GUEST SERVICES
The Company also markets a free-to-guest service pursuant to which a hotel
may elect to receive one or more satellite programming channels, such as HBO,
CNN, ESPN, WTBS and other cable networks. The hotel typically pays the Company
a fixed monthly fee per room for each programming channel selected. As of
December 31, 1995, the Company provided free-to-guest services to 819 hotels
serving 287,259 guest rooms. Approximately 76% of these rooms also offer the
Company's PPV services. As of February 29, 1996, the Company had deliverable
backlog orders to install free-to-guest systems in approximately 1,988
additional rooms, as compared to approximately 5,242 rooms in backlog at
February 28, 1995. The Company has identified approximately 29,000 rooms in 115
hotels that are subject to having service discontinued in 1996 due to expired or
rescinded contracts.
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, 2000, respectively. The
Company intends to renew the contracts upon expiration.
INTERACTIVE AND OTHER SERVICES
In addition to entertainment services, the Company provides interactive
services to the lodging industry. These services generate revenues and cash
flows for the Company which are independent of viewing levels. These services
utilize the two-way interactive communications capability of the PPV equipment
and include Video Checkout, Video Messaging, Video Breakfast Menu, Video
Bellman, Smart Survey and room availability monitoring. The hotel typically
pays a fixed monthly fee for each service selected. Interactive services are
also currently available in Spanish, French, and certain other foreign
languages.
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As of December 31, 1995, the Company provided one or more interactive
services to 238,000 rooms in 491 hotels, all of which also offer the Company's
PPV service. These services differentiate the Company's products from those of
its competitors, because they increase productivity of the hotel personnel
resources, and they strengthen the Company's relationships with its hotel
customers.
Other revenue sources include the sale and license of the Company's
proprietary equipment, the installation, design and maintenance of hotel Master
Antenna Television ("MATV") systems, sales of satellite dishes, sales of
miscellaneous parts and supplies (including television remote controls) and
advertising revenues.
PROGRAMMING
The Company obtains the nonexclusive rights to show recently released
motion pictures from major motion picture studios generally pursuant to a master
agreement with each studio. The license period and fee for each motion picture
are negotiated individually with each studio, which typically receives a
percentage of that picture's gross revenues generated in the Company's PPV
system. Negotiated fees are related to the popularity of a given movie and the
volume of pictures licensed by the Company from a given studio. Those license
fees typically decline over the time the movie is played in the Company's PPV
systems. Typically, the Company obtains rights to exhibit major motion pictures
during the "Hotel/Motel PPV Window" which is the time period after initial
theatrical release and before release for home video distribution or cable
television exhibition. The Company attempts to license pictures as close as
possible to a motion picture's theatrical release date to benefit from the
studios' advertising and promotional efforts.
With respect to most independently produced features, the Company obtains
non-exclusive rights from the producers for a flat fee for an extended period of
time.
THE EDS SERVICE AND TECHNOLOGY AGREEMENT
In 1993, the Company entered into a ten-year agreement with EDS to install
a satellite-based digital movie delivery system to replace its existing tape-
based delivery systems. In conjunction with the installation of this system,
the Company introduced its new SPEXIS computer system which allows the Company
to provide new and improved interactive services. The Company and EDS first
installed equipment to enable the Company to provide its scheduled play movies
in a digital CDV format on a real time basis via satellite. The CDV system was
installed in 1,200 hotels with 371,845 rooms as of December 31, 1995. In late
1994, the Company and EDS began the second phase of the technology conversion
and initiated the installation of the new Digital Guest Choice video on-demand
system in selected hotels. This system consists of high capacity disk arrays,
which are used to store digitized movies, delivered to a hotel via satellite,
for instantaneous on-demand viewing by hotel guests.
Field Service Contract: The Company also entered into a contract with EDS
whereby EDS assumed the Company's field service and Management Information
Services (MIS) functions. The transition of the Company's field service to EDS
involved numerous difficulties for field service personnel in maintaining the
normal level of repairs and maintenance required. On February 1, 1996, the
Bankruptcy Court approved a modification to the EDS Service and Technology
Agreement whereby the field service and the MIS services operations would
transition back to the Company. The Company is currently in the process of
implementing this agreement.
Technology: In accordance with the terms of the Company's ten-year
exclusive contract, EDS has granted the Company exclusive rights during the term
of the EDS contract with regard to the use, installation and operation of CDV
technology within the U.S. hotel market as well as in hospitals, nursing homes,
supervised retirement facilities and military installations. The Company has
the right, in its sole discretion, to approve any venture by EDS, whether on its
own or with a third party, to install, operate or manage any CDV network in the
U.S. market.
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MARKETS AND CUSTOMERS
The Company currently provides PPV services to hotels that are part of
chains including Hyatt, Loew's, Four Seasons, Wyndham, Stouffer and Harvey
Hotels. The following table sets forth certain information regarding the number
of hotels and rooms served by the Company for the past five years:
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As of December 31,
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1995 1994 1993 1992 1991
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Hotels Served:
Pay-Per-View 1,888 2,308 2,442 2,543 2,554
Free-To Guest 819 888 1,006 998 1,018
Rooms Served:
Pay-Per-View 550,406 635,378 684,599 722,571 758,710
Free-To Guest 287,259 308,249 330,138 336,295 363,116
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The Company offers its free-to-guest services to the same type of hotels to
which it markets its pay-per-view services. The service is provided to hotels
pursuant to contracts similar to the pay-per-view contracts, although in certain
cases, the contracts are terminable after three years, at the option of the
hotel, upon payment of a fee to the Company.
The Company offers its interactive services only to hotels that have PPV
systems. In most cases, the interactive services are made a part of the
contract for pay-per-view services and the service term is concurrent with the
term of the pay-per-view contract, which is typically five years.
International Markets. In addition to its operations in the United States,
the Company presently offers its services in Canada, Puerto Rico, the U.S.
Virgin Islands, Hong Kong, Singapore, Thailand, Australia and the Bahamas. The
legal entities located in Canada, Puerto Rico, the U.S. Virgin Islands, Hong
Kong, Singapore, Thailand, and Australia are not part of the Company's Chapter
11 bankruptcy proceedings. The Company intends to continue to expand its
international operations. The Company is a leading provider of in-room video
entertainment in Asia-Pacific and Australia. The Company serves its
international hotel customers primarily with its tape-based systems, but
generally experiences higher revenues and operating cash flow per room than in
the U.S. because of higher prices, higher usage and the lack of programming
alternatives. The competition to provide PPV services to hotels is generally
less in international markets than in the United States. Expansion of the
Company's operations into foreign markets involves certain risks that are not
associated with further expansion in the United States including availability of
programming, government regulation, currency fluctuations, 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. See Note 15 included in Item 8, Part II,
"Financial Statements and Supplementary Data" for financial information about
the Company by geographic area.
HOTEL CONTRACTS
The Company typically enters into a separate contract with each hotel for
the services provided. Contracts with the corporate-managed hotels in any one
chain generally are negotiated by that chain's corporate management, and the
hotels subscribe at the direction of corporate management. In the case of
franchised or independently owned hotels, the contracts are generally negotiated
separately with each hotel. Existing contracts generally have a term of five or
seven years from the date the system becomes operational. At the scheduled
expiration of a contract, the Company typically seeks to extend the term of a
hotel's contract with market competitive terms. At December 31, 1995,
approximately 16.9% of the pay-per-view hotels have contracts that have expired
and are on a month-to-month basis as compared to 19.8% at December 31, 1994.
Approximately 14.7% of the existing pay-per-view served hotels have contract
expiration dates during 1996. It is the Company's intention to attempt to renew
the hotel contracts it considers to be profitable.
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MANUFACTURING
Prior to 1994, the Company manufactured substantially all of the equipment
used in its tape-based PPV and interactive hotel systems. In December 1993, the
Company's manufacturing capability was sold to The Cerplex Group. In connection
with this sale, SpectraVision entered into a five year contract with Certech
Technology, Inc. ("Certech"), a wholly-owned subsidiary of The Cerplex Group, to
provide manufacturing and repair services of certain equipment for use in hotel
PPV and interactive systems. In 1995, Certech provided manufacturing and repair
services to the Company totaling $13.5 million.
COMPETITION
The Company is one of the largest operators of pay-per-view hotel movie
viewing systems in North America. The Company has experienced intense
competition from other pay-per-view suppliers on a national scale in the United
States market, including competition for contract renewals at hotels operated by
certain of the major hotel chains served by the Company. From 1993 to 1995,
contracts for three major hotel chains, representing a total of 151,000 rooms,
expired and were not renewed. Additionally, the Company is experiencing
increased competition in its international markets. The principal components of
the competition in the hotel PPV market are service, advanced technological
products and customer incentives. Also, some of the Company's competitors have
greater access to financial and other resources.
Approximately 14.7%, 18.1% and 16.3% of the 550,406 rooms served by the
Company at December 31, 1995, are subject to contracts that expire in 1996, 1997
and 1998, respectively. In recent years the Company's competitors have expanded
their PPV room base, and the number of hotels into which the Company can
profitably expand has declined. Additionally, the Company's pay-per-view system
competes for a guest's viewing time with broadcast television, and where
available, the Company's own free-to-guest programming or cable television
service. Cable television also is able to offer pay-per-view programming, and
it is now being marketed to hotels by competitor cable companies on a limited
basis in certain areas.
In the satellite-delivered free-to-guest programming business, the Company
has several direct and indirect competitors and has no proprietary hardware,
exclusive programming or captive customer base. Major cable companies compete
with the Company in delivering free-to-guest programming to hotels in several
major metropolitan areas, such as New York City, Chicago, Atlanta, San Francisco
and Boston.
The Company's interactive services are available only to hotels equipped
with its pay-per-view movie systems. Other competitors have released and tested
similar interactive systems, but the Company believes that interactive services
can be marketed profitably only as part of a pay-per-view system due to the
substantial fixed costs of installing equipment in each hotel. Consequently,
the Company believes that its primary competitors in the interactive services
market are the same as its competitors in the pay-per-view market.
The communications industry is subject to rapid technological change. New
technological developments could have an adverse effect on the Company's
operations unless the Company is able to provide equivalent services at
competitive cost.
REGULATION
The Federal Communications Commission ("FCC") has broad jurisdiction over
electronic communications. The FCC does not directly regulate the Company's
pay-per-view or free-to-guest systems. The FCC's jurisdiction, however, does
encompass certain aspects of the Company's operations as they relate to the
Company's use of the radio frequency spectrum in certain hotels served by the
Company. The Company has, as a matter of practice, obtained optional licenses
from the FCC for a number of its downlink, television receive-only earth
stations, which are used to receive transmissions from communications satellites
in connection with the Company's free-to-guest services and obtained the
required licenses for the microwave point-to-point relay facilities.
On February 1, 1996 Congress passed S .652, "The Telecommunications Act of
1996" (the "Act"), which was subsequently signed into law on February 8, 1996.
The new law will alter federal, state and local laws and regulations for
telecommunications providers and services, and may affect the Company. There
are numerous rulemakings to be undertaken by the FCC which will interpret and
implement the Act. It is not possible at this time to predict the outcome of
such rulemakings.
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PATENTS, TRADEMARKS AND COPYRIGHTS
The Company has four issued patents, one acquired and unexpired patent and
four patents pending in the United States covering various aspects of its pay-
per-view and interactive systems, which are for 17 years each. In addition, the
Company has numerous registered trademarks and servicemarks, including
"SpectraVision," "Guest Choice," "STARPATH" and pending trademark applications
for "SPEXIS" and "Guest Touch," and numerous registered copyrights covering the
protocol interface between the Company's computer and the hotel's property
management system computer ("PMS") and the protocol interface between the
Company's room-unit technology and various television products. The Company
considers its intellectual property rights to be valuable assets and intends to
protect them when necessary.
EMPLOYEES
As of December 31, 1995, the Company had 365 employees worldwide. The
Company believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
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The Company owns its headquarters located in Richardson, Texas. The
headquarters contain approximately 84,000 square feet of manufacturing and
office space, of which 45,000 square feet are leased to Certech. The Company
also 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. A 10,800 square foot warehouse is also
leased. The lease expires in October 1998. The Company's annual rental for
these facilities is approximately $382,000. The Company also leases office
space throughout the United States, Canada, Mexico, Puerto Rico, Hong Kong, and
Australia for its customer support operations. The Company's properties are
suitable and adequate for the Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
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On October 20, 1994, a purported class action complaint was filed in the
United States District Court for the Northern District of Texas, Dallas
Division, styled Seth Stern v. SpectraVision Inc., Albert D. Jerome, Michael C.
Colleran, John Davis, Marvin Davis, Gerald S. Gray, Kenneth Ziffren, John F.
Berardi, Robert D. Beyer and Danny G. Hair. The complaint alleges violations of
Sections 11, 12(2) and 15 of the Securities Act of 1933, sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under
that Act relating to alleged misrepresentations and omissions concurrent with
and following the Company's public offering of Class B Common Stock and the
Company's offering of 11-1/2% senior discount notes, both on September 28, 1993,
including but not limited to alleged misrepresentations and omissions made in
the Prospectuses. The complaint asserts that it is brought on behalf of a class
consisting of purchasers of securities of the Company, including Common Stock
and senior discount notes, between September 28, 1993 and August 15, 1994. On
December 20, 1994, the defendants moved to dismiss the complaint. In response
to that motion, plaintiff agreed to file an amended complaint and the motions to
dismiss were withdrawn without prejudice. On February 2, 1995, plaintiff served
an amended complaint reasserting the claims set forth in the prior complaint and
adding claims under Section 33 of the Texas Securities Act, enlarging the class
period to November 7, 1994, and altering other allegations, including some of
the allegations relating to the alleged misrepresentations and omissions. On
July 20, 1995, the plaintiffs dismissed without prejuidice Messrs. Colleran,
John Davis, Gray, Ziffren, Berardi and Beyer. On September 11, 1995, plaintiff
purported to amend the complaint to add as a second plaintiff Werner, Zaroff,
Slotnick, Stern & Ashkenazy Pension F/B/O Fred Werner. Plaintiffs seek
unspecified damages, prejudgment interest, and fees and costs of the plaintiffs.
While the Company believes that it has meritorious defenses to the claims and
intends to vigorously defend itself, an unfavorable resolution could have a
material adverse effect on the Company. In addition, the Company is presently
unable to estimate the amount, if any, of such loss. Proceedings in connection
with this lawsuit against the Company have been stayed as a result of the
Chapter 11 filings. See Item 1. "Business."
The Company and its subsidiaries and related companies are potential and
named defendants in several other lawsuits and claims arising in the ordinary
course of business. While the outcome of such claims, lawsuits or other
proceedings against the Company cannot be predicted with certainty, management
expects that such liability, to the extent not provided for through insurance or
otherwise, will not have a material adverse effect on the financial condition of
the Company. Proceedings in connection with any lawsuit against the Company
have been stayed as a result of the Chapter 11 filings. See Item 1 for a
description of the Company's bankruptcy proceedings.
7
<PAGE>
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 1995.
8
<PAGE>
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 February 15,
1996.
Until May 1, 1995, the Company's Class B Common Stock was available for
public trading on the American Stock Exchange (the "Exchange") under the ticker
symbol "SVN". On May 1, 1995, the Exchange halted trading on the Company's
Class B Common Stock and Contingent Value Rights ("CVRs") following the
Company's announcement on Friday, April 28, 1995, that it had presented a
restructuring plan to certain holders of its senior discount notes and reset
notes. Exchange officials expressed concern about current or potential
shareholders' ability to value the Company's Class B Common Stock and CVRs, and
there can be no assurance that trading in the Class B Common Stock and CVRs will
be resumed. The Company no longer meets the continuing listing guidelines of
the Exchange. The Company's reset notes (AMEX: SVN C) continue to trade on the
Exchange. The high and low closing prices by quarter for the Company's Class B
Common Stock for the years ended December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------- ---------
<S> <C> <C>
December 31, 1995 $ 1/64 $ 1/64
September 30, 1995 $ 3/16 $ 1/64
June 30, 1995 $ 1/8 $ 1/64
March 31, 1995 $ 7/16 $ 3/16
December 31, 1994 $2 1/4 $ 3/16
September 30, 1994 $3 3/8 $1 15/16
June 30, 1994 $ 6 $ 2
March 31, 1994 $9 5/8 $ 5 1/4
</TABLE>
As of February 15, 1996, there were 19,390,379 shares of Class B Common Stock
outstanding held by approximately 405 stockholders of record.
No dividends have been paid on the Company's Class A Common Stock or Class B
Common Stock during the years ended December 31, 1995 or 1994. Provisions of
the Company's indebtedness agreements limit payment of dividends on the Common
Stock. See Note 7 and Note 11 included in Item 8, Part II, "Financial
Statements and Supplementary Data".
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The financial data set forth below, except hotel and room data, was derived
from the audited consolidated financial statements of the Company and should be
read in connection with the consolidated financial statements and related notes
included elsewhere herein. References herein are to the financial statements
and footnotes included in Item 8, Part II "Financial Statements and
Supplementary Data".
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Revenues:
Pay-Per-View $104,930 $ 119,452 $134,830 $ 136,541 $138,695
Free-to-Guest 13,565 14,840 17,875 21,275 23,118
Interactive and Other 5,491 8,092 10,288 10,805 11,280
-------- --------- -------- --------- --------
Total Revenues
123,986 142,384 162,993 168,621 173,093
======== ========= ======== ========= ========
Direct Costs:
Pay-Per-View 39,942 41,766 42,195 41,217 42,268
Free-to-Guest 11,443 11,818 12,804 12,085 13,142
Other 1,428 4,431 3,835 3,226 3,187
-------- --------- -------- --------- --------
Total Direct Costs
52,813 58,015 58,834 56,528 58,597
======== ========= ======== ========= ========
EBITDA (a) 866 19,148 55,790 65,303 69,877
======== ========= ======== ========= ========
Write-off of Goodwill - - - 218,453 -
======== ========= ======== ========= ========
Write-down of Hotel Contracts - 196,256 - - -
======== ========= ======== ========= ========
Loss Before Extraordinary Items and
Cumulative Effect of Change in
Accounting Principle (73,645) (254,284) (43,057) (270,242) (60,003)
Extraordinary Gain (Loss) (915) - (2,699) 23,378 -
Cumulative Effect of Change in
Accounting Principle - - - (28,498) -
-------- --------- -------- --------- ========
Net Loss (74,560) (254,284) (45,756) (275,362) (60,003)
Preferred Stock Dividend - - - (21,878) (38,157)
-------- --------- -------- --------- --------
Loss Applicable to Common
Stockholders $(74,560) $(254,284) $(45,756) $(297,240) $(98,160)
======== ========= ======== ========= ========
Loss per Common Share before
Extraordinary Items and Cumulative
Effect of Accounting Change $(3.07) $(10.60) $(2.37) $(166.31) $(655.88)
- -------------------------
</TABLE>
(a) EBITDA consists of earnings before interest expense, income taxes,
reorganization items, depreciation, amortization, write-off of goodwill and
hotel contracts and certain other non-cash charges. EBITDA is not intended to
represent cash flow or any other measure of performance in accordance with
generally accepted accounting principles. EBITDA is included herein because
management believes that certain investors find it a useful tool for measuring
the ability to service debt.
10
<PAGE>
Other Selected Data
<TABLE>
(In thousands except hotel and room data) December 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Total Assets $ 205,622 $ 242,822 $ 409,478 $ 401,493 $619,518
Total Debt $ 28,667* $ 510,563 $ 436,557 $ 458,900 $514,782
Liabilities Subject to Settlement Under
Reorganization $ 579,587* - - - -
Stockholders' Equity (Deficit) $(447,608) $(373,025) $(118,614) $(150,923) $ 59,899
Pay-Per-View Hotels 1,888 2,308 2,442 2,543 2,554
Pay-Per-View Rooms 550,406 635,378 684,599 722,571 758,710
Free-to-Guest Hotels 819 888 1,006 998 1,018
Free-to Guest Rooms 287,259 308,249 330,138 336,295 363,116
Interactive Hotels 491 481 489 480 491
</TABLE>
* Certain liabilities have been reclassed to "Liabilities Subject to
Settlement Under Reorganization" in accordance with bankruptcy reporting.
11
<PAGE>
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, 1995, 1994 and 1993.
CURRENT FINANCIAL CONDITION
During 1995, the Company experienced a net loss of $74.6 million as compared
to a net loss of $254.3 million in 1994. The decrease in the net loss is
largely due to the write-down of hotel contracts (an intangible asset) in the
amount of $196.3 million which occurred in 1994. Additionally, the Company's
EBITDA (earnings before interest, taxes, reorganization items, depreciation,
amortization, write-down of hotel contracts and certain other non-cash charges)
was $.9 million for 1995 as compared to $19.1 million during 1994. The decrease
in EBITDA was due to lower revenues caused by the loss of hotel contracts and
lower margins primarily due to higher direct costs as a percentage of revenues
and other cost increases particularly in operating expenses.
The Company had total liabilities of approximately $633.2 million and assets
of $205.6 million at December 31, 1995. The Company's cash flow from operations
in 1995 was not sufficient to satisfy its demands for cash, and the Company
made up the deficiency by borrowing under its revolving line of credit. At
December 31, 1995, the Company had $11.8 million available borrowing capacity
under its revolving line of credit and $3.4 million in cash on hand to meet its
continuing cash flow needs. The Company's cash on hand and cash flow from
operations in 1996 will not be sufficient to satisfy its current demands for
cash. There can be no assurance that the amount the Company can borrow under
its revolving line of credit will be sufficient to meet its cash requirements
for 1996. The Company's independent public accountants included in their report
on the Company's consolidated financial statements an explanatory paragraph that
describes the uncertainty about the Company's ability to continue as a going
concern. See Part II, Item 8. "Financial Statements and Supplementary Data".
If the Company is unable to reach agreement with a potential bidder or bidders
on a business combination, the strategy of the Company is to shrink the room
base to profitable hotels, renew contracts, add new hotels only on a profitable
basis and reduce the administrative structure to efficiently support the
smaller, more profitable room base. There can be no assurance that the Company
will have adequate capital resources to fulfill this strategy.
If the Company cannot borrow or otherwise obtain the cash necessary to operate
throughout 1996 or the Company is unable to obtain confirmation of a plan of
reorganization, its creditors, equity security holders or the United States
Trustee may seek a liquidation of the Company by conversion to a Chapter 7
bankruptcy proceeding.
The Company was not in compliance with certain of its financial covenants
related to the revolving line of credit with Foothill Capital Corporation,
which is providing debtor-in-possession financing to the Company, on December
31, 1995. On March 22, 1996, the Company obtained a waiver from Foothill
Capital Corporation for the December 31, 1995 covenant violations. However,
the Company does not expect that it will be in compliance with the financial
covenants relating to its operating cash flow and its fixed charges to cash flow
ratios in 1996. Accordingly, in April 1996, Foothill Capital Corporation could
elect to terminate the revolving line of credit, demand immediate payment of all
outstanding balances and foreclose on the Company's assets securing the
revolving line of credit if payment is not made. In this event, if the Company
cannot obtain alternative financing, it may be forced to liquidate in a Chapter
7 bankruptcy proceeding.
In early 1995, the Company determined that a financial restructuring would be
required to ensure the Company's long-term survival. The Company conducted
restructuring negotiations with representatives of its secured and unsecured
creditors during April and May 1995, working toward the development of an
overall restructuring plan. In June 1995, the Company concluded that the
Chapter 11 filing should be made in order to preserve the value of its assets
and to ensure that the business had sufficient cash resources to continue
operations while it completed the financial restructuring process.
On June 8, 1995, SpectraVision, together with SPI Newco, Inc., Spectradyne,
Inc., Spectradyne International, Inc., and Kalevision Systems, Inc. - USA, filed
voluntary petitions for reorganization under Chapter 11 and are currently
operating their respective businesses as debtors-in-possession pursuant to
sections 1107 and 1108 of the Bankruptcy Code. On June 23, 1995, the Creditors'
Committee was appointed by the U.S. Trustee for the District of Delaware
pursuant to section 1102 of the Bankruptcy Code. The Creditors' Committee has
the right
12
<PAGE>
to review and object to certain business transactions and is expected to
participate in the negotiation of the Company's plan of reorganization.
In March 1996, the Bankruptcy Court authorized the employment of Salomon
Brothers Inc. as investment bankers and financial advisors of the Company. The
agreement with Salomon Brothers Inc. calls for a monthly advisory fee and an
additional fee ("Transaction Fee") upon the consummation of a transaction
resulting in the sale of the Company. The Transaction Fee will be a percentage
of the total purchase price.
The Company has been actively pursuing several avenues of restructuring its
financial position to achieve the maximum return for all parties involved. In
January 1996 the Company solicited bids from third parties for financial
restructuring proposals which would allow the Company to emerge from bankruptcy
pursuant to a business combination with the third party. It is the Company's
intent to select one or more such proposals and, with the Bankruptcy Court's
approval, emerge from bankruptcy in 1996. However, there can be no assurance
that any agreement for a business combination will be reached or that any
agreement will be approved by the creditors or the Bankruptcy Court.
As of the Petition Date, actions to collect pre-petition indebtedness have
been automatically stayed pursuant to section 362 of the Bankruptcy Code (unless
modified by an order of the Bankruptcy Court) and, in certain circumstances,
other pre-petition contractual obligations may not be enforced against the
Company. In addition, the Company may reject pre-petition executory contracts
and lease obligations, and parties affected by these rejections may file claims
with the Bankruptcy Court in accordance with the reorganization process.
Substantially all liabilities as of the Petition Date are subject to being paid
or compromised under a plan of reorganization to be voted upon by all impaired
classes of creditors and equity security holders and approved by the Bankruptcy
Court.
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,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Hotels served as of the end of the year 1,888 2,308 2,442
Rooms served as of the end of the year 550,406 635,378 684,599
Average rooms served during the period 592,436 652,226 700,444
Average price per view $ 7.78 $ 7.71 $ 7.73
Revenue per equipped room per day ("RER") $ 0.49 $ 0.51 $ 0.53
</TABLE>
During 1995, 1994 and 1993, revenues from the Company's pay-per-view movie
services accounted for 84.6%, 83.9%, and 82.7%, 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 and de-installed during a period, the hotel
occupancy rate, the frequency of movie viewing by hotel guests, the availability
of popular movies, the price charged per view and the proximity of a movie's
introduction in the Company's PPV system to its first-run theatrical release and
length of time of the "window" in which the movie is available in the Company's
PPV system but is not available for home video, cable television exhibition or
direct sales to the consumer.
On March 1, 1996, the Company implemented a $1.00 price increase for pay-
per-view movies for substantially all of the hotels located in the United
States. Further, the Company intends to increase the pay-per view movie prices
in Canada on April 1, 1996. The Canadian price increase will raise the price in
Guest Choice
13
<PAGE>
hotels, approximately 20% of the hotel base, $.72 per movie to $7.98 and the
price at the scheduled pay-per-view hotels, approximately 80% of the hotel base,
$.42 per movie to $6.93.
Pay-per-view systems installed and deinstalled. The number of rooms
equipped with pay-per-view systems decreased during 1995 by 84,972 rooms to
550,406 rooms as of December 31, 1995. This was due to the Company's inability
to renew profitable expiring contracts because of poor field service and the
lack of capital to compete in an intensely competitive market place. The
Company expects that the number of PPV rooms served will continue to decrease
due to the Company's continuing lack of funds and the competitive market. In
addition, the Company initiated "Project 300", a project to de-install
approximately 300 small, unprofitable hotels from the current hotel base.
Ninety-nine of these hotels with 13,261 rooms were de-installed in 1995. The
remainder of these hotels will be de-installed in early 1996. In September
1993, the Company signed a seven-year exclusive contract renewal with Hyatt
Hotels & Resorts to provide pay-per-view movies and interactive video services.
This contract covers 103 hotels with a total of approximately 54,000 rooms.
Hyatt Hotels are now equipped with the Digital Guest Choice system and is the
first hotel chain to be completely installed with the CDV Satellite Network. At
February 29, 1996, the Company had deliverable orders for systems to be
installed in approximately 13,339 additional rooms, as compared to approximately
10,973 rooms at February 28, 1995.
Price per view. The following table sets forth, for the periods indicated,
the average price per view for the United States, Canada, International
operations and for the consolidated company. Foreign exchange rate fluctuations
impact the consolidated average price per view.
<TABLE>
<CAPTION>
Average Price Per View
----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
United States $7.87 $7.85 $7.84
Canada $6.54 $6.30 $6.58
International* $8.80 $8.64 $8.41
Consolidated $7.78 $7.71 $7.73
</TABLE>
* International includes Australia, Hong Kong, Mexico, Singapore and
Thailand
Revenue per equipped room per day ("RER"). RER represents total pay-per-
view revenues earned per equipped PPV room per day. The Company's RER declined
each of the past two years from $0.53 per room per day in 1993 to $0.51 in 1994
and to $0.49 in 1995. The lower RER is attributable to the two primary factors
discussed below:
. Poor Field Service Maintenance: In 1994, the transition of the Company's
field service to EDS involved numerous difficulties for field service
personnel in maintaining the normal level of repairs and maintenance of
existing PPV rooms concurrent with the rapid installation of the CDV
system. In 1995, the Company continued to experience poor field service
maintenance. The Company currently has approximately 90 of its own
employees involved in field service and intends to complete the transition
of control of the technical field service function to SpectraVision during
April 1996.
. Loss of high RER producing hotels: The Company has lost several contracts
over the last two years covering hotels which were consistently producing
high RER.
Direct costs. Direct costs incurred with the offering of pay-per-view
services include film licensing costs, hotel commissions, videotapes, in-room
cards and transponder access fees necessary to provide signals to transmit the
digitized movies to the hotels.
14
<PAGE>
FREE-TO-GUEST AND OTHER SERVICES
Free-to-guest services to hotel guests include satellite delivery of
programming such as HBO, CNN, ESPN and other cable networks, as well as
providing to the hotels, in most cases, the satellite equipment to receive the
programming. The hotel typically pays the Company a fixed monthly fee per room
for each programming channel selected.
The following table sets forth, for the periods indicated, the percentage
of total revenues and the number of hotels and rooms served. Revenues from
free-to-guest services are a function of total rooms served and the fee charged
by the Company.
<TABLE>
<CAPTION>
Free to Guest Services
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Percentage of total revenue 11.0% 10.4% 11.0%
Number of hotels served 819 888 1,006
Number of rooms served 287,259 308,249 330,138
</TABLE>
The majority of the decrease from 1993 to 1994 was the result of the non-
renewal of a free-to-guest services contract with certain corporate owned
Marriott Hotels that expired during 1994. The decline in free-to-guest services
from 1994 to 1995 is also due to the nonrenewal of free-to-guest services
contracts. These contracts were not renewed due to the loss of pay-per-view
contracts at hotels to which the Company also supplied free-to-guest service.
Direct costs incurred in connection with the offering of free-to-guest services
to hotels consist primarily of license fees paid to programming suppliers.
The balance of the Company's revenues are derived from the fees earned from
hotels for interactive communications services, such as Video Checkout, and
sales of various other products and services, such as remote control units,
satellite dishes, master antennae system upgrades and licensing agreements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 ("1995") COMPARED TO YEAR ENDED DECEMBER 31, 1994
("1994")
Total revenues decreased to $124.0 million in 1995 from $142.4 million in
1994, a decrease of $18.4 million or 12.9% primarily due to the decline in pay-
per-view revenues as a result of the reduction of installed hotel rooms. Of the
total revenues reported in 1995, 84.6% were revenues from pay-per-view, 11.0%
were from free-to-guest, 4.4% were from interactive services and other revenue
sources.
Pay-per-view revenues decreased to $104.9 million in 1995 from $119.5
million in 1994, a decrease of $14.6 million or 12.2%. This decrease in pay-
per-view revenues reflects the decline in the number of rooms served, which
resulted in an approximate $11.1 million decrease in revenues. The remainder of
the decrease in pay-per-view revenues is attributed to a decline in RER
reflecting lower viewing levels. The Company believes the lower RER in 1995 can
also be attributed to an increased number of non-operating hotel systems due to
poor service and poorly performing movie product.
Free-to-guest revenues decreased to $13.6 million in 1995 from $14.8
million in 1994, a decrease of $1.2 million or 8.1%. This decrease primarily
reflects negotiated price reductions in connection with certain PPV hotel
contract renewals and the decline in the number of hotels with free-to-guest
services.
Other revenues decreased to $5.5 million in 1995 from $8.1 million in 1994,
a decrease of $2.6 million or 32.1%. This decrease is primarily due to the fact
that equipment sales in 1994 did not recur in 1995.
15
<PAGE>
Pay-per-view direct costs decreased to $39.9 million in 1995 from $41.8
million in 1994, a decrease of $1.9 million or 4.5%. As a percentage of pay-
per-view revenues, pay-per-view direct costs increased to 38.1% in 1995 from
35.0% in 1994 for a number of reasons. Film share expense increased from 16.2%
of PPV revenues in 1994 to 17.1% of PPV revenues in 1995 because of higher film
share percentages being charged to the Company from the various film studios
for the major studio film product shown by the Company. Although transmission
costs remained the same, they increased to 3.1% of PPV revenues in 1995 from
2.3% in 1994 because PPV revenues declined. The video tape costs increased to
3.4% of PPV revenues in 1995 compared to 2.6% in 1994 due to increased tape
encoding and duplicating costs established by the Company's vendors during
bankruptcy. Movie card costs rose from 2.9% of PPV revenues in 1994 to 3.8% of
PPV revenues in 1995 due primarily to the introduction of an Entertainment Guide
magazine.
Free-to-guest direct costs decreased to $11.4 million in 1995 from $11.8
million in 1994, a decrease of $.4 million or 3.4%. As a percentage of free-to-
guest revenues, free-to-guest direct costs increased to 84.4% in 1995 from 79.6%
in 1994 as a result of the lower revenues due to price reductions granted in
connection with certain PPV contract renewals without a corresponding decrease
in programming fees paid to suppliers.
Other direct costs decreased to $1.4 million in 1995 from $4.4 million in
1994, a decrease of $3.0 million or 68.2%. As a percentage of other revenues,
other direct costs decreased to 26.0% in 1995 from 54.8% in 1994 principally due
to a one time $1.5 million charge for prior period licensing fees in 1994.
Depreciation and amortization expense decreased to $39.4 million in 1995
from $50.5 million in 1994, a decline of $11.1 million or 22.0%. The decline is
due to the write-down of hotel contracts at the end of 1994 and assets becoming
fully depreciated.
Operating expenses increased to $17.6 million in 1995 from $13.2 million in
1994, a net increase of $4.4 million or 33.3%. Operating expenses for periods
prior to April 1994 included costs of the Company's U.S. field service
organization as well as field service operations in its foreign subsidiaries,
and labor costs of repairs and maintenance of hotel system components (including
TV's). Subsequent to March 1994, operating expenses are comprised of field
service operations of the foreign subsidiaries and repairs and maintenance
costs. In 1995, these costs also included technicians who were hired to improve
customer service in the field. Approximately $2.0 million represented
duplicated costs during 1995 when the Company employed its own field service
organization and also paid contract fees under the EDS Service and Technology
Agreement. In addition, the cost of repairs to system components increased $1.6
million due to both the cost of shipping and the increased quantity of room
units and videotape players repaired. The increased number of repairs,
primarily to room unit channel selectors, is partially due to the omission of
on-site repairs previously performed by Company field service personnel in prior
years.
Contracted service costs increased to $29.3 million in 1995 from $21.0
million in 1994, an increase of $8.3 million or 39.5%. The remaining increases
include the costs from the EDS Service and Technology Agreement, which was in
effect for the last three quarters of 1994 and the entire year of 1995. The
increase is due primarily to the recording of $6.0 million of operating leases
for equipment previously owned by the Company and sold in a sale leaseback
arrangement.
Selling and marketing expenses decreased to $4.9 million in 1995 from $8.7
million in 1994, a decrease of $3.8 million or 43.7% due to the elimination of
the marketing department during the year and reductions in activities associated
with public relations and promotion of new products.
General and administrative expenses decreased to $17.3 million in 1995 from
$19.6 million in 1994, a net decrease of $2.3 million or 11.7%. Expenses in
1994 included severance costs of $2.1 million due to changes in executive
management. Additionally, 1994 included increases in legal fees, outside
management fees for warehouse management and shipping services provided by
Certech.
16
<PAGE>
Research and development expenses decreased to $1.8 million in 1995 from
$3.8 million in 1994, a decrease of $2.0 million due to various cost reductions
implemented.
Non-operating income for 1995 was $.5 million. This amount includes
adjustments to certain prior obligations which were settled for less than
anticipated. Non-operating income for 1994 was $1.2 million and is comprised of
business interruption insurance proceeds from hurricanes in 1993 and certain
non-operating payments received in-lieu of performance under purchase orders for
equipment by a customer.
Interest expense (net) decreased to $28.2 million in 1995 from $55.0
million in 1994, a decrease of $26.8 million or 48.7%. Cash interest expense
decreased from $4.0 million in 1994 to $3.2 million in 1995, a decrease of $.8
million. Non-cash interest expense decreased from $51.2 million in 1994 to
$25.0 million in 1995, a decrease of $26.2 million. These decreases in interest
expense were the result of the non-accrual of interest on debt instruments
subject to settlement under reorganization for the period from June 8, 1995, the
date of the Chapter 11 filing, to December 31, 1995. This decrease was
partially offset by an increase in interest expense due to the increased
outstanding balance of the 11.65% Senior Subordinated Reset Notes during 1995
(prior to June 8, 1995) as compared to 1994.
Reorganization items of $7.6 million ($0 in 1994) for the twelve months
ended December 31, 1995 include normal bankruptcy, professional and
miscellaneous charges of $1.6 million and restructure charges of $6.0 million,
which includes discontinuing service to a number of unprofitable hotels and the
elimination of certain positions within the Company. Of the total $6.0 million
restructuring charge, $.9 million relates to the cost of deinstalling certain
hotels and $1.7 million was recorded for estimated losses on the disposal of
deinstalled equipment. The Company also recorded $.1 million in employee
severance costs which will be incurred in the restructure process. The Company
recorded an additional charge of $2.3 million which represented the write-off or
abandonment of other fixed assets and $1.0 million for other costs associated
with the restructure process.
Deferred income tax benefits decreased to $1.0 million in 1995 from $28.5
million in 1994, a decrease of $27.5 million or 96.5%. The 1994 deferred tax
benefit includes the tax effects related to the write-down of hotel contracts.
The Company has recognized deferred tax assets only to the extent such assets
can be realized through future reversals of existing taxable timing differences.
As of December 31, 1995, the net operating loss carryforwards for federal income
tax purposes were $328 million.
Extraordinary item of $.9 million in 1995 represents the write-off of
unamortized debt issuance costs in connection with the extinguishment of the
Company's Revolving and Canadian Bank Credit Facilities.
Net loss decreased to $74.6 million in 1995 from $254.3 million in 1994, a
decrease of $179.7 million. The net loss for 1994 included a one-time charge of
$196.3 million for the revaluation of hotel contracts and patent costs. See
Note 18, Part II, Item 8, "Intangible Assets". Ignoring this one time charge in
1994, 1995 net loss increased by $16.6 over the 1994 net loss.
YEAR ENDED DECEMBER 31, 1994 ("1994") COMPARED TO YEAR ENDED DECEMBER 31, 1993
("1993")
Total revenues decreased to $142.4 million in 1994 from $163.0 million in
1993, a decrease of $20.6million or 12.6% primarily due to the decline in pay-
per-view revenues as a result of the reduction of installed hotel rooms. Of the
total revenues reported in 1994, 83.9% were revenues from pay-per-view, 10.4%
were from free-to-guest, 5.7% were from interactive services and other revenue
sources.
Pay-per-view revenues decreased to $119.5 million in 1994 from $134.8
million in 1993, a decrease of $15.3 million or 11.4%. This decrease in pay-
per-view revenues reflects the decrease in the number of rooms served, which
resulted in an approximate $11.3 million decrease in revenue. The remainder of
the decrease in pay-per-view revenues is attributed to a decline in RER
reflecting lower viewing levels. The Company believes the
17
<PAGE>
lower RER in 1994 can also be attributed to an increased number of non-operating
hotel systems during the transition. The transition of the Company's field
service to EDS involved numerous difficulties for field service personnel in
maintaining the normal level of repairs and maintenance of existing PPV rooms
(particularly those with tape-based PPV systems) concurrent with the
installation of the CDV sites.
Free-to-guest revenues decreased to $14.8 million in 1994 from $17.9
million in 1993, a decrease of $3.1 million or 17.3%. This decrease primarily
reflects negotiated price reductions in connection with certain PPV hotel
contract renewals and the decline in the number of hotels with free-to-guest
services.
Other revenues decreased to $8.1 million in 1994 from $10.3 million in
1993, a decrease of $2.2 million or 21.4%. This decrease is primarily due to
reduced equipment sales and a $1.0 million decrease in interactive revenues due
to price reductions granted in connection with certain PPV contract renewals.
Pay-per-view direct costs decreased to $41.8 million in 1994 from $42.2
million in 1993, a decrease of $429,000 or 1.0%. As a percentage of pay-per-
view revenues, pay-per-view direct costs increased to 35.0% in 1994 from 31.3%
in 1993. The increase resulted primarily from costs of the transponder lease
required for the implementation of the CDV Satellite Network beginning in the
last quarter of 1993. The costs of videotapes and in-room schedule cards
increased to 5.4% of PPV revenues in 1994 from 4% in 1993. Due to the delay of
deployment of the STARPATH technology including SPEXIS and the electronic on-
screen movie card, reduction of videotapes and in-room cards were not realized
as anticipated.
Free-to-guest direct costs decreased to $11.8 million in 1994 from $12.8
million in 1993, a decrease of $1.0 million or 7.8%. As a percentage of free-
to-guest revenues, free-to-guest direct costs increased to 79.0% in 1994 from
71.6% in 1993. The increase in free-to-guest direct costs as a percentage of
free-to-guest revenues is a result of the lower revenues due to price reductions
granted in connection with certain PPV contract renewals without a corresponding
decrease in programming fees paid to suppliers.
Other direct costs increased to $4.4 million in 1994 from $3.8 million in
1993, an increase of $.6 million or 15.8%. As a percentage of other revenues,
other direct costs increased to 54.8% in 1994 from 50.2% in 1993 principally due
to a $1.5 million charge for prior period licensing fees.
Depreciation and amortization expense increased to $50.5 million in 1994
from $44.1 million in 1993, an increase of $6.4 million or 14.5%. The increase
in depreciation is due to the increase in video systems capitalized during 1994
due to the installation of the new STARPATH.
Technology and Field Service charge for 1993 reflects the one-time costs
due to changes in technology and field service operations in connection with the
EDS Service and Technology Agreement. The Company recorded costs in the amount
of $7.0 million for the write-off of obsolete equipment (primarily videotape
players and obsolete microprocessing equipment) and personnel related costs
associated with the reorganization of the Company's field service operations.
Approximately $3.9 million was attributable to the write-off of obsolete
equipment and $3.1 million was due to costs of severance and incentives to field
operation personnel and costs related to the closing of field service offices.
The EDS Service and Technology Agreement was executed in July 1993 and the
Company's management determined the impact on operations including obsolete
equipment and personnel reductions at that time and accordingly recorded the
estimation of these costs in the results of operations for 1993.
Loss on sale of manufacturing assets and inventory is a result of the sale
of the Company's manufacturing operations to The Cerplex Group in December 1993.
Certech Technology, Inc., a wholly-owned subsidiary of The Cerplex Group,
manufactures and sells to the Company a portion of the hotel PPV system
components. Certech has leased the manufacturing space at the Company's
corporate headquarters. The cash proceeds to the Company resulting from the
sale of assets and inventory were $5.2 million. The net loss on the transaction
of $0.7 million is comprised of a gain on the sale of assets net of inventory
write-downs and accrued severance costs.
18
<PAGE>
Operating expenses combined with contracted service costs increased to
$34.2 million in 1994 from $26.3 million in 1993, a net increase of $7.9 million
or 30.0%. Operating expenses for periods prior to April 1994 include costs of
the Company's U.S. field service organization as well as field service
operations in its foreign subsidiaries, and labor costs of repairs and
maintenance of hotel system components (including TV's). Subsequent to March
1994, operating expenses are comprised of field service operations of the
foreign subsidiaries and repairs and maintenance costs. The combined expenses
for 1994 includes a decrease of approximately $2.2 million due to personnel
transferred from operations to the Company's sales organization which costs are
included in selling and marketing expenses for 1994. Approximately $5.3 million
represents duplicated costs during the first quarter of 1994 when the Company
employed its own field service organization and also paid contract fees under
the EDS Service and Technology Agreement. The cost of repairs to system
components also increased. This increase is attributable to both the cost of
shipping and the increased quantity of room units and videotape players
repaired. The increased number of repairs, primarily to room unit channel
selectors, is partially due to the omission of on-site repairs previously
performed by Company field service personnel.
Selling and marketing expenses increased to $8.7 million in 1994 from $5.1
million in 1993, an increase of $3.6 million or 70.6%. Sales costs increased
approximately $2.2 million due to transfers of personnel previously utilized in
the field operations group as described above. Marketing costs increased
approximately $1.2 million due to activities associated with public relations
and promotion of new products.
General and administrative expenses increased to $19.6 million in 1994 from
$15.4 million in 1993, a net increase of $4.2 million or 27.3%. Expenses in
1994 included severance costs of $2.1 million due to changes in executive
management. Additionally there were increases in legal fees and increases in
outside management fees for warehouse management and shipping services provided
by Certech. Directors' and officers' liability insurance costs and bad debt
expense decreased in 1994 as compared to 1993.
Non-operating income for 1994 was $1.2 million and is comprised of business
interruption insurance proceeds from hurricanes in 1993 and certain non-
operating payments received in-lieu of performance under purchase orders for
equipment by a customer. Non-operating income was zero in 1993.
Research and development expenses increased to $3.8 million in 1994 from
$1.6 million in 1993, an increase of $2.2 million due to increased development
and support of STARPATH.
Interest expense (net) increased to $55.0 million in 1994 from $49.0
million in 1993, an increase of $6.0 million or 12.2%. Cash interest expense
decreased from $43.2 million in 1993 to $4.0 million in 1994, a decrease of
$39.2 million. Non-cash interest expense increased from $6.1 million in 1993
to $51.2 million in 1994, an increase of $45.1 million. The decrease in cash
interest expense and the increase in non-cash interest expense is due to the
Company's issuance of additional Reset Notes in payment of the interest
obligation on June 1 and December 1, 1994 on the Reset Notes resulting in $34.0
million of non-cash interest expense. Additionally, 1994 includes a full year
of discount accretion on the Senior Notes (issued in October 1993) compared to
only 3 months of discount accretion during 1993.
State and foreign income tax benefit was $448,888 in 1994 as compared to
$1.7 million of state and foreign income tax expense in 1993, a decrease of $2.2
million. The benefit in 1994 is primarily attributed to operating losses on the
state level resulting in loss carrybacks.
Deferred tax benefits increased to $28.5 million in 1994 from $4.5 million
in 1993, as a result of a reduction in the Company's net deferred tax
liabilities. The increase in the tax benefit for 1994 as compared to 1993
primarily relates to the write-down of hotel contracts (see Note 18, Part II,
Item 8, "Intangible Assets"). The Company has recognized deferred tax assets
only to the extent such assets can be realized through future reversals of
existing taxable temporary differences. As of December 31, 1994 the net
operating loss carryforwards for federal income tax purposes were $285 million.
19
<PAGE>
Loss before extraordinary items increased to $254.3 million in 1994 from
$43.1 million in 1993, an increase of $211.2 million. The net loss for 1994
includes a one-time charge of $196.3 million for the revaluation of hotel
contracts and patent costs. See Note 18, Part II, Item 8 "Intangible Assets".
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents were $3.4 million and $1.3 million at December
31, 1995 and 1994, respectively. During 1995 the Company used net funds
generated from operating cash flow (earnings before interest, reorganization
items, taxes, extraordinary items, depreciation, amortization and exchange
gain/loss) of $.9 million, net funds generated from working capital of $21.4
million (primarily due to the stay of all actions to collect prepetition
indebtedness pursuant to section 362 of the Bankruptcy Code), borrowings of $5.9
million and cash on hand to repay obligations under capital leases and other
debt of $6.4 million, make cash interest payments of $3.5 million, pay state and
foreign income taxes of $0.1 million and make capital expenditures of $16.1
million.
Installations of video systems in process and completed video systems were
$259.3 million at December 31, 1995. Capital expenditures for 1995 were $16.1
million (excluding equipment purchased under capital leases of $6.8 million).
Capital expenditures in 1995 were largely comprised of $12.2 million for the
installation of Pay Per View systems, $3.1 million of capitalized interest, and
$.8 million for other miscellaneous capital expenditures.
Accounts payable was $63.1 million at December 31, 1995 ($55.0 million in
prepetition accounts payable and $8.1 million in postpetition accounts payable)
as compared to $48.8 million at December 31, 1994. Included in the 1995 and
1994 balances are approximately $46.0 million and $32.6 million, respectively,
payable to EDS and its affiliates for equipment purchases and services in
connection with the EDS Service and Technology Agreement. Other accrued
liabilities were $9.1 million at December 31, 1995 as compared to $21.5 million
at December 31, 1994. Included in the other accrued liabilities at December 31,
1995 was $3.6 million which represents additional amounts payable to EDS and its
affiliates in connection with the EDS Service and Technology Agreement.
The liabilities subject to settlement under reorganization was $579.6
million at December 31, 1995 and includes all material debts, payables and
accrued liabilities which existed on June 8, 1995 when the Company made its
Chapter 11 filing.
EBITDA (earnings before interest, taxes, reorganization items,
depreciation, amortization, write-down of hotel contracts and certain other non-
cash charges) for 1995 was $.9 million as compared to 1994 EBITDA of $19.1
million. The decrease is primarily due to revenues lost, higher operating
expenses, severance costs incurred in connection with management changes,
increases in direct costs as a percent of revenue and the reduction in the
number of installed hotel rooms with pay-per-view service. The Company expended
$16.1 million in cash capital expenditures of which $12.2 million was used to
refit a significant portion of the Company's installed systems with the new
STARPATH technology including Digital Guest Choice. The Company anticipates cash
capital expenditure requirements to be approximately $18 million in 1996.
The Company had total liabilities of approximately $633.2 million and
assets of $205.6 million at December 31, 1995. The Company's cash flow from
operations in 1995 was not sufficient to satisfy its demands for cash, and the
Company made up the deficiency by borrowing under its revolving line of credit.
At December 31, 1995, the Company had $11.8 million available borrowing capacity
under its revolving line of credit and $3.4 million in cash on hand to meet its
continuing cash flow needs. The Company's cash on hand and cash flow from
operations in 1996 will not be sufficient to satisfy its current demands for
cash. There can be no assurance that the amount the Company can borrow under
its revolving line of credit will be sufficient to meet its cash requirements
for 1996.
If the Company is unable to reach agreement with a potential bidder or
bidders on a business combination, the strategy of the Company is to shrink the
room base to profitable hotels, renew contracts, add new hotels only on a
profitable basis and reduce the administrative structure to efficiently support
the smaller, more profitable room base. There can be no assurance that the
Company will have adequate capital resources to fulfill this strategy.
20
<PAGE>
If the Company cannot borrow or otherwise obtain the cash necessary to
operate throughout 1996 or the Company is unable to obtain confirmation of a
plan of reorganization, its creditors, equity security holders or the United
States Trustee may seek a liquidation of the Company by conversion to a Chapter
7 bankruptcy proceeding.
The Company was not in compliance with certain of its financial covenants
related to the revolving line of credit with Foothill Capital Corporation,
which is providing debtor-in-possession financing to the Company, on December
31, 1995. On March 22, 1996, the Company obtained a waiver from Foothill
Capital Corporation for the December 31, 1995 covenant violations. However,
the Company does not expect that it will be in compliance with the financial
covenants relating to its operating cash flow and its fixed charges to cash flow
ratios in 1996. Accordingly, in April, Foothill Capital Corporation could elect
to terminate the revolving line of credit, demand immediate payment of all
outstanding balances and foreclose on the Company's assets securing the
revolving line of credit if payment is not made. In this event, if the Company
cannot obtain alternative financing, it may be forced to liquidate in a Chapter
7 bankruptcy proceeding.
The Company's consolidated financial statements have been prepared on a
going concern basis, which assumes continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 filings and circumstances relating to
these events, such realization of assets and liquidation of liabilities is
subject to significant uncertainty. In addition, the Company's independent
public accountants included in their report on the Company's consolidated
financial statements, an explanatory paragraph that describes the uncertainty
about the Company's ability to continue as a going concern.
As a Chapter 11 debtor, the Company may sell (subject, in certain
circumstances, to Bankruptcy Court approval) or otherwise dispose of assets, and
liquidate or settle liabilities for amounts other than those reflected in the
consolidated financial statements. The amounts reported in the consolidated
financial statements do not give effect to any adjustments to the carrying value
of assets or amounts of liabilities that might result as a consequence of
actions taken pursuant to a plan of reorganization. If the Company is unable to
obtain confirmation of a plan of reorganization, its creditors or equity
security holders may seek a liquidation of the Company by conversion to a
Chapter 7 bankruptcy proceeding. In that event, it is likely that additional
liabilities and claims would be asserted which are not presently reflected in
the consolidated financial statements. In the event of a liquidation, the
amounts reflected in the consolidated financial statements would be subject to
adverse adjustments in amounts which, while not presently determinable, could be
material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Independent Auditors' Report
Consolidated Statements of Financial Position at December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Notes to the Consolidated Financial Statements
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
SpectraVision, Inc.:
We have audited the accompanying consolidated financial statements of
SpectraVision, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the index at Item 14.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SpectraVision, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in notes 1 and
3 to the consolidated financial statements, the Company, together with four of
its subsidiaries, filed voluntary petitions for reorganization under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court on
June 8, 1995. Although the Company and the subsidiaries are currently operating
their businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court, the continuation of their businesses as going concerns is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the creditors and confirmation by the
Bankruptcy Court and the ability to generate sufficient cash from operations and
financing sources to meet obligations as they come due. In addition, as
discussed in Note 7, the Company does not expect that it will be in compliance
in 1996 with certain financial covenants related to its debtor-in-possession
financing, which could permit its lenders to accelerate the due date of such
financing. The Company's filing under Chapter 11 and its expected noncompliance
with certain covenants related to its debtor-in-possession financing raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are discussed in Note 3 to the
consolidated financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Dallas, Texas
March 1, 1996, except as to the second paragraph
of Note 7, which is as of March 22, 1996
22
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 3,438 $ 1,317
Accounts Receivable (net of allowance for doubtful
accounts of $1,812 and $1,072 in 1995 and 1994,
respectively) 16,428 20,417
Debt Issuance Costs (net) 5,827 6,797
Prepaids and Other Assets 8,125 8,108
Video Systems
In Process Video Systems 11,329 38,144
Installed Video Systems 247,987 242,003
--------- ---------
259,316 280,147
Less Accumulated Depreciation and Amortization (155,604) (148,290)
--------- ---------
Total Video Systems 103,712 131,857
Building and Equipment
Building 4,300 4,294
Furniture, Fixtures and Other Equipment 8,002 6,887
--------- ---------
12,302 11,181
Less Accumulated Depreciation (5,921) (4,965)
--------- ---------
Total Building and Equipment 6,381 6,216
Land 2,559 2,559
Hotel Contracts (net) 47,403 50,000
Deferred Contract Concession Costs (net) 11,749 15,551
--------- ---------
TOTAL ASSETS $ 205,622 $ 242,822
========= =========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
23
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts Payable $ 8,128 $ 48,807
Accrued Liabilities
Interest - 3,413
Compensation 2,112 4,495
Other 9,086 21,522
Income Taxes 183 290
Deferred Income Taxes 5,467 6,757
Debt
Revolving Credit Facility - 12,500
Canadian Bank Credit Facility - 7,350
Foothill Revolving Credit Facility 26,703 -
11.5% Senior Discount Notes - 172,295
11.65% Senior Subordinated Reset Notes - 294,768
Capitalized Lease Obligations 1,964 23,492
Other Debt - 158
--------- ---------
Total Debt 28,667 510,563
Liabilities Subject to Settlement Under
Reorganization 579,587 -
--------- ---------
Total Liabilities 633,230 595,847
Contingent Value Rights Subject to Settlement
Under Reorganization 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 shares at
December 31, 1995 and 1994 5 5
Class B Common Stock - $0.001 par value,
authorized 144,000,000 shares, issued and
outstanding 19,390,379 shares at
December 31, 1995 and 1994 19 19
Additional Paid in Capital 392,185 392,185
Retained Deficit (840,289) (765,729)
Foreign Currency Translation Adjustment 472 495
--------- ---------
Total Stockholders' Deficit (447,608) (373,025)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 205,622 $ 242,822
========= =========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
24
<PAGE>
SPECTRAVISION, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Revenues $123,986 $ 142,384 $162,993
Costs and Expenses
Direct costs 52,813 58,015 58,834
Depreciation and amortization 39,364 50,534 44,103
Write-down of hotel contracts - 196,256 -
Technology and field service charge - - 7,000
Loss on sale of manufacturing assets and inventory - - 649
Operating expenses 17,563 13,205 24,583
Contracted service costs 29,280 21,029 1,716
Selling and marketing expenses 4,883 8,741 5,054
General and administrative expenses 17,320 19,595 15,431
Research and development (net) 1,769 3,814 1,585
Exchange loss 247 581 833
-------- --------- --------
Total costs and expenses
163,239 371,770 159,788
-------- --------- --------
Operating Income (Loss) (39,253) (229,386) 3,205
Non-operating (income) (508) (1,163) -
Interest expense (net) (Contractual interest expense of
$67,959 in 1995) 28,177 54,981 48,990
-------- --------- --------
Loss Before Reorganization Items, Income Taxes
and Extraordinary Item (66,922) (283,204) (45,785)
Reorganization Items 7,563 - -
-------- --------- --------
Loss Before Income Taxes and Extraordinary Item (74,485) (283,204) (45,785)
Income Taxes
State and foreign provision (benefit) 126 (448) 1,739
Deferred benefit (966) (28,472) (4,467)
-------- --------- --------
Total Income Tax Benefit (840) (28,920) (2,728)
-------- --------- --------
Loss Before Extraordinary Item (73,645) (254,284) (43,057)
Extraordinary Item - loss from debt extinguishment 915 - 2,699
-------- --------- --------
Net Loss $(74,560) $(254,284) $(45,756)
======== ========= ========
Loss Per Common Share:
Before extraordinary item $(3.07) $(10.60) $(2.37)
Extraordinary item (0.04) - (0.15)
-------- --------- --------
Net Loss $(3.11) $(10.60) $(2.52)
======== ========= ========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
25
<PAGE>
SPECTRAVISION, INC. (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Class A Common Stock
Beginning balance $ 5 $ 5 $ 5
--------- --------- ---------
Ending Balance 5 5 5
--------- --------- ---------
Class B Common Stock
Beginning balance 19 19 11
Issued in public offering - - 8
--------- --------- ---------
Ending Balance
19 19 19
--------- --------- ---------
Additional Paid in Capital
Beginning balance 392,185 392,185 314,544
Issued in public offering - - 77,641
--------- --------- ---------
Ending Balance
392,185 392,185 392,185
--------- --------- ---------
Retained Deficit
Beginning balance (765,729) (511,445) (465,689)
Net loss (74,560) (254,284) (45,756)
--------- --------- ---------
Ending Balance
(840,289) (765,729) (511,445)
--------- --------- ---------
Translation Adjustment
Beginning balance 495 622 206
Translation adjustment (23) (127) 416
--------- --------- ---------
Ending balance
472 495 622
--------- --------- ---------
Total Stockholder's Deficit $(447,608) $(373,025) $(118,614)
========= ========= =========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
26
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Operating activities
Net loss $(74,560) $(254,284) $(45,756)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 39,364 50,534 44,103
Loss on sale of manufacturing assets and inventory - - 649
Payment of 1992 Restructuring costs - - (9,236)
Other non-cash items:
Write-down of hotel contracts - 196,256 -
Technology and field service charge - - 7,000
Deferred income tax benefit (966) (28,472) (4,467)
Extraordinary loss from debt extinguishment 915 - 2,699
Conversion of non-cash interest to
secondary notes 18,494 33,973 -
Accretion of discount on senior notes 8,609 18,240 4,074
Amortization and write-off of debt issuance costs 1,148 1,261 1,055
Loss on disposal of assets 1,344 - -
Exchange loss 247 581 833
Other items (net) (777) (948) 86
Increase (decrease) in:
Accounts payable 30,367 27,463 1,377
Accrued interest (1,004) 816 (1,248)
Other accrued liabilities (9,383) (2,138) 2,374
Income taxes payable (107) (370) (124)
Decrease (increase) in:
Accounts receivable 3,989 (2,504) 559
Prepaids and other assets 1,024 (4,243) 2,282
-------- --------- --------
Total adjustments 93,264 290,449 52,016
-------- --------- --------
Net cash provided by operating activities $ 18,704 $ 36,165 $ 6,260
======== ========= ========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
27
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Investing Activities:
Proceeds from sale of manufacturing assets
and inventory $ - $ - $ 5,201
Decrease (increase) in raw materials - - (313)
Cost of in-process systems, deferred contract
concession costs and capital expenditures (16,131) (57,362) (36,097)
-------- -------- ---------
Net cash used in investing activities
$(16,131) $(57,362) $ (31,209)
-------- -------- ---------
Financing Activities:
Borrowings under Revolving Credit Facility $ 7,396 $ 12,500 $ -
Borrowings under Supplemental Bank Credit Facility - - 23,000
Repayment of Supplemental Bank Credit Facility - - (31,000)
Repayment of Bank Credit Facility - - (180,120)
Repayment of other debt and capitalized leases (6,366) (4,187) (1,432)
Borrowing under Foothill Revolving Credit Facility 88,618 - -
Repayment of Foothill Revolving Credit Facility (61,915) - -
Repayment of Revolving Credit Facility (20,811) - -
Repayment of Canadian Bank Credit Facility (7,350) - -
Issuance of class B common stock - - 84,150
Stock issuance costs - - (6,501)
Issuance of senior discount notes - - 149,981
Payment of debt issuance costs - - (8,417)
-------- -------- ---------
Net cash provided by financing activities $ (428) $ 8,313 $ 29,661
-------- -------- ---------
Effect of exchange rate changes on cash (24) (84) (20)
-------- -------- ---------
Net Increase (Decrease) in cash and cash equivalents 2,121 (12,968) 4,692
Cash and cash equivalents at beginning of period 1,317 14,285 9,593
-------- -------- ---------
Cash and cash equivalents at end of period $ 3,438 $ 1,317 $ 14,285
======== ======== =========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
28
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
SpectraVision, Inc., (the "Company" or "SpectraVision"), previously known
as SPI Holding, Inc., is a leading provider of in-room entertainment services to
the lodging industry and conducts all operations through Spectradyne, Inc., and
Spectradyne's wholly-owned foreign subsidiaries. Founded in 1971, the Company
originally developed and patented a system, known as "SpectraVision," which
provides in-room television viewing of recently released major and other motion
pictures on a pay-per-view ("PPV") basis.
From September 1979 until October 1987, Spectradyne, Inc. ("Spectradyne"),
a Texas corporation, was a public company whose common stock was traded on the
NASDAQ over-the-counter market. In October 1987, SpectraVision, Inc. acquired
all of the outstanding stock of Spectradyne in a highly leveraged transaction
following which Spectradyne remained the surviving entity and a wholly owned
subsidiary of the Company (the "1987 Acquisition"). On April 12, 1989, DP
Acquisition Corp., ("DP"), a company controlled by Mr. Marvin Davis, acquired
all of the outstanding common stock of SpectraVision (the "1989 Acquisition").
In December, 1990, DP was dissolved into its parent, Rainbow Company
("Rainbow"), a partnership controlled by Mr. Marvin Davis. On September 17,
1992, after obtaining the necessary votes on a prepackaged joint plan of
reorganization, the Company and certain of its subsidiaries, including SPI
Newco, Inc. ("SPI Newco") and Spectradyne filed a voluntary petition for
bankruptcy in the United States Bankruptcy Court for the District of Delaware.
On October 29, 1992, the Bankruptcy Court issued an order confirming the plan of
reorganization (the "Reorganization Plan"). On November 23, 1992, the
Reorganization Plan became effective, and the Company completed a restructuring
of its debt and capital structure (the "1992 Restructuring"). The 1992
Restructuring included, among other things, (i) the purchase by Rainbow of
4,995,864 shares of Class A Common Stock, (ii) the exchange of previously
outstanding 14.875% reset notes for $260.8 million of 11.5% Senior Subordinated
Reset Notes, due 2002 ("Reset Notes"), (iii) the exchange of previously
outstanding 14.75% debentures for newly issued Class B Common Stock and (iv) the
exchange of previously outstanding preferred stock for shares of Class B Common
Stock and Contingent Value Rights ("CVRs").
On October 5, 1993 the Company issued 7,650,000 shares (including 650,000
shares exercised under an over-allotment option) of its Class B Common Stock and
$209.5 million aggregate principal amount of 11.5% Senior Discount Notes, due
2001 (the "Senior Notes") through a public offering, (the debt and equity
offerings referred to herein as the "1993 Offerings") resulting in net proceeds
to the Company of $223.8 million. The net proceeds from the 1993 Offerings were
used to refinance an aggregate principal amount of $182.6 million of outstanding
obligations under the Company's previous senior bank loan (the "Bank Credit
Facility") and previous revolving credit loan (the "Supplemental Credit
Facility") and were used for general corporate purposes, including funding
capital expenditures required for the implementation of the EDS Service and
Technology Agreement and the Company's expansion plans. See Note 4, "EDS
Service and Technology Agreement". In connection with the common stock offering,
the underwriters exercised an over-allotment option and purchased 400,000 shares
of Class B Common Stock from Rainbow upon Rainbow's conversion of 400,000 shares
of Class A Common Stock. The Company did not receive any of the proceeds from
the shares sold by Rainbow.
In early 1995, the Company determined that a financial restructuring would
be required to ensure the Company's long-term survival. The Company conducted
restructuring negotiations with representatives of its secured and unsecured
creditors during April and May 1995, working toward the development of an
overall restructuring plan. In June 1995, the Company concluded that a filing
under Chapter 11 of the United Bankruptcy Code ("Chapter 11") should be made in
order to preserve the value of its assets and to ensure that the business had
sufficient cash resources to continue operations while it completed the
financial restructuring process.
On June 8, 1995 (the "Petition Date"), SpectraVision, Inc., together with
SPI Newco, Inc., Spectradyne, Inc., Spectradyne International, Inc., and
Kalevision Systems, Inc. - USA, filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") and are
currently operating their respective businesses as debtors-in-possession
pursuant to sections 1107 and 1108 of the Bankruptcy Code. On June 23, 1995, a
single unsecured creditors' committee (the "Creditors' Committee") was appointed
by the U.S. Trustee for the District of Delaware
29
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
pursuant to Section 1102 of the Bankruptcy Code. The Creditors' Committee has
the right to review and object to certain business transactions and is expected
to participate in the negotiation of the Company's plan of reorganization. See
Note 3, "Bankruptcy".
Unless the context otherwise requires, all references herein to the Company
are not intended to imply exact corporate relationships and include
SpectraVision, Inc. and its subsidiaries, including SPI Newco, Inc., its direct
subsidiary, and Spectradyne, Inc., the direct subsidiary of SPI Newco, Inc., as
well as, Spectradyne's foreign operating subsidiaries.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Business and consolidation. The Company owns and operates pay-per-view
movie systems and provides satellite delivered free-to-guest sports, news and
entertainment to the hotel industry. The Company has operating subsidiaries in
the United States, Canada, Mexico, Hong Kong, Singapore, Thailand and Australia.
The consolidated financial statements include the accounts of SpectraVision and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform with the current year presentation.
Cash Flows. For purposes of the Statements of Cash Flows, the Company
considers all certificates of deposit and debt instruments with original
maturities of three months or less to be cash equivalents.
Video systems, building and equipment. Video systems, building and
equipment are stated at cost. Capital leases are recorded at the inception of
the lease at the lower of the discounted present value of future minimum lease
payments or the fair value of the property. Installed video systems include
$44.0 million and $28.2 million of equipment, primarily televisions, under
capital leases at December 31, 1995 and 1994, respectively. Accumulated
amortization of such leased equipment was $12.6 million and $4.5 million
(ranging from 4 to 5 years) at December 31, 1995 and 1994, respectively.
Depreciation and amortization, which includes the amortization of assets
recorded under capital leases, is computed by the straight-line method over the
lesser of 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 $32.3 million for 1995, $36.0 million for 1994 and
$31.2 million for 1993. Prior to installation, in-process video systems are
stated at cost, and depreciation of video systems begins when the system is
installed and activated. The Company capitalized interest related to the
installation of video systems and related equipment of $3.0 million and $2.9
million for the years ended December 31, 1995 and 1994, respectively.
Intangible assets. In connection with the 1989 Acquisition, hotel
contracts were recorded at fair value and amortized on a straight-line basis
over 25 years. Accumulated amortization related to the hotel contracts was $2.6
million and zero at December 31, 1995 and 1994, respectively. As of December
31, 1995, the Company has separately classified certain contract costs related
primarily to the purchase of televisions as deferred contract concession costs.
Such costs are amortized on a straight-line basis over the anticipated period of
benefit, which is generally five to seven years. As of December 31, 1994, such
contract costs were included in Video Systems and have been reclassified to
conform to the current year presentation. Accumulated amortization related to
deferred contract concession costs was $2.6 million and $1.2 million at December
31, 1995 and 1994, respectively. Amortization expense related to hotel
contracts and deferred contract concession costs was $7.1 million for 1995,
$13.7 million for 1994 and $12.5 million for 1993. The Company routinely
assesses the propriety of the carrying amount of hotel contracts and deferred
contract concession costs through a future cash flows method as well as the
amortization periods to determine whether circumstances warrant adjustments to
the carrying amounts or estimated useful lives. At December 31, 1994 the
carrying amount of hotel contracts was decreased. See Note 18, "Intangible
Assets". The assessment of the recoverability of intangible assets will be
adversely impacted if estimated future operating cash flows are not achieved.
30
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. Income taxes are accounted for under the asset and liability
method. 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 and operating loss and tax credit carryforwards. 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. 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.
Foreign currency translation. For translation of its international
currencies, the Company has determined that the local currencies of its
international subsidiaries are the functional currencies. Assets and
liabilities of the international subsidiaries are translated at the rate of
exchange in effect at period end. Results of operations are translated at the
approximate rate of exchange in effect during the period. The translation
adjustment is shown as a separate component of stockholders' deficit. The US
dollar denominated balances of the international subsidiaries are restated at
the rate of exchange at year end and any resulting gains or losses, other than
gains/losses on intercompany balances, are included in the results of
operations.
Fair value of financial instruments. The following table presents the
carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994. Cash and cash equivalents, accounts
receivable and accounts payable (post-petition) have been excluded since the
carrying amounts reported in the accompanying consolidated statements of
financial position approximate fair values.
<TABLE>
<CAPTION>
At December 31, 1995 At December 31, 1994
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Financial liabilities:
Revolving Credit Facility (Note 7) $ - $ - $ 12,500 $12,500
Canadian Bank Credit Facility (Note 7) $ - $ - $ 7,350 $ 7,350
Senior Discount Notes (Note 7) $180,904 N/A $172,295 $75,800
Senior Subordinated Reset Notes (Note 7) $313,262 N/A $294,768 $29,500
Contingent Value Rights (Note 10) $ 20,000 N/A $ 20,000 $ 800
Foothill Revolving Credit Facility (Note 7) $ 26,703 $26,703 $ - $ -
</TABLE>
The fair value of the Foothill Revolving Credit Facility at December 31, 1995
approximated the carrying amount as the facility bears interest at a current
market rate. Due to the extenuating circumstances involving the Senior Discount
Notes, Senior Subordinated Reset Notes, the Contingent Value Rights, other pre-
petition liabilities as a result of the Chapter 11 filings and the anticipated
reorganization, it is not practicable to estimate the fair value of these debts
as of December 31, 1995.
The fair value of the Revolving Credit Facility and the Canadian Credit
Facility at December 31, 1994 approximated the carrying amount because the
facilities bore interest at current market rates. The fair value of the Senior
Discount Notes and Reset Notes at December 31, 1994 was estimated using market
transaction information. The fair value of the Contingent Value Rights at
December 31, 1994 was based upon quoted market prices.
31
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
New Accounting Standards. The Financial Accounting Standards Board (FASB)
has issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, which will become effective for fiscal
years beginning in 1996. The effect of this Statement, if implemented
currently, would not be material to the Company's financial statements.
Use of Estimates. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
NOTE 3 - BANKRUPTCY
In early 1995, the Company determined that a financial restructuring would be
required to ensure the Company's long-term survival. The Company conducted
restructuring negotiations with representatives of its secured and unsecured
creditors during April and May 1995, working toward the development of an
overall restructuring plan. In June 1995, the Company concluded that the
Chapter 11 filing should be made in order to preserve the value of its assets
and to ensure that the business had sufficient cash resources to continue
operations while it completed the financial restructuring process.
On the Petition Date, SpectraVision, Inc., together with SPI Newco, Inc.,
Spectradyne, Inc., Spectradyne International, Inc., and Kalevision Systems, Inc.
- - USA, filed voluntary petitions for reorganization under Chapter 11 in the
Bankruptcy Court and are currently operating their respective businesses as
debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
On June 23, 1995, the Creditors' Committee was appointed by the U.S. Trustee for
the District of Delaware pursuant to Section 1102 of the Bankruptcy Code. The
Creditors' Committee has the right to review and object to certain business
transactions and is expected to participate in the negotiation of the Company's
plan of reorganization.
As of the Petition Date, actions to collect pre-petition indebtedness have
been automatically stayed pursuant to Section 362 of the Bankruptcy Code
(subject to order of the Bankruptcy Court) and, in certain circumstances, other
pre-petition contractual obligations may not be enforced against the Company.
In addition, the Company may reject pre-petition executory contracts and lease
obligations, and parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. Substantially
all liabilities as of the Petition Date are subject to being paid or compromised
under a plan of reorganization to be voted upon by all impaired classes of
creditors and equity security holders and approved by the Bankruptcy Court.
In March 1996, the Company employed Salomon Brothers Inc. as investment
bankers and financial advisors. The agreement with Salomon Brothers Inc. calls
for a monthly advisory fee and an additional fee ("Transaction Fee") upon the
consummation of a transaction resulting in the sale of the Company. The
Transaction Fee will be a percentage of the total purchase price.
The Company has been actively pursuing several avenues of restructuring its
financial position to achieve the maximum return for all parties involved. In
January 1996 the Company solicited bids from third parties for financial
restructuring proposals which would allow the Company to emerge from bankruptcy.
The Company received five bids and intends to select one or more such proposals
and, with the Bankruptcy Court's approval, emerge from bankruptcy in 1996.
However, there can be no assurance that any agreement for a business combination
will be reached or that any agreement will be approved by the creditors or the
Bankruptcy Court.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which assumes continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 filings and circumstances relating to
these events, such realization of assets
32
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and liquidation of liabilities is subject to significant uncertainty. In
addition, the Company's independent public accountants included in their report
on the Company's consolidated financial statements, an explanatory paragraph
that describes the uncertainty about the Company's ability to continue as a
going concern.
As a Chapter 11 debtor, the Company may sell (subject, in certain
circumstances, to Bankruptcy Court approval) or otherwise dispose of assets, and
liquidate or settle liabilities for amounts other than those reflected in the
consolidated financial statements. The amounts reported in the consolidated
financial statements do not give effect to any adjustments to the carrying value
of assets or amounts of liabilities that might result as a consequence of
actions taken pursuant to a plan of reorganization. If the Company is unable to
obtain confirmation of a plan of reorganization, its creditors, equity security
holders or the United States Trustee may seek a liquidation of the Company by
conversion to a Chapter 7 bankruptcy proceeding. In that event, it is likely
that additional liabilities and claims would be asserted which are not presently
reflected in the consolidated financial statements. In the event of a
liquidation, the amounts reflected in the consolidated financial statements
would be subject to adverse adjustments in amounts which, while not presently
determinable, could be material.
Financial accounting and reporting during a Chapter 11 proceeding is
prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly,
certain pre-petition obligations, which may be impaired, have been classified as
obligations subject to Chapter 11 reorganization proceedings and include the
following estimated amounts at December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Debt Instruments:
11.5% Senior Discount Notes due 2000 $180,904
11.65% Senior Subordinated Reset Notes due 2001 313,262
--------
Total debt instruments 494,166
Accrued Expenses:
Interest 2,411
Liabilities 4,549
Compensation 885
--------
7,845
Capital lease obligations 22,587
Accounts payable 10,918
EDS & EDS affiliated (Note 4) 49,071
--------
Total liabilities subject to settlement under reorganization $579,587
========
Contingent Value Rights subject to settlement under reorganization $ 20,000
========
</TABLE>
Pursuant to SOP 90-7, the Company has discontinued, effective June 8, 1995,
the accrual of interest on pre-petition debt that is unsecured or estimated to
be undersecured.
In September 1995, in connection with the Company's bankruptcy, management
approved a company restructuring that it believes is required to maintain the
viability of the business. This restructure will result in, among other things,
discontinuing service to a number of unprofitable hotels with monthly revenues
of approximately $256,000 and $289,000 for 1995 and 1994, respectively, and will
further result in the elimination of certain positions within the Company. It
is currently anticipated such actions will be completed in 1996. As a result,
the Company recorded a restructure charge of $6.0 million in 1995. Of this
total, $.9 million relates to the cost of deinstalling certain hotels and $1.7
million was recorded for estimated losses on the disposal of deinstalled
equipment. The Company also recorded $.1 million in employee severance costs
which will be incurred in the
33
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
restructure process. The Company recorded an additional charge of $2.3 million
which represents the write-off or abandonment of other fixed assets and $1.0
million for other costs associated with the restructure process.
Total bankruptcy reorganization items of $7.6 million for the twelve months
ended December 31, 1995 include normal bankruptcy, professional and
miscellaneous charges of $1.6 million and the restructure charges discussed
above.
In addition, as a result of a review during the third quarter of 1995, the
Company recorded several adjustments to reflect the impact of certain changes in
estimates that are not related to operations in 1995. These changes in
estimates totalled $2.6 million. Such adjustments related primarily to
revisions in the Company's prior estimates of amounts due Electronic Data
Systems Corporation ("EDS") and chargebacks to EDS under the EDS Services and
Technology Agreement of $1.7 million and a $.9 million reduction for ASCAP fees.
The $1.7 million included additional provisions for doubtful accounts of $.2
million, a reserve of $.8 million of obsolete inventory held by a third party
and an increase related to certain liabilities of $.7 million. The $.7 million
in increased liabilities included $.4 million for prior years' employee related
sick pay liability and other miscellaneous adjustments of $.3 million.
The total effect of the bankruptcy reorganization items and changes in
estimates was to increase net loss for the twelve months ended December 31, 1995
by approximately $10.2 million or $.43 per common share.
NOTE 4 - EDS SERVICE AND TECHNOLOGY AGREEMENT
On July 28, 1993, the Company entered into a ten year exclusive agreement
with EDS to install the first digital video system in the hotel PPV industry.
Under this agreement, EDS and the Company began installing a Compressed Digital
Video ("CDV") satellite movie transmission system, STARPATH, throughout most of
the Company's current and future U.S. hotel sites. STARPATH replaces the
Company's existing analog technology, which relies exclusively on videotape
players located at each hotel or studio location and which technology has been
used since the Company's inception in 1971. EDS and the Company have also
installed a new digital video on-demand movie system utilizing video file
servers, "Digital Guest Choice" in select hotels. Also, included in the
STARPATH technology is the Company's development of a UNIX based integrated
computer system ("SPEXIS") which is installed in conjunction with the Company's
PPV systems and will enable the Company to provide enhanced interactive
services. In connection with the installation of the STARPATH system, EDS and
the Company entered into a contract for EDS to perform all of the field service
functions beginning in April 1994. The transition of the Company's field service
to EDS involved numerous difficulties for field service personnel in maintaining
the normal level of repairs and maintenance of existing PPV rooms concurrent
with rapid installation of the CDV sites.
The Company pays EDS (i) a fixed fee for network services which includes
satellite uplink, customer assistance service and management information
services; (ii) a fixed fee (which fee increases and decreases as the number of
the Company's hotels served increases and decreases) for field services and
maintenance of the Company's hotel systems; and (iii) a fixed monthly fee for
transponder access, time and related services for transmission of movies. On
February 1, 1996, the Bankruptcy Court approved a modification to the EDS
Service and Technology Agreement whereby the field service and the MIS services
operations would transition back to the Company. In addition, this modification
continues certain other lease agreements and allows for the deferral of certain
payments to EDS. Assuming a fixed number of hotels served of 1,750 sites, the
contracted service fees for the modified service agreement would be
approximately $22.0 million, $17.6 million, and $9.9 million for the years ended
December 31, 1996, 1997, 1998, respectively, and $39.2 million thereafter
through September 30, 2003. The Company also has committed to purchase certain
system components, such as personal computers, integrated receiver/decoders
("IRDs") and antennae from EDS or its affiliate in connection with deployment of
the CDV Satellite Network and digital file servers in connection with Digital
Guest Choice. The Company has purchased components of this type from EDS, in
the amount of approximately $3.4 million, $22.6 million, and $2.5 million for
the years ended 1995, 1994 and 1993, respectively.
34
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1994 the Company had amounts payable to EDS for equipment
purchased during 1994 in connection with the technology change, primarily IRDs,
antenna and Digital Guest Choice file servers in the amount of $16.0 million.
On January 1, 1995 the Company entered into a special provisions agreement (the
"Special Provisions Agreement") with regards to $16 million of outstanding
payables for purchases of components ("EDS Equipment Lease") and $24.6 million
due for services rendered under the EDS Service and Technology Agreement ("EDS
Services Note"). The EDS Services Note accrued interest at 11.5% per annum with
payment due in full on or before August 31, 1995. Additionally, the Company was
required to make minimum payments of $500,000 for each of January, February and
March 1995 for current (1995) service fees. To the extent these current fees
exceeded the payments made during this period, the excess was due and payable on
August 31, 1995. Notwithstanding the above, 10% of the proceeds from the sale
of any of the Company's significant assets, as defined, must be applied to the
EDS Services Note. As a result of the Company's Chapter 11 filing, payment of
the EDS Services Notes has been stayed and such amount has been classified as a
pre-petition liability. As a result of the EDS Equipment Lease, $16.0 million
of system components classified in video systems at December 31, 1994, have been
accounted for as an operating lease effective January 1, 1995.
As a result of the changes in technology and field service operations, the
Company accrued charges in the amount of $6.8 million in its results of
operations for the year ended December 31, 1993 for the write-off of obsolete
equipment (primarily videotape players and obsolete microprocessing equipment),
and personnel related costs associated with the transition of the Company's
field service operations. Approximately $3.9 million were non-cash charges
attributable to the write-down of obsolete equipment and $2.9 million was due to
costs of severance and incentives to field operation personnel and costs related
to the closing of field service offices. Upon execution of the EDS Service and
Technology Agreement, the Company's management determined the impact on
operations including obsolete equipment and personnel reductions and accordingly
recorded the estimation of these costs in the results of operations for 1993.
The cash charges were paid during 1994.
NOTE 5 - STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Cash Interest Paid $ 3,513 $ 3,643 $43,854
State and foreign income taxes paid $ 126 $ 612 $ 2,191
Non-cash investing and financing activities
Capital lease obligation incurred on lease of equipment $ 6,757 $13,484 $12,915
EDS Equipment Lease (Note 4) $16,000 $16,000 $ -
</TABLE>
35
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 - 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.
See Note 11, Part II, Item 8, "Stockholders' Deficit". The weighted average
number of common shares outstanding for each period are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Average Shares
--------------
<S> <C>
1995 23,983,905
1994 23,983,905
1993 18,178,289
</TABLE>
NOTE 7 - DEBT
Foothill Revolving Facility: On June 9, 1995, Spectradyne entered into a
loan and security agreement with Foothill Capital Corporation to provide debtor-
in-possession financing (the "Foothill Loan"). The Foothill Loan allows for
revolving advances up to a maximum amount of $40 million and bears interest
payable monthly at prime plus 1.75% with a floor of 8.5%. Proceeds from initial
advances under the Foothill Loan were used to repay outstanding balances and
accrued interest under the Company's revolving credit facility and the Canadian
Bank Credit Facility (referred to herein as the "Old Credit Facilities"). The
Foothill Loan matures June 15, 1997. At December 31, 1995 there was $26.7
million outstanding under the Foothill Loan.
The Foothill Loan is secured by all of the assets of Spectradyne and
certain subsidiaries, all of the outstanding stock of the Company's subsidiaries
and the guarantees of SpectraVision and certain subsidiaries. The Foothill Loan
contains various and customary financial and operating covenants including
limitations on additional indebtedness and limitations on capital expenditures.
At December 31, 1995 the Company was not in compliance with the financial
covenants relating to its operating cash flow and its fixed charges to cash flow
ratio requirements. On March 22, 1996, the Company obtained a waiver from
Foothill Capital Corporation for the December 31, 1995 covenant violations.
However, the Company does not expect that it will be in compliance with the
financial covenants relating to its operating cash flow and its fixed charges to
cash flow ratios in 1996. Accordingly, in April 1996, Foothill Capital
Corporation could elect to terminate the revolving line of credit, demand
immediate payment of all outstanding balances and foreclose on the Company's
assets securing the revolving line of credit if payment is not made. In this
event, if the Company cannot obtain alternative financing, it may be forced to
liquidate in a Chapter 7 bankruptcy proceeding.
Revolving Credit Facility: Concurrent with the 1993 Offerings, the Company
obtained a revolving credit facility with borrowing availability of $20 million
with two financial institutions (the "Revolving Credit Facility"). The
Revolving Credit Facility includes a letter of credit sub-facility of up to $10
million including a letter of credit in the amount of $7.5 million (the "Standby
Letter of Credit") supporting the Canadian Bank Credit Facility, described
below. The Revolving Credit Facility matured on October 5, 1997. All
outstanding loans bore interest at the Company's option at either (i) the
highest of prime rate plus 1.25%, CD rate plus 2.25% and federal funds rate plus
1.75% or (ii) Eurodollar rate plus 3.75%. Interest on loans bearing interest at
the rate set forth in clause (i) above were payable quarterly in arrears and
interest on Eurodollar loans were payable at the earliest of either three months
or the end of the applicable interest period. At December 31, 1994 there was
$12.5 million outstanding under the Revolving Credit Facility at 10.75%.
36
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Revolving Credit Facility was secured by a pledge of the outstanding
stock of Spectradyne and SPI Newco and assets of the Company and all of its
direct and indirect subsidiaries. The Revolving Credit Facility was senior to
the Reset Notes and CVRs and pari passu in right of payment with the Senior
Notes.
The Revolving Credit Facility contained 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 prohibited the Company
from making any cash payments with respect to the CVRs.
Outstanding borrowings under the Revolving Credit Facility were repaid in
June 1995 with initial proceeds from the Foothill Loan.
Canadian Bank Credit Facility. The Canadian Bank Credit Facility provided
borrowings up to US$7.35 million. The loan allowed 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 bore
interest at the Eurodollar rate plus .75%, payable as the Eurodollar loans
matured or quarterly, whichever occurred earlier. At December 31, 1994, the
Company had $7.35 million in Eurodollar loans at 6.75%. The loan was secured by
the $7.5 million Standby Letter of Credit provided by the Revolving Credit
Facility. In May 1995, the outstanding balance and accrued interest were repaid.
Senior Discount Notes. At October 5, 1993 the Senior Notes were issued at
a substantial discount from their $209.5 million principal amount generating
gross proceeds to the Company of $150.0 million. The Senior Notes mature
October 1, 2001 and accrue interest at 11.5% commencing on October 1, 1996 and
are payable semi-annually on April 1 and October 1, beginning April 1, 1997.
On or after October 1, 1997, the Company, at its option, may redeem the
Senior Notes in whole or in part at the following redemption prices (expressed
as a percentage of principal amount) together with accrued and unpaid interest
to the redemption date, if redeemed during the twelve-month period beginning
October 1 of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -----------
<S> <C>
1997 104.929%
1998 103.286%
1999 101.643%
2000 100.000%
</TABLE>
The Senior Notes contain certain covenants which, among other things, (a)
limit the payment of dividends and certain other restricted payments by both the
Company and its subsidiaries, (b) require the purchase by the Company of the
Senior Notes at the option of the holder upon a change of control, as defined,
(c) limit additional indebtedness and (d) limit transactions with certain
affiliates. The Senior Notes are guaranteed by SPI Newco and Spectradyne and
are secured on a subordinated basis to the Revolving Credit Facility by a pledge
of all of the outstanding stock of SPI Newco and Spectradyne and certain other
assets.
The Senior Notes are senior to the Reset Notes and CVRs and pari passu in
right of payment to the Revolving Credit Facility.
In accordance with Statement of Position No. 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7), the accruing
of interest on the Senior Notes was suspended on June 8,
37
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1995 when the Company filed for protection under Chapter 11 of the Federal
Bankruptcy Act. The unrecorded accrued interest since June 8, 1995 is $12.2
million.
Other Debt. Other debt consists of a series of collateralized bank loans
and other installment debt with fixed and variable interest rates to be repaid
in monthly installments of principal and interest over a period ending September
1997.
Senior Subordinated Reset Notes. The Reset Notes, issued in November
1992, initially carried an interest rate of 11.50% per annum payable semi-
annually in cash on June 1 and December 1. On November 23, 1993 (the "Reset
Date"), the interest rate was reset, in accordance with the Reset Note
indenture, to an interest rate determined to cause the market value of the Reset
Notes to equal 101.7% of the principal amount. On the Reset Date, the interest
rate was reset to 11.65% per annum.
In accordance with the Reset Note indenture, the Company elected to pay
interest on the Reset Notes on June 1, 1994, December 1, 1994 and June 1, 1995
through the issuance of additional Reset Notes in the amount of $34.0 million
in 1994 and $18.5 million in 1995 (the "PIK Option"). The annual interest rate
on the Reset Notes for the interest period for which such option was exercised
was increased to 12.65%. On December 1, 1995 and each interest payment
thereafter, the Reset Note indenture requires interest to be paid in cash.
In accordance with SOP 90-7, the accruing of interest on the Reset Notes
was suspended on June 8, 1995 when the Company filed for protection under
Chapter 11 of the Federal Bankruptcy Act. The unrecorded accrued interest since
June 8, 1995 is $21.3 million.
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:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -----------
<S> <C>
1997 105.00%
1998 103.75%
1999 102.50%
2000 101.00%
2001 100.00%
</TABLE>
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 CVRs 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.
Interest Rate Protection Agreement. The Company entered into an interest
rate protection agreement with Wells Fargo Bank on June 30, 1993, the lender
under the Bank Credit Facility, for a period of one year on a principal amount
up to the lesser of $75 million or 50% of the outstanding balance under the Bank
Credit Facility. Under the terms of the agreement, the Company would have
received compensation when the 90 day LIBOR (London Interbank Offered Rate)
exceeded 6.00% (ceiling) and the Company paid compensation when LIBOR is less
than 3.31% (floor). Compensation paid or received was recognized as interest
rates deviate beyond the stated rates. The Interest Rate Protection Agreement
expired June 30, 1994. For the twelve months ended December 31,
38
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1994 and 1993, additional interest expense under this agreement and a previous
similar agreement was $23,000, and $1.7 million, respectively. The Company
currently has no financial derivatives.
In connection with the Foothill Loan in 1995, a portion of the proceeds was
used to extinguish the Revolving Credit Facility originally due in 1997. The
unamortized debt issuance cost of $.9 million was expensed resulting in an
extraordinary loss on extinguishment of debt. In connection with the 1993
Offerings, a portion of the proceeds was used to extinguish the Bank Credit
Facility and Supplemental Credit Facility originally due in 1998. The
unamortized debt issuance cost of $2.7 million was expensed resulting in an
extraordinary loss on extinguishment of debt.
The following table indicates future maturities of all debt, excluding
liabilities subject to settlement under reorganization and minimum annual
rentals under capital lease obligations:
<TABLE>
<S> <C>
1996 $ -
1997 26,703
1998 -
1999 -
2000 -
After 2000 -
-------
$26,703
=======
</TABLE>
NOTE 8 - INCOME TAXES
The income tax benefit attributable to continuing operations for the years
ended December 31, 1995, 1994 and 1993 consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1995 1994 1993
------- ---------- ---------
<S> <C> <C> <C>
CURRENT:
-------- $ - $ - $ -
U.S. Federal 41 (812) 1,275
State and local 85 364 464
Foreign ----- -------- -------
$ 126 $ (448) $ 1,739
===== ======== =======
DEFERRED:
--------- $(693) $(18,519) $(3,325)
U.S. Federal (273) (9,946) (1,044)
State and local - (7) (98)
Foreign ----- -------- -------
$(966) $(28,472) $(4,467)
===== ======== =======
</TABLE>
39
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income tax benefit for the years ended December 31, 1995, 1994, and 1993
differed from the amount computed by applying the U.S. Federal income tax rate
of 35 percent in 1995, 1994 and 1993 to the loss before income taxes and
extraordinary item as a result of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax benefit $(26,070) $(99,122) $(16,025)
Change in income tax benefit resulting from: - - -
State income taxes (341) (6,993) 150
Current year loss for which no benefit is recognized 25,737 76,963 10,112
Other, net (166) 232 3,035
-------- -------- --------
$ (840) $(28,920) $ (2,728)
======== ======== ========
</TABLE>
At December 31, 1995 and 1994 the tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 114,836 $ 99,764
Tax benefit of deferred state taxes 865 1,063
Original issue discount 33,485 25,034
Other 9,454 9,226
--------- ---------
Total gross deferred tax assets 158,640 135,087
Less valuation allowance (139,432) (113,375)
--------- ---------
Net deferred tax assets 19,208 21,712
--------- ---------
Deferred tax liabilities:
Intangible assets, principally due to differences
in basis 18,961 20,000
Video systems and fixed assets, principally due to
differences in depreciation 3,222 6,569
Other 2,492 1,900
--------- ---------
Total gross deferred tax liabilities 24,675 28,469
--------- ---------
Net deferred tax liability
$ 5,467 $ 6,757
========= =========
</TABLE>
At January 1, 1995 the valuation allowance for deferred tax assets was
$113.4 million. The net change in the total valuation allowance for the years
ended December 31, 1995 and 1994 were increases of $26.1 million and $75.1
million, respectively. The Company has recognized deferred tax assets to the
extent such assets can be realized through future reversals of existing taxable
temporary differences. At December 31, 1995, subsequently recognized tax
benefits relating to the valuation allowance for deferred tax assets will be
reported in the consolidated statement of operations.
At December 31, 1995, SpectraVision had an unused net operating loss
("NOL") carryforward for federal income tax purposes of $328 million which will
expire in years 2002 through 2010. However, because the consummation of the
1992 Restructuring triggered an ownership change of the Company on November 23,
1992 (the "Effective Date"), the Company's pre-ownership change NOL
carryforwards are subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"). The Company has applied
Section 382(l)(6) of the Code which will limit the Company's use of its pre-
ownership change NOLs (approximately
40
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$220 million) in each taxable year following the 1992 Restructuring. The
Company has calculated the annual limitation by taking the product of (i) the
long-term tax-exempt rate prevailing on the Effective Date and (ii) the value of
the Company's stock immediately after the Effective Date. The Company also has
available any NOLs not utilized from post-ownership change taxable years. The
Company currently estimates the annual amount available under this limitation to
be approximately $14 million.
NOTE 9 - STOCK OPTIONS
The 1994 Management Incentive Equity Plan (the "1994 Option Plan") was
approved by shareholders on May 25, 1994. The 1994 Option Plan provides that
officers and key employees may be granted either nonqualified stock options or
incentive stock options for the purchase of the Company's Class B Common Stock,
and also authorized the issuance of stock appreciation rights, either coupled
with or independent of outstanding or concurrently granted stock options. Up to
1,800,000 shares of the Company's common stock may be issued upon exercise of
options and rights granted under this plan. The compensation committee of the
board of directors administers the plan.
Stock options vest at the rate of 25 percent per year commencing on the
first anniversary of the date of grant, except for the initial options granted,
and expire ten years from the date of grant. On February 2, 1994, subject to
shareholder approval of the 1994 Option Plan, options with respect to 359,756
shares were granted (the "Initial Options"). The Initial Options vested on the
date of shareholder approval and 25 percent per year on each subsequent
anniversary date of grant. In connection with certain employment contracts,
options with respect to 460,000 shares were granted during 1994.
All outstanding options for 3,060 shares under the 1988 stock option plan
became fully vested upon the change of control of the Company as a result of the
1989 Acquisition on April 12, 1989. Pursuant to the terms of the purchase
agreement dated April 12, 1989, DP purchased options with respect to 3,010
shares from several employees of the Company in 1989, for a price of $402.70 per
option. Options were granted at an exercise price of $37.30, (restated for the
effects of the 1-for-20 reverse stock splits on September 13, 1991 and June 30,
1992) which was the fair market value of the Company's common stock on the date
of grant. The options for 3,010 shares of Class B Common Stock held by DP were
transferred to Rainbow on December 20, 1990, and are outstanding and unexercised
at December 31, 1995.
41
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes transactions under the Company's 1988 and
1994 stock option plans:
<TABLE>
<CAPTION>
Shares Under Exercise Price
Option Per Option
------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1992 3,010 $ 37.30
Granted - -
Exercised - -
Canceled - -
--------
Outstanding at December 31, 1993 3,010 $ 37.30
Granted 819,756 $7.875 - $0.375
Exercised - -
Canceled (151,100) $ 7.875
--------
Outstanding at December 31, 1994 671,666 $37.30 - $0.375
Granted - -
Exercised - -
Canceled - -
--------
Outstanding at December 31, 1995 671,666 $37.50 - $0.375
========
Exercisable at December 31, 1995
671,666 $37.30 - $0.375
========
</TABLE>
NOTE 10 - CONTINGENT VALUE RIGHTS
In November 1992, the Company issued 3,269,544 CVRs. Holders of the CVRs
were entitled to a payment (the "Mandatory Redemption Payment") on November 23,
1995 (the "Mandatory Redemption Date"). For each CVR, the holder was to have
received a payment equal to the lesser of $6.12 (the "Ceiling Price") or the
amount, if any, by which $30.59 (the "Target Price") exceeded the current market
value per share of Class B Common Stock, subject to certain adjustments. The
Mandatory Redemption Payment was to be made in cash, except where agreements
under senior obligation of the Company prohibited cash payments. The Company
has recorded the maximum obligations as temporary equity. These payments have
been stayed as a result of the Chapter 11 filings.
NOTE 11 - STOCKHOLDERS' DEFICIT
Class A and Class B Common Stock. The Company has authorized 6,000,000
shares of Class A Common Stock and 144,000,000 shares of Class B Common Stock.
Holders of Class A Common Stock are entitled to ten votes for each share and
holders of Class B Common Stock are entitled to one vote for each share.
Holders of Class A Common Stock have the right to elect nine members of the
Company's Board of Directors and holders of Class B Common Stock have the right
to elect five members of the Company's Board of Directors. Except as described
above, the Class A Common Stock and the Class B Common Stock have equal rights
and privileges and rank equally, share ratably, and are identical in all
respects as to all matters.
Each share of Class A Common Stock is convertible into one fully paid and
nonassessable share of Class B Common Stock at the option of the holder
thereof. Upon transfer by the holder of Class A Common Stock, other than to a
permitted transferee (as defined), each share of Class A Common Stock shall
automatically be converted into one share of Class B Common Stock. In the event
of a stock split, reverse stock split or stock dividend, the holders of Class A
Common Stock will receive in exchange thereof the number of shares of Class B
Common Stock which such holder would have been entitled to receive had the
conversion occurred prior to such subdivision, combination or distribution.
42
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The indentures governing the Reset Notes, the Senior Notes and the Foothill
Loan limit payment of cash dividends on both Class A and Class B Common Stock.
The following table shows capital stock transactions in share amounts during
1995, 1994 and 1993:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
CLASS A COMMON STOCK 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of the year 4,593,526 4,745,526 5,145,526
Converted to Class B Common Stock - (152,000) (400,000)
End of the year 4,593,526 4,593,526 4,745,526
- --------------------------------------------------------------------------
CLASS B COMMON STOCK 1995 1994 1993
- --------------------------------------------------------------------------
Beginning of the year 19,390,379 19,238,379 11,188,379
Issued in 1993 Offering - - 7,650,000
Converted from Class A Common Stock - 152,000 400,000
End of the year 19,390,379 19,390,379 19,238,379
==========================================================================
</TABLE>
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, 1995 there were 4,322,260 warrants outstanding.
NOTE 12 - COMMITMENTS
Capital and Operating Leases: SpectraVision leases certain office space
and equipment used in operations under operating lease agreements. The Company
finances certain equipment used in its PPV systems, primarily televisions and
video racks, under capital leases. Rental expense for operating leases totaled
$7.0 million, $5.1 million, and $4.0 million in 1995, 1994 and 1993,
respectively. Future minimum annual rentals under lease arrangements are as
follows (in thousands):
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1996 $ 9,148 $7,557
1997 7,190 7,083
1998 7,383 828
1999 4,455 270
2000 911 133
Thereafter - 366
------- ------
$29,087 $16,237
=======
Less imputed interest (4,536)
-------
$24,551
=======
</TABLE>
In connection with the EDS Service and Technology Agreement, certain
operating lease payments are reimbursable to the Company by EDS. As a result of
the modification of this agreement on February 1, 1996, the reimbursed rents
portion of the agreement will be terminated. The amount of reimbursed rents
included in Operating Leases above will be $1,565 for the year ended December
31, 1996. See Note 4, "EDS Service and Technology Agreement" for additional
description of other commitments.
43
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 - CONTINGENCIES
On October 20, 1994, a purported class action complaint was filed in the
United States District Court alleging misrepresentations and omissions
concurrent and following the 1993 Offerings. The plaintiffs seek unspecified
damages, prejudgment interest, and fees and costs of the plaintiffs. While the
Company believes that it has meritorious defenses to the claims and intends to
vigorously defend itself, an unfavorable resolution could have a material
adverse effect on the Company. In addition, the Company is presently unable to
estimate the amount, if any, of such loss. Proceedings in this lawsuit with
respect to the Company have been stayed as a result of the Chapter 11 filings.
The Company and its subsidiaries and related companies are potential and
named defendants in several other lawsuits and claims arising in the ordinary
course of business. While the outcome of such claims, lawsuits or other
proceedings against the Company cannot be predicted with certainty, management
expects that such liability, to the extent not provided for through insurance or
otherwise, will not have a material adverse effect on the operating results or
financial condition of the Company. Proceedings in connection with any lawsuit
against the Company have been stayed as a result of the Chapter 11 filings.
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1995 and 1994 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
1995 (a)
- ----
Revenues $ 33,135 $ 32,073 $ 30,599 $ 28,179
Operating loss (5,365) (6,871) (14,786) (12,231)
Income taxes (benefit) (241) (223) (141) (235)
Net loss (19,954) (19,690) (22,455) (12,461)
Loss per common share
before extraordinary item $ (0.83) $ (0.82) $ (0.94) $ (0.52)
1994 (b)
- ----
Revenues $ 37,100 $ 37,700 $ 34,602 $ 32,982
Operating loss (3,392) (2,163) (7,873) (215,958)
Income taxes (benefit) (1,821) (1,782) 61 (25,378)
Net loss (15,218) (14,094) (22,631) (202,341)
Loss per common share
before extraordinary item $ (0.63) $ (0.59) $ (0.95) $ (8.43)
</TABLE>
(a) The second quarter of 1995 includes an extraordinary item for the write-off
of unamortized debt issuance costs in the amount of $915,000.
(b) The fourth quarter of 1994 includes the revaluation of hotel contracts and
write-off of patent costs in the amount of $196.3 million.
44
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15 - OPERATIONS BY GEOGRAPHIC AREA
The following table presents the Company's revenues and operating loss before
income taxes for the years ended December 31, 1995, 1994 and 1993 and
identifiable assets net of accumulated depreciation and amortization as of
December 31, 1995, 1994 and 1993 by geographic area. The United States includes
branch operations in Puerto Rico and the U.S. Virgin Islands and Other includes
operations in Hong Kong, Australia, Thailand, Singapore and Mexico (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Revenues:
United States $100,667 $ 119,869 $140,457
Canada 12,115 12,879 12,867
Other 11,204 9,636 9,669
-------- --------- --------
Total Revenues $123,986 $ 142,384 $162,993
======== ========= ========
Operating Income (Loss)
Before Corporate Expenses:
United States $(39,015) $ (22,870) $ 13,562
Canada 4,107 2,035 1,518
Other 4,255 2,944 3,113
-------- --------- --------
(30,653) (17,891) 18,193
Less corporate expenses and
non-operating (income):
Parent company expenses 1,606 1,993 2,105
Amortization of corporate
intangibles 6,994 13,246 12,883
Write-down of hotel contracts - 196,256 -
Non-operating (income) (508) (1,163) -
Interest expense 28, 177 54,981 48,990
Reorganization items 7,563 - -
-------- --------- --------
Loss Before Income Taxes and
Extraordinary Item $(74,485) $(283,204) $(45,785)
======== ========= ========
Identifiable Assets, net:
United States $129,719 $ 166,782 $137,151
Canada 11,749 9,276 10,958
Other 10,710 9,819 7,650
-------- --------- --------
152,178 185,877 155,759
Hotel Contracts, net 47,403 50,000 253,508
Corporate Assets 6,041 6,945 211
-------- --------- --------
Total Assets, net $205,622 $ 242,822 $409,478
======== ========= ========
PPV Rooms: (unaudited)
United States 441,672 527,608 584,354
Canada 71,600 73,987 74,777
Other 37,134 33,783 25,468
-------- --------- --------
550,406 635,378 684,599
======== ========= ========
</TABLE>
45
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 16 - RELATED PARTIES
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's guarantee of the Company's then outstanding
supplemental credit facility. In consideration for these services, the Company
paid Rainbow a monthly fee equal to 1.2% of the maximum available commitment
under the supplemental credit facility. Fees paid under this agreement were
$182,189 in 1993. Upon closing of the 1993 Offerings and Revolving Credit
Facility, the Management Agreement was terminated.
In connection with the 1993 Offerings and Revolving Credit Facility, the
Board of Directors approved payment of an advisory fee of $1.0 million to Davis
Capital Advisors, an entity controlled by Mr. Marvin Davis. Additionally, the
Company reimbursed Rainbow for out-of-pocket expenses in connection with
advisory services provided in 1993 of $56,000. The Company believes the
Advisory Fee and the fees under the Management Agreement are at least as
favorable as could be obtained from an unrelated third party.
NOTE 17 - SAVINGS FOR RETIREMENT PLAN
The Company provides a Savings for Retirement Plan under Section 401(k) of
the Internal Revenue Code. The plan allows participation by all employees of
Spectradyne and United States based employees of Spectradyne International,
Inc., who are not covered by a collective bargaining agreement, after three
months of employment. Eligible employees are allowed to contribute up to 15% of
their compensation, subject to other limitations of the plan and the Internal
Revenue Code; the Company's discretionary matching contribution is limited to
100% of the first 3% of a participant's 401(k) contribution and 50% of the next
2% of a participant's contribution. Employee contributions in excess of 5% of
their annual compensation are not matched by the Company. In March 1995, the
Company suspended its matching contribution. 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 $47,000, $425,000, and $564,000 for
1995, 1994, and 1993, respectively.
NOTE 18 - INTANGIBLE ASSETS
The hotel contracts were recorded at fair value as a result of the 1989
Acquisition and amortized on a straight-line basis over 25 years. Fair value of
hotel contracts was calculated utilizing the future cash flows to be produced by
the Company's existing hotel contracts discounted at the then prevailing
interest rate and further discounted at the historical contract renewal rate.
During 1994, the Company experienced a significant reduction of cash flows
from existing hotel contracts, an increase in capital expenditures in support of
contract renewals and significant capital expenditures for the deployment of the
new STARPATH technology without any immediate cash flow improvement. The
Company continually assesses the carrying amount of hotel contracts by
determining whether its balance can be recovered over its remaining life. The
Company's analysis of undiscounted future cash flows indicated that a
substantial portion of the carrying amount of hotel contracts would not be
recoverable. Accordingly, based on the Company's estimate of discounted future
cash flows from existing hotel contracts, the Company wrote off $191.0 million
of the carrying amount of hotel contracts at December 31, 1994 which resulted in
a remaining balance of hotel contracts of $50.0 million as of December 31, 1994.
Additionally, the Company wrote-off $5.2 million in patent costs at December 31,
1994.
As of December 31, 1995, the Company has separately classified certain
contract costs related primarily to the purchase of televisions as Deferred
Contract Concession Costs. Such costs were previously included in Video Systems
as of December 31, 1994 and have been reclassified to conform to the current
year presentation.
46
<PAGE>
SPECTRAVISION, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 19 - GUARANTOR SUBSIDIARIES
The Company's obligations under the Reset Notes and Senior Notes are
guaranteed on a subordinated basis by the Company's direct subsidiary, SPI Newco
and by SPI Newco's direct subsidiary, Spectradyne (the "Subordinated
Guarantees"). Such guarantee is full, unconditional and joint and several.
The following supplemental combining financial information presents:
(1) Statements of Financial Position as of December 31, 1995 and 1994 and
Statements of Operations and Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 of (a) SpectraVision, the parent, (b) SPI Newco
and Spectradyne, the Guarantors, (c) combined nonguarantor subsidiaries and (d)
the consolidated Company.
(2) Elimination entries required to consolidate SpectraVision, SPI Newco
and Spectradyne and the combined nonguarantor subsidiaries.
47
<PAGE>
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Guarantor Subsidiaries
------------------------
Parent Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
---------- ---------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ - $ 2 $ 2 $ 3,434 $ - $ 3,438
Accounts Receivable, less
allowance for doubtful accounts - - 13,050 3,378 - 16,428
Prepaids and Other Assets 5,604 - 7,318 1,030 - 13,952
Intercompany receivables 188,105 137,332 20,660 782 (346,879) -
Intercompany note receivable 350,000 - - - (350,000) -
Intercompany investments (476,381) 477,150 3,072 2 (3,843) -
Video Systems - - 220,198 39,118 - 259,316
Less accumulated depreciation - - (130,921) (24,683) - (155,604)
--------- -------- --------- -------- --------- ---------
Total Video Systems - - 89,277 14,435 - 103,712
Land, Building and Equipment - - 13,449 1,412 - 14,861
Less accumulated depreciation - - (4,720) (1,201) - (5,921)
--------- -------- --------- -------- --------- ---------
Total Land, Building and
Equipment - - 8,729 211 - 8,940
Hotel Contracts (net) - - 47,403 - - 47,403
Deferred Contract Concession
Costs (net) - - 11,749 - - 11,749
--------- -------- --------- -------- --------- ---------
TOTAL ASSETS $ 67,328 $614,484 $ 201,260 $ 23,272 $(700,722) $ 205,622
========= ======== ========= ======== ========= =========
LIABILITIES AND
STOCKHOLDERS'S EQUITY
(DEFICIT)
Liabilities
Accounts payable $ - $ - $ 7,691 $ 437 $ - $ 8,128
Other accrued liabilities 61 1 10,689 447 - 11,198
Income taxes - - 5,583 67 - 5,650
Intercompany payables - 177,553 138,142 31,184 (346,879) -
Intercompany note payable - 350,000 - - (350,000) -
Debt
Foothill Revolving Credit
Facility - - 26,703 - - 26,703
Capital Lease Obligations - - 1,618 346 - 1,964
--------- -------- --------- -------- --------- ---------
Total Debt - - 28,321 346 - 28,667
Liabilities Subject to Settlement
Under Reorganization 494,875 - 84,712 - - 579,587
Contingent Value Rights Subject
to Settlement Under
Reorganization 20,000 - - - - 20,000
Stockholders' Equity (Deficit)
Class A Common Stock 5 - - - - 5
Class B Common Stock 19 - - - - 19
Common Stock-Subsidiaries - - - 420 (420) -
Additional Paid in Capital 392,185 127,150 477,149 2,655 (606,954) 392,185
Retained Deficit (840,289) (40,220) (551,027) (14,511) 605,758 (840,289)
Foreign Currency
Translation Adjustment 472 - - 2,227 (2,227) 472
--------- -------- --------- -------- --------- ---------
Total Stockholders' Equity
(Deficit) (447,608) 86,930 (73,878) (9,209) (3,843) (447,608)
--------- -------- --------- -------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS '
EQUITY (DEFICIT) $ 67,328 $614,484 $ 201,260 $ 23,272 $(700,722) $ 205,622
========= ======== ========= ======== ========= =========
</TABLE>
48
<PAGE>
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
Guarantor Subsidiaries
------------------------
Parent Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
---------- ---------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ 2 $ - $ 260 $ 1,055 $ - $ 1,317
Accounts Receivable, less
allowance for doubtful accounts - - 16,646 3,771 - 20,417
Prepaids and Other Assets 6,942 1 6,674 1,288 - 14,905
Intercompany receivables 163,604 160,096 16,547 100 (340,347) -
Intercompany note receivable 350,000 - - - (350,000) -
Intercompany investments (390,484) 477,150 3,072 - (89,738) -
Video Systems - - 245,510 34,637 - 280,147
Less accumulated depreciation
and amortization - - (127,391) (20,899) - (148,290)
--------- -------- --------- -------- --------- ---------
Total Video Systems - - 118,119 13,738 - 131,857
Land, Building and Equipment - - 12,536 1,204 - 13,740
Less accumulated depreciation - - (3,911) (1,054) - (4,965)
--------- -------- --------- -------- --------- ---------
Total Land, Building and
Equipment - - 8,625 150 - 8,775
Hotel Contracts (net) - - 50,000 - - 50,000
Deferred Contract Concession
Costs (net) - - 15,551 - - 15,551
--------- -------- --------- -------- --------- ---------
TOTAL ASSETS $ 130,064 $637,247 $ 235,494 $ 20,102 $(780,085) $ 242,822
========= ======== ========= ======== ========= =========
LIABILITIES AND
STOCKHOLDERS'S EQUITY
(DEFICIT)
Liabilities
Accounts payable $ - $ - $ 48,404 $ 403 $ - $ 48,807
Other accrued liabilities 3,526 - 25,406 498 - 29,430
Income taxes - - 6,563 484 - 7,047
Intercompany payables - 160,448 160,196 19,703 (340,347) -
Intercompany note payable - 350,000 - - (350,000) -
Debt
Revolving Credit Facility 12,500 - - - - 12,500
Canadian Bank Credit Facility - - - 7,350 - 7,350
11.5% Senior Discount Notes 172,295 - - - - 172,295
11.65% Senior Reset Notes 294,768 - - - - 294,768
Capitalized Lease Obligations - - 23,036 456 - 23,492
Other Debt - - 150 8 - 158
--------- -------- --------- -------- --------- ---------
Total Debt 479,563 - 23,186 7,814 - 510,563
Contingent Value Rights 20,000 - - - - 20,000
Stockholders' Equity (Deficit)
Class A Common Stock 5 - - - - 5
Class B Common Stock 19 - - - - 19
Common Stock-Subsidiaries - - - 420 (420) -
Additional Paid in Capital 392,185 127,150 477,150 2,652 (606,952) 392,185
Retained Deficit (765,729) (351) (505,411) (13,540) 519,302 (765,729)
Foreign Currency
Translation Adjustment 495 - - 1,668 (1,668) 495
Total Stockholders' Equity
(Deficit) (373,025) 126,799 (28,261) (8,800) (89,738) (373,025)
--------- -------- --------- -------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS '
EQUITY (DEFICIT) $ 130,064 $637,247 $ 235,494 $ 20,102 $(780,085) $ 242,822
========= ======== ========= ======== ========= =========
</TABLE>
49
<PAGE>
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Guarantor Subsidiaries
------------------------
Parent Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $102,436 $25,731 $ (4,181) $123,986
Costs and Expenses
Direct costs - - 44,007 8,806 - 52,813
Depreciation and amortization - - 34,272 5,092 - 39,364
Operating expenses - - 12,771 4,792 - 17,563
Contracted service costs - - 28,921 359 - 29,280
Selling and marketing expenses - - 4,321 562 - 4,883
General and administrative
expenses 1,606 3 13,796 1,915 - 17,320
Research and development - - 1,769 - - 1,769
Exchange loss - - (18) 846 (581) 247
Intercompany charges - - - 4,181 (4,181) -
-------- -------- -------- ------- -------- --------
Total costs and expenses 1,606 3 139,839 26,553 (4,762) 163,239
-------- -------- -------- ------- -------- --------
Operating Income (Loss) (1,606) (3) (37,403) (822) 581 (39,253)
Non-operating income - - (458) (50) - (508)
Equity in losses of subsidiaries 85,874 - - - (85,874) -
Interest expense (net) 26,030 - 1,859 288 - 28,177
Intercompany interest expense (39,865) 39,865 - - - -
(income)
Reorganization items - 1 7,561 1 - 7,563
-------- -------- -------- ------- -------- --------
Gain (Loss) Before Income Taxes
and Extraordinary Items (73,645) (39,869) (46,365) (1,061) 86,455 (74,485)
Income Taxes
State and foreign provision - - 1 125 - 126
Deferred provision (benefit) - - (966) - - (966)
-------- -------- -------- ------- -------- --------
Total Income Tax Benefit - - (965) 125 - (840)
-------- -------- -------- ------- -------- --------
Gain (Loss) before extraordinary
items (73,645) (39,869) (45,400) (1,186) 86,455 (73,645)
Extraordinary items
Loss on debt extinguishment 915 - - - - 915
-------- -------- -------- ------- -------- --------
Net Income (Loss)
$(74,560) $(39,869) $(45,400) $(1,186) $ 85,455 $(74,560)
======== ======== ======== ======= ======== ========
</TABLE>
50
<PAGE>
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
Guarantor Subsidiaries
------------------------
Parent Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
---------- --------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ 122,138 $24,659 $ (4,413) $ 142,384
Costs and Expenses
Direct costs - - 50,576 7,439 - 58,015
Depreciation and amortization 20 - 45,353 5,161 - 50,534
Write-down of hotel contracts - - 196,256 - - 196,256
Operating expenses - - 9,802 3,403 - 13,205
Contracted service costs - - 19,563 1,466 - 21,029
Selling and marketing expenses - - 8,467 274 - 8,741
General and administrative
expenses 1,990 3 16,277 1,325 - 19,595
Research and development - - 3,649 165 - 3,814
Exchange loss - - - 1,754 (1,173) 581
Intercompany charges - - - 4,413 (4,413) -
--------- -------- --------- ------- --------- ---------
Total costs and expenses 2,010 3 349,943 25,400 (5,586) 371,770
--------- -------- --------- ------- --------- ---------
Operating Income (Loss) (2,010) (3) (227,805) (741) 1,173 (229,386)
Non-operating Expense (Income) - - (1,163) - - (1,163)
Equity in losses of subsidiaries 239,991 - - - (239,991) -
Interest expense (net) 54,628 - (239) 592 - 54,981
Intercompany interest expense
(income) (42,345) 42,345 - - - -
Intercompany dividend expense
(income) - (42,345) 42,345 - - -
--------- -------- --------- ------- --------- ---------
Income (Loss) Before Income
Taxes (254,284) (3) (268,748) (1,333) 241,164 (283,204)
Income Taxes
State and foreign provision - - (812) 364 - (448)
Deferred provision (benefit) - - (28,465) (7) - (28,472)
--------- -------- --------- ------- --------- ---------
Total Income Tax Benefit - - (29,277) 357 - (28,920)
--------- -------- --------- ------- --------- ---------
Net Income (Loss) $(254,284) $ (3) $(239,471) $(1,690) $ 241,164 $(254,284)
========= ======== ========= ======= ========= =========
</TABLE>
51
<PAGE>
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands)
<TABLE>
<CAPTION>
Guarantor Subsidiaries
------------------------
Parent Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
---------- --------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $143,493 $23,579 $ (4,079) $162,993
Costs and Expenses
Direct costs - - 52,108 6,726 - 58,834
Depreciation and amortization 34 45 38,427 5,597 - 44,103
Technology and field service
charges - - 6,703 297 - 7,000
Loss on sale of manufacturing
assets and inventory - - 649 - - 649
Operating expenses - - 21,103 3,480 - 24,583
Contracted service costs - - 1,716 - - 1,716
Selling and marketing expenses - - 4,887 167 - 5,054
General and administrative
expenses 2,102 3 11,539 1,787 - 15,431
Research and development - - 1,426 159 - 1,585
Exchange loss - - 9 824 - 833
Intercompany charges - - - 4,079 (4,079) -
-------- -------- -------- ------- -------- --------
Total costs and expenses 2,136 48 138,567 23,116 (4,079) 159,788
-------- -------- -------- ------- -------- --------
Operating Income (Loss) (2,136) (48) 4,926 463 - 3,205
Non-operating Expense (Income)
Equity in losses of subsidiaries 50,691 - - - (50,691) -
Interest expense (net) 47,762 - 696 532 - 48,990
Intercompany interest expense
(income) (57,532) 57,532 - - - -
Intercompany dividend expense
(income) - (57,532) 57,532 - - -
-------- -------- -------- ------- -------- --------
Income (Loss) Before Income
Taxes and Extraordinary Item (43,057) (48) (53,302) (69) 50,691 (45,785)
Income Taxes
State and foreign provision - - 1,275 464 - 1,739
Deferred provision (benefit) - - (4,369) (98) - (4,467)
-------- -------- -------- ------- -------- --------
Total Income Tax Benefit - - (3,094) 366 - (2,728)
-------- -------- -------- ------- -------- --------
Income (Loss) Before Extraordinary
Item 43,057 (48) (50,208) (435) 50,691 (43,057)
Extraordinary Item
Loss from debt extinguishment (2,699) - - - - (2,699)
-------- -------- -------- ------- -------- --------
Net Income (Loss) $(45,756) $ (48) $(50,208) $ (435) $ 50,691 $(45,756)
======== ======== ======== ======= ======== ========
</TABLE>
52
<PAGE>
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Guarantor Subsidiaries
-----------------------
Parent Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Eliminations Consolidated
---------- ------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Activities:
Net cash provided by (used in)
operating activities $ 13,436 $2 $(10,432) $15,137 $ 561 $ 18,704
-------- -- -------- ------- ----- --------
Investing Activities:
Cost of in-process systems and
capital expenditures $ - $- $(10,379) $(5,752) $ - $(16,131)
-------- -- -------- ------- ----- --------
Net cash used in investing
activities $ - $- $(10,379) $(5,752) $ - $(16,131)
-------- -- -------- ------- ----- --------
Financing Activities:
Borrowings under Revolving
Credit Facility $ 7,396 $- $ - $ - $ - $ 7,396
Repayment of Revolving
Credit Facility (20,811) - - - - (20,811)
Borrowings under Foothill
Revolving Facility - - 88,618 - - 88,618
Repayment of Foothill
Revolving Facility - - (61,915) - - (61,915)
Repayment of other debt and
capitalized lease obligations - - (6,150) (7,566) - (13,716)
-------- -- -------- ------- ----- --------
Net cash provided by (used in)
financing activities $(13,415) $- $ 20,553 $(7,566) $ - $ (428)
-------- -- -------- ------- ----- --------
Effect of exchange rate changes
on cash flow (23) - - 560 (561) (24)
-------- -- -------- ------- ----- --------
Net increase (decrease) in cash and
cash equivalents (2) 2 (258) 2,379 - 2,121
Cash and equivalents at beginning
of period 2 - 260 1,055 - 1,317
-------- -- -------- ------- ----- --------
Cash and equivalents at end of
period $ - $2 $ 2 $ 3,434 $ - $ 3,438
======== == ======== ======= ===== ========
</TABLE>
53
<PAGE>
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
Guarantor Subsidiaries
------------------------
Parent Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Consolidated
---------- -------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net cash provided by (used in)
operating activities $(12,504) $(1) $ 43,314 $ 5,356 $ 36,165
-------- --- -------- ------- --------
Investing Activities:
Cost of in-process systems and
capital expenditures $ - $ - $(52,350) $(5,012) $(57,362)
-------- --- -------- ------- --------
Net cash used in investing
activities $ - $ - $(52,350) $(5,012) $(57,362)
-------- --- -------- ------- --------
Financing Activities:
Borrowings under Revolving
Credit Facility $ 12,500 $ - $ - $ - $ 12,500
Repayment of other debt and
capitalized lease obligations - - (3,897) (290) (4,187)
-------- --- -------- ------- --------
Net cash provided by (used in)
financing activities $ 12,500 $ - $ (3,897) $ (290) $ 8,313
-------- --- -------- ------- --------
Effect of exchange rate changes
on cash flow - - - (84) (84)
-------- --- -------- ------- --------
Net decrease in cash and cash
equivalents (4) (1) (12,933) (30) (12,968)
Cash and equivalents at beginning
of period 6 1 13,193 1,085 14,285
-------- --- -------- ------- --------
Cash and equivalents at end of
period $ 2 $ - $ 260 $ 1,055 $ 1,317
======== === ======== ======= ========
</TABLE>
54
<PAGE>
SPECTRAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands)
<TABLE>
<CAPTION>
Guarantor Subsidiaries
------------------------
Parent Nonguarantor SpectraVision
Company Newco Spectradyne Subsidiaries Consolidated
---------- -------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net cash provided by (used in)
operating activities $ (31,102) $(4) $ 31,138 $ 6,228 $ 6,260
--------- --- -------- ------- ---------
Investing Activities:
Proceeds from sale of manu-
facturing assets and inventory $ - $ - $ 5,201 $ - $ 5,201
Increase in raw materials - - (313) - (313)
Cost of in-process systems and
capital expenditures $ - $ - $(30,941) $(5,156) $ (36,097)
--------- --- -------- ------- ---------
Net cash used in investing
activities $ - $ - $(26,053) $(5,156) $ (31,209)
--------- --- -------- ------- ---------
Financing Activities:
Borrowings under Supplemental
Bank Credit Facility $ 23,000 $ - $ - $ - $ 23,000
Repayment of Supplemental Bank
Credit Facility (31,000) - - - (31,000)
Repayment of Bank Credit
Facility (180,120) - - - (180,120)
Repayment of other debt and
capitalized lease obligations - - (1,043) (389) (1,432)
Issuance of Class B common stock 84,150 - - - 84,150
Stock issuance costs (6,501) - - - (6,501)
Issuance of senior discount notes 149,981 - - - 149,981
Payment of debt issue costs (8,417) - - - (8,417)
--------- --- -------- ------- ---------
Net cash provided by (used in)
financing activities $ 31,093 $ - $ (1,043) $ (389) $ 29,661
--------- --- -------- ------- ---------
Effect of exchange rate changes
on cash flow - - (9) (11) (20)
--------- --- -------- ------- ---------
Net increase (decrease) in cash and
cash equivalents (9) (4) 4,033 672 4,692
Cash and equivalents at beginning
of period 15 5 9,160 413 9,593
--------- --- -------- ------- ---------
Cash and equivalents at end of
period $ 6 $ 1 $ 13,193 $ 1,085 $ 14,285
========= === ======== ======= =========
</TABLE>
55
<PAGE>
NOTE 20 - FINANCIAL STATEMENTS OF ENTITIES UNDER CHAPTER 11
The condensed balance sheet as of December 31, 1995 of SpectraVision and
all entities included in the Chapter 11 filings is as follows (dollars in
thousands):
<TABLE>
<S> <C>
ASSETS
Cash and Cash Equivalents $ 84
Accounts Receivable 13,346
Debt Issuance Costs 5,827
Prepaids and Other Assets 7,304
Video Systems 222,802
Less accumulated depreciation and amortization 132,332
---------
Total Video Systems 90,470
Building and Equipment
Building 4,300
Furniture, fixtures and other equipment 6,649
Less accumulated depreciation (4,769)
---------
Total Building and Equipment 6,180
Land 2,559
Hotel Contracts (net) 47,403
Deferred Contract Concession Costs (net) 11,749
Investment in and advances to subsidiaries, at cost 33,202
---------
TOTAL ASSETS $ 218,124
=========
LIABILITIES
Accounts Payable 7,723
Other Accrued Liabilities 10,881
Deferred Income Taxes 5,467
Foothill Revolving Facility 26,703
Capital Lease Obligations 1,617
---------
52,391
Liabilities Subject to Settlement Under Reorganization 579,587
Intercompany Payable 4,947
---------
Total Liabilities 636,925
Contingent Value Rights Subject to Settlement Under Reorganization 20,000
Stockholders' Deficit
Common Stock 24
Paid in Capital 393,092
Retained Deficit (831,917)
---------
Total Stockholders' Deficit (438,801)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 218,124
=========
</TABLE>
56
<PAGE>
The condensed statement of operations for the year ended December 31, 1995
of SpectraVision and all entities included in the Chapter 11 filings is as
follows (dollars in thousands):
<TABLE>
<S> <C>
Revenues $104,063
Costs and Expenses
Direct costs 44,779
Depreciation and amortization 34,676
Operating expenses 12,771
Contracted service costs 29,686
Selling and marketing expenses 4,294
General and administrative expenses 15,646
Research and development (net) 1,769
Exchange loss 1,051
--------
Total costs and expenses 144,672
--------
Operating Income (Loss) (40,609)
Non-operating (income) (508)
Interest expense (Contractual interest expense of $67,596 in 1995) (net) 27,873
--------
Loss Before Reorganization Items, Income Taxes and Extraordinary Item (67,974)
--------
Reorganization Items 7,593
--------
Loss Before Income Taxes and Extraordinary Items (75,567)
Income Taxes
State and foreign provision (benefit) 1
Deferred benefit (966)
--------
Total Income Tax Benefit (965)
--------
Loss Before Extraordinary Item (74,602)
Extraordinary Item
Loss from debt extinguishment 915
--------
Net Loss $(75,517)
========
</TABLE>
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- --------------------------------------------------
The following sets forth certain information regarding the directors and
executive officers of the Company as of December 31, 1995:
Name Age Position
- --------------------- --- -------------------------------
Gary G. Weik 50 Chairman of the Board and
Chief Executive Officer
Richard M. Gozia 51 Executive Vice President and
Chief Financial Officer
Elaine W. Parrish 46 Senior Vice President,
Sales and Affiliate Marketing,
Spectradyne, Inc.
Howard D. Gardner 38 Senior Vice President of
Technology and Network
Operations, Spectradyne, Inc.
Janet L. Dalicandro 41 Vice President of International
Operations, Spectradyne, Inc.
Michael C. Colleran 43 Director
John Davis 41 Director
Marvin Davis 70 Director
Leonard Goldberg 62 Director
Gerald S. Gray 66 Director
Sidney Poitier 69 Director
Michael J. Seibert 40 Director
Kenneth Ziffren 55 Director
Gary G. Weik became Chief Executive Officer of the Company and its
subsidiaries in September 1994 and Chairman of the Board in June 1995. 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.
Richard M. Gozia became Executive Vice President and Chief Financial Officer
of the Company and its subsidiaries in October 1994. Mr. Gozia was president
and chief executive officer of Wyatt Cafeterias, Inc. from 1992 to 1994. From
1986 to 1991, Mr. Gozia was president and chief executive officer of Gozia-
Driver Media, Inc., a media investment company. From 1982 to 1986, he was vice
president and chief financial officer of Harte-Hanks Communications, Inc.
Elaine W. Parrish became Senior Vice President of Sales and Affiliate
Marketing of Spectradyne, Inc. in December 1994. Prior to joining Spectradyne,
Ms. Parrish was Senior Vice President of Cable Marketing and Sales of StarSight
Telecast, Inc. from May 1993 to December 1994. From February 1983 to May 1993,
Ms. Parrish was with Showtime Networks, Inc., most recently as Vice President of
National Accounts.
58
<PAGE>
Howard D. Gardner has been Senior Vice President of Technology and Network
Operations of Spectradyne since November 1993. From 1984 to 1993, Mr. Gardner
served in various capacities, most recently as Divisional General Manager, with
SRX Inc., a developer and manufacturer of digital telecommunications systems for
business and public safety markets.
Janet L. Dalicandro has been Vice President of International Operations for
Spectradyne, Inc. since April 1995. From August 1991 to March 1995, Ms.
Dalicandro was Vice President and Managing Director of SpectraVision of Canada,
Inc. Prior to joining the Company, Ms. Dalicandro was Vice President and
General Manager for Granada Canada Limited, a supplier of television and video
products to the Canadian lodging industry from May 1987 to July 1991. Ms.
Dalicandro terminated her employment with the Company on January 30, 1996.
Michael C. Colleran has been a Director of the Company since November 1992.
Mr. Colleran has also served as the Executive Vice President of Davis Companies,
an investment company, and as the Chief Financial Officer for Miller-Davis
Company, a real estate development general partnership, since May 1988. Mr.
Colleran is a member of the Executive Committee and the Audit Committee.
John Davis has been a Director the Company since November 1992. Mr. Davis
has been President and a Director of Davis Entertainment Company, a motion
picture and television production company, since November 1985; Vice President
of Davis Companies, an investment company, since December 1986 and Director
since April 1989; President and a Director of Davis Entertainment Television, a
television production company, since 1988; President and a Director of Davis
Films, Inc., a motion picture production company, since January 1987; and
President and a Director of both Azur Communications Corporation and Bramble
Communications Corporation, both television broadcast station companies, since
December 1988. Mr. Davis is a member of the Executive Committee. Mr. Davis is
the son of Mr. Marvin Davis, a Director the Company.
Marvin Davis has been a Director of the Company since April 1989 and is the
principal partner of Rainbow Company, an investment company. Mr. Davis has been
President and Director of Davis Companies, an investment company, from October
1986 to present; Managing General Partner of Davis Oil Company, an independent
oil and gas partnership, from 1960 to present; Managing General Partner of MD
Co., an investment company, which is a General Partner of Mill-Klutznick-Davis-
Gray Co. (now known as MKDG Co.), a real estate development general partnership,
from March 1982 to present; General Partner of Miller-Davis Company, a real
estate development general partnership, from January 1978 to present. Mr. Davis
is the father of John Davis, a Director the Company.
Leonard Goldberg has been a Director of the Company since October 1989. Mr.
Goldberg was President and Chief Operating Officer of Twentieth Century Fox Film
Corporation from December 1986 until May 1989. Mr. Goldberg has been directly
involved in the production of many feature films for both the movie and
television industries. Mr. Goldberg is a member of the Compensation Committee.
Gerald S. Gray has been a Director the Company since April 1989. Mr. Gray
has also served as Senior Vice President of Davis Companies, an investment
company, since January 1987; Chief Financial Officer of Davis Oil Company, an
independent oil and gas partnership, since 1977; Managing General Partner of GSG
Company, an investment company, which is a General Partner of Miller-Klutznick-
Davis-Gray Co. (now known as MKDG Co.); a real estate development general
partnership, since March 1982; and General Partner of Miller-Davis Company, a
real estate development general partnership, since January 1978. Mr. Gray is
presently a Director of Children's Diabetes Foundation in Denver, Colorado. Mr.
Gray is a member of the Executive Committee and the Audit Committee.
Sidney Poitier has been a Director of the Company since October 1992. Mr.
Poitier is an actor, producer and director. He has been President of Verdon
Cedric Productions, a film production company, since 1962. In 1994, Mr. Poitier
was elected as a member of the Board of Directors of The Walt Disney Company, a
major producer and distributor of film entertainment. Mr. Poitier is a member
of the Compensation Committee.
Michael J. Seibert has been a Director the Company since November 1993. Mr.
Seibert has been Senior Vice President of Davis Companies, an investment
company, since August 1989.
Kenneth Ziffren has been a Director of the Company since May 1989. Mr.
Ziffren is presently Senior Partner of Ziffren, Brittenham, Branca & Fischer
(Attorneys at Law) and has been with that firm since 1978. Mr.
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<PAGE>
Ziffren is also a director of City National Corp., a one-bank holding company,
and Marvel Entertainment Group, Inc., a comic book publisher. Mr. Ziffren is a
member of the Audit Committee and the Compensation Committee.
Compliance with Section 16 Reporting Requirements. To the Company's
knowledge, based solely on a review of the copies of reports furnished to the
Company, and, in certain circumstances, written representations that no
additional reports were required, during the fiscal year ended December 31,
1995, all of the Company's officers, directors and holders of more than 10% of
its Common Stock filed all reports required by Section 16(a) of the Securities
Exchange Act of 1934, as amended.
Directors serve for a term of one year or until the next annual meeting of
stockholders. Because of the Company's bankruptcy, there was no annual meeting
in 1995, and the Company does not anticipate holding an annual meeting until it
emerges from bankruptcy. The Company's executive officers are elected by the
Board of Directors and serve until their successors are elected.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
COMPENSATION OF EXECUTIVE OFFICERS
The Summary Compensation Table includes individual compensation information
for (i) the Chief Executive Officer of the Company during 1995, (ii) the four
other most highly paid executive officers who were serving at December 31, 1995,
and (iii) one other officer who, in each case served during 1995 for services in
all capacities during the years ended December 31, 1995, 1994 and 1993.
60
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------- ------------
Number of
Other Securities
Name and Annual Underlying All Other
Principal Position Year Salary Bonus Comp./2/ Options Compensation/3/
- ---------------------------- ---- -------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gary G. Weik/1/ 1995 $574,200 $290,285 --- --- $1,304
Chairman of the Board 1994 159,195 319,000 --- --- ---
and Chief Executive 1993 --- --- --- --- ---
Officer
Richard M. Gozia 1995 266,559 134,420 --- --- 814
Executive Vice President 1994 70,912 15,000 --- --- ---
& Chief Financial 1993 --- --- --- --- ---
Officer
Elaine W. Parrish 1995 161,604 125,007 --- --- ---
Senior Vice President 1994 11,539 --- $ 6,867 --- ---
Sales & Affiliate 1993 --- --- --- --- ---
Marketing,
Spectradyne, Inc.
Howard D. Gardner 1995 152,724 76,201 --- --- 636
Senior Vice President 1994 117,007 --- --- $17,988 2,572
Technology & Network 1993 15,845 --- --- --- ---
Operations,
Spectradyne, Inc.
Janet L. Dalicandro/4/ 1995 185,364 96,390 --- ---
Vice President of 1994 106,749 52,154 --- 7,195 5,338
International Operations, 1993 84,661 10,539 --- --- 4,233
Spectradyne, Inc.
Harry S. Budow/5/ 1995 201,042 --- 53,935 --- 997
Senior Vice President 1994 205,540 --- --- 50,366 4,732
Marketing & Business 1993 151,117 150,000 --- --- 4,497
Development,
Spectradyne, Inc.
</TABLE>
- --------------------
/1/ In September 1994, Mr. Weik became Chief Executive Officer of the Company.
Mr. Weik's 1994 Bonus was paid in consideration of his forfeiture of
monetary benefits from his previous employer. See "-- Description of
Certain Agreements with Management -- Gary G. Weik".
/2/ Perquisites for each individual named in Summary Compensation Table for
1995, 1994 and 1993 are not reflected because the value aggregated less
than the lower of $50,000 or 10% of the total annual salary and bonus
reported for such individual in the Summary Compensation Table. Mr. Budow's
Other Compensation included accrued sick and vacation wages paid upon
termination.
/3/ Includes the aggregate value of the Company's contribution under the
Savings for Retirement Plan and for Ms. Dalicandro under the SpectraVision
of Canada Pension Plan.
/4/ Although Ms. Dalicandro's compensation was paid in Canadian Dollars, the
information reported above for Ms. Dalicandro has been converted to U.S.
Dollars based upon the average exchange rates for 1993, 1994 and 1995,
which were .7749, .7317 and .7304, respectively.
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<PAGE>
/5/ Mr. Budow's employment with the Company was terminated in December 1995.
OPTION GRANTS IN LAST FISCAL YEAR
None of the executive officers named in the Summary Compensation Table
above who were granted stock options during the last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table provides information related to stock options held at
December 31, 1995 by persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Fiscal Year End December 31, 1995
-------------------------- --------------------------
Shares
Acquired Value
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Name
- -----
Gary G. Weik --- --- --- --- --- ---
Richard M. Gozia --- --- --- --- --- ---
Elaine D. Parrish --- --- --- --- --- ---
Howard D. Gardner --- --- 4,497 13,491 --- ---
Janet L. Dalicandro --- --- 1,799 5,396 --- ---
Harry S. Budow --- --- 12,592 37,774 --- ---
</TABLE>
COMPENSATION OF DIRECTORS
Prior to the Company's bankruptcy filing in June 1995, the Company paid all
directors $25,000, payable quarterly. This compensation was paid regardless of
the number of meetings held and individual attendance thereat. Committee member
received $1,000 for each committee meeting that was held on a day when there was
no Board meeting. As a result of the bankruptcy filing, the Company ceased
paying directors' fees. The Company currently provides liability insurance for
potential losses incurred by its directors and officers as a result of actions
taken by them in their respective capacities on behalf of the Company.
DESCRIPTION OF CERTAIN AGREEMENTS WITH MANAGEMENT
Gary G. Weik. Spectradyne entered into a retention and severance agreement
------------
on December 20, 1995 with Gary G. Weik (the "Weik Agreement"), pursuant to which
Mr. Weik serves as Chief Executive Officer of Spectradyne and its affiliates,
including the Company. The Weik Agreement expires on the effective date of a
plan of reorganization confirmed in Spectradyne's bankruptcy case. Mr. Weik's
base salary is $580,570. The Weik Agreement provides for a bonus of $290,272
for 1995, which was paid on December 31, 1995. If Mr. Weik is employed by
Spectradyne on the effective date of Spectradyne's plan of reorganization, Mr.
Weik shall be entitled to receive a bonus for 1996 of $290,272 pro rated for
the number of days from December 31, 1995 to the effective date of the plan of
reorganization. Mr. Weik is entitled to participate in any employee benefit
plans maintained by Spectradyne.
If Mr. Weik continues to be employed until the plan of reorganization
becomes effective and a sale of all or part of Spectradyne to another business
entity (which might take the form of a merger, sale of assets or equity
securities) or an alliance or business venture between Spectradyne and other
business entities (which may involve
62
<PAGE>
a contractual arrangement between Spectradyne and such other entities or a
direct investment by another entity into Spectradyne), Mr. Weik shall be
entitled to receive from Spectradyne on the later of (i) the effective date of
such plan of reorganization or (ii) the closing of a transaction described in
this sentence, a bonus (the "Weik Deal Bonus") equal to 0.3% of (a) the
aggregate consideration received by Spectradyne, its employees, or its debt
and/or equity holders or (b) in the event of a stand-alone plan of
reorganization, the enterprise value of the reorganized Company as determined by
Salomon Brothers Inc.
If Spectradyne terminates Mr. Weik's employment without cause prior to the
time Spectradyne reaches an agreement in principle or executes a term sheet for
a sale, merger, equity infusion, partnership or other transaction that forms the
basis for a reorganization of Spectradyne (a "Transaction"), Mr. Weik will be
entitled to receive (i) a lump-sum severance payment of $870,842 and (ii) a sum
equal to $290,272 pro rated for the number of days Mr. Weik was employed in such
year.
If Spectradyne terminates Mr. Weik without cause after Spectradyne has
reached an agreement in principle for a Transaction, Mr. Weik will be entitled
to receive from Spectradyne the Weik Deal Bonus and Mr. Weik's base salary
through the earlier of (i) the effective date of Spectradyne's plan of
reorganization and (ii) the expiration of 90 days following the date of
termination. In addition, Mr. Weik will be entitled to receive a sum equal to
$290,272 pro rated for the number of days that he was employed during such year.
Upon Mr. Weik's death or permanent disability, the Weik Agreement shall
terminate; provided, however, that any Weik Deal Bonus that inures prior to such
date will still be due. In addition, in the event of Mr. Weik's total permanent
disability, Mr. Weik will be entitled to receive salary compensation for six
months. In the event of Mr. Weik's death, his estate will receive $290,272.
The Weik Agreement contains confidentiality provisions and certain non-
competition provisions.
The Weik Agreement provides that Spectradyne will provide, for the period
of Mr. Weik's employment, term life insurance for Mr. Weik in the principal
amount of not less than $2.0 million and long term disability insurance
providing for monthly payments of 60% of Mr. Weik's monthly base salary in the
event of total disability.
Mr. Weik has the right to terminate the Weik Agreement upon 30 days notice.
Richard M. Gozia. Spectradyne entered into a retention and severance
----------------
agreement on December 4, 1995 with Richard M. Gozia (the "Gozia Agreement"),
pursuant to which Mr. Gozia serves as Executive Vice President and Chief
Financial Officer of Spectradyne and its affiliates, including the Company. The
Gozia Agreement expires on the effective date of a plan of reorganization
confirmed in Spectradyne's bankruptcy case. Mr. Gozia's base salary is
$268,840. The Gozia Agreement provides for a bonus of $134,420 for 1995, which
was paid on December 31, 1995. If Mr. Gozia is employed by Spectradyne on the
effective date of its plan of reorganization, he shall receive a bonus for 1996
of $134,420 pro rated based on the number of days from December 31, 1995 to the
effective date of the plan of reorganization. Mr. Gozia is entitled to
participate in any employee benefit plans maintained by Spectradyne.
If Mr. Gozia continues to be employed until the plan of reorganization
becomes effective and a sale of all or part of Spectradyne to another business
entity (which might take the form of a merger, sale of assets or equity
securities) or an alliance or business venture between Spectradyne and other
business entities (which may involve a contractual arrangement between
Spectradyne and such other entities or a direct investment by another entity
into Spectradyne), Mr. Gozia shall be entitled to receive from Spectradyne on
the later of (i) the effective date of such plan of reorganization or (ii) the
closing of a transaction described in this sentence, a bonus (the "Gozia Deal
Bonus") equal to 0.15% of (a) the aggregate consideration received by
Spectradyne, its employees, or its debt and/or equity holders or (b) in the
event of a stand-alone plan of reorganization, the enterprise value of the
reorganized Company as determined by Salomon Brothers Inc.
If Spectradyne terminates Mr. Gozia's employment without cause prior to the
time Spectradyne reaches an agreement in principle or executes a term sheet for
a Transaction, Mr. Gozia will be entitled to receive (i) a lump-sum severance
payment of $403,260 and (ii) a sum equal to $134,420 pro rated for the number of
days Mr. Gozia was employed in such year.
If Spectradyne terminates Mr. Gozia without cause after Spectradyne has
reached an agreement in principle for a Transaction, Mr. Gozia will be entitled
to receive the Gozia Deal Bonus and Mr. Gozia's base salary through
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<PAGE>
the earlier of (i) the effective date of Spectradyne's plan of reorganization
and (ii) the expiration of 90 days following the date of termination. In
addition, Mr. Gozia will be entitled to receive a sum equal to $134,420 pro
rated for the number of days that he was employed during such year.
The Gozia Agreement contains confidentiality provisions and certain non-
competition provisions. Mr. Gozia has the right to terminate the Gozia
Agreement upon 30 days notice.
Elaine W. Parrish. Spectradyne entered into an employment agreement,
-----------------
effective as of December 1, 1994, with Elaine Parrish which was amended on
August 1, 1995, (collectively, the "Parrish Agreement") pursuant to which Ms.
Parrish serves as Senior Vice President of Sales and Affiliate Marketing of
Spectradyne. The Parrish Agreement expires on December 1, 1997. The Parrish
Agreement provides for a base salary for 1995 of $160,014 and is subject to an
annual increase based upon the increase during the previous year in the Consumer
Price Index for Urban Wage Earners in Dallas, Texas, or any greater amount
approved by Spectradyne's Board of Directors. Ms. Parrish is eligible to
receive an annual incentive payment pursuant to the Bonus Plan, which will be
equal to 50% of Ms. Parrish's annual base salary if the Bonus Plan targets are
achieved; provided, however, that for the period ending December 31, 1995, the
amount of such incentive payment was set at 50% of Ms. Parrish's annual base
salary for such period and such incentive payment for 1995 was paid on December
31, 1995.
The Parrish Agreement also provides for (i) a one-time payment of $45,000
representing loss of income from her previous job, (ii) the payment by
Spectradyne of closing costs not to exceed $10,000 associated with the purchase
of a home in Dallas, (iii) reimbursement of reasonable relocation expenses, and
(iv) the grant to Ms. Parrish of options to purchase 60,000 shares of Common
Stock under Spectradyne's 1994 Management Incentive Equity Plan that vest at the
rate of 25% per year. The Parrish Agreement also provides that if Ms. Parrish's
employment is terminated without cause by Spectradyne, the terms of
Spectradyne's 1994 Management Incentive Equity Plan will not be construed or
interpreted to preclude Ms. Parrish from recovering the remaining stock
described in (iv) of the preceding sentence. Ms. Parrish also is entitled to
participate in any employee benefit plan maintained by Spectradyne.
Spectradyne has the right to terminate Ms. Parrish's employment upon a
material breach of the Parrish Agreement by Ms. Parrish on (i) 30 days notice or
(ii) the payment of 30 days' pay in lieu of notice. Upon termination by
Spectradyne, Ms. Parrish is entitled to all accrued cash and non-cash
compensation to the date of termination.
Ms. Parrish has the right to terminate the Parrish Agreement upon a
material breach of the Parrish Agreement by Spectradyne. Upon such termination,
Ms. Parrish will be entitled to receive all sums due to her through the date of
termination and an amount equal to 150% of Ms. Parrish's annual base salary.
The Parrish Agreement contains certain confidentiality, proprietary
information and non-competition provisions. The Parrish Agreement also provides
that it may be assigned to Spectradyne at any time.
Howard D. Gardner. Spectradyne entered into an employment agreement,
-----------------
effective as of January 1, 1995, with Howard D. Gardner that was amended on
August 1, 1995 (collectively, the "Gardner Agreement"), pursuant to which Mr.
Gardner serves as Senior Vice President of Technology and Network Operations of
Spectradyne. The Gardner Agreement expires on December 31, 1997. Mr. Gardner's
base salary for 1995 was $152,400 and is subject to a yearly increase based upon
the increase during the previous year in the Consumer Price Index for Urban Wage
Earners in Dallas, Texas or any greater amount approved by Spectradyne's Board
of Directors. Mr. Gardner is eligible to receive an annual incentive payment
pursuant to the Bonus Plan, which will be equal to 50% of his base salary if the
Bonus Plan targets are achieved, provided, however, that for the year ending
December 31, 1995, the amount of such incentive payment was set at 50% of Mr.
Gardner's annual base salary for such period and such incentive payment for 1995
was paid on December 31, 1995. Mr. Gardner also is entitled to participate in
any employee benefit plans maintained by Spectradyne.
Spectradyne has the right to terminate Mr. Gardner's employment upon a
material breach of the Gardner Agreement by Mr. Gardner on (i) 30 days notice or
(ii) the payment of 30 days' pay in lieu of notice. Upon termination by
Spectradyne, Mr. Gardner is entitled to all accrued cash and non-cash
compensation to the date of termination.
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<PAGE>
Mr. Gardner has the right to terminate the Gardner Agreement upon a
material breach of the Gardner Agreement by Spectradyne. Upon such termination,
Mr. Gardner will be entitled to receive all sums due to him through the date of
termination and an amount equal to 150% of Mr. Gardner's annual base salary.
The Gardner Agreement contains certain confidentiality, proprietary
information and non-competition provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Goldberg, Poitier and Ziffren are the members of the Compensation
Committee. No executive officer of the Company served as a director or member
of the Compensation Committee of another entity that had a director or executive
officer serve on the Company's board or Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The table below sets forth certain information, to the Company's knowledge,
as of March 1, 1996, unless otherwise indicated, regarding the beneficial
ownership of the Company's Class A and Class B Common Stock, by (i) each person
known by the Company to own beneficially more than 5 percent of its outstanding
shares of Class A or Class B Common Stock, (ii) each director of the Company,
(iii) the executive officers of the Company named in the Summary Compensation
Table and (iv) all executive officers and directors of the Company as a group.
Unless otherwise indicated, each person has sole voting and investment power
over the shares of Common Stock beneficially owned by him or her.
65
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
---------------------------- ----------------------------
Number of Number of
Shares Shares
Beneficially Percentage of Beneficially Percentage of
Beneficial Owner Owned Shares/1/ Owned Shares/1/
- ---------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Rainbow Company/2, 3/ 4,593,476 99.9% 4,674,986 19.5%
Gary G. Weik --- --- --- ---
Richard M. Gozia --- --- --- ---
Elaine W. Parrish --- --- --- ---
Howard D. Gardner --- --- 9,994/4/ ---
Michael C. Colleran --- --- --- ---
John Davis --- --- --- ---
Marvin Davis/2, 3/ 4,593,476 99.9% 4,674,986 19.5%
Leonard Goldberg --- --- --- ---
Gerald S. Gray --- --- --- ---
Sidney Poitier --- --- --- ---
Michael J. Seibert --- --- --- ---
Kenneth Ziffren --- --- --- ---
Janet L. Dalicandro --- --- 3,598/5/ ---
Harry S. Budow --- --- 25,183/6/ ---
All executive officers and
directors as a group (12
persons)/7/ 4,593,476 99.9% 4,713,756 19.6%
- --------------------
</TABLE>
* Less than 1%
/1/ Based upon 4,593,526 outstanding shares of Class A Common Stock and
19,390,379 outstanding shares of Class B Common Stock, which are treated
collectively for the purpose of calculating the percentage of shares of
Class B Common Stock held by Rainbow Company ("Rainbow"), Mr. Marvin Davis
and all executive officers and directors as a group.
/2/ Each share of Class A Common Stock is convertible at any time by the holder
thereof into one share of Class B Common Stock. The Class B Common Stock
information included above for Rainbow and Marvin Davis includes (i)
4,593,476 shares of Class B Common Stock issuable upon conversion of shares
of Class A common Stock, (ii) 78,500 shares of Class B Common Stock held by
Davis Oil Company and (iii) 3,010 shares of Class B Common Stock issuable
pursuant to presently exercisable stock options held by Rainbow.
/3/ Rainbow is a general partnership controlled by Mr. Marvin Davis through its
general partners, Davis-Rainbow, Inc., and the Marvin Davis and Barbara
Davis Revocable Trust. Rainbow is the record owner of substantially all of
the shares of Class A Common Stock of the Company. The mailing address of
the principal executive office of Rainbow is Suite 2800, 2121 Avenue of the
Stars, Los Angeles, California 90067-5000.
/4/ Includes 8,994 shares of Class B Common Stock issuable upon exercise of
vested options.
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<PAGE>
/5/ Includes 3,598 shares of Class B Common Stock issuable upon exercise of
vested options.
/6/ Includes 25,183 shares of Class B Common Stock issuable upon exercise of
vested options.
/7/ Includes an aggregate of 40,780 shares of Common Stock issuable upon the
exercise of vested options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
None.
67
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of SpectraVision, Inc.
are included in Item 8:
Independent Auditors' Report
Consolidated Statements of Financial Position at December 31, 1995 and
1994
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Notes to the Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of
SpectraVision, Inc. is included:
Schedule II -- Valuation Accounts
Information required by the other schedules has been presented in the
notes to the consolidated financial statement or such schedule is not
applicable and, therefore, has been omitted.
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(A)(3) EXHIBITS
Exhibit No. Description
----------- -----------
2.0 Order dated October 29, 1992 confirming debtors' plan of
reorganization under Chapter 11 of the bankruptcy code (filed as
Exhibit 2 to the Company's Report on Form 10-Q for the period
ended September 30, 1992 (Commission File No. 1-9724) and
incorporated herein by reference)
3.1 Certificate of Incorporation of SPI Holding, Inc. (filed as
Exhibit 3(a) to the Company's Registration Statement on Form S-4
(Registration No. 33-16859) and incorporated herein by
reference)
3.1.1 Certificate of Amendment of the Certificate of Incorporation of
SPI Holding, Inc. (filed as Exhibit 3(b) to the Company's 1988
Form 10-K (Commission File No. 1-9724) and incorporated herein
by reference)
3.1.2 Certificate of Amendment of the Certificate of Incorporation of
SPI Holding, Inc. filed April 12, 1989 (filed as Exhibit 3 to
the Company's Report on Form 8-K dated April 26, 1989
(Commission File No. 1-9724) and incorporated herein by
reference)
3.1.3 Certificate of Amendment of the Certificate of Incorporation of
SPI Holding, Inc. filed September 13, 1991 (filed as Exhibit
3.1.3 to the Company's Registration Statement on Form S-4
(Registration No. 33-43199) and incorporated herein by
reference)
3.1.4 Certificate of Amendment of the Certificate of Incorporation of
SPI Holding, Inc. filed July 1, 1992 (filed as Exhibit 3.1.4 to
the Company's Registration Statement on Form S-4 (Registration
No. 33-43199) and incorporated herein by reference)
3.1.5 Certificate of Amendment of the Certificate of Incorporation of
SPI Holding, Inc. filed November 23, 1992 (filed as Exhibit
3.1.5 to the Company's 1992 Form 10-K (Commission File No. 1-
9724) and incorporated herein by reference)
3.1.6 Certificate of Amendment of the Certificate of Incorporation of
SpectraVision, Inc. (filed as Exhibit 3.1.6 to the Company's
Report of Form 10-Q for the period ended June 30, 1994
(Commission File No. 1-9724) and 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)
4.1 Indenture dated as of November 23, 1992 by and among SPI
Holding, Inc., Spectradyne, Inc., SPI Newco, Inc., and U.S.
Trust Company of Texas, N.A., as Trustee, re: 11 1/2% Senior
Subordinated Reset Notes due 2002 (filed as Exhibit 4.2 to the
Company's 1992 Form 10-K (Commission File No. 1-9724) and
incorporated herein by reference)
4.2 Form of Note (filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-1/S-2 (Registration No. 33-66762) and
incorporated herein by reference)
4.4 Contingent Value Rights Agreement dated as of November 23, 1992
by and among SPI Holding, Inc., Spectradyne, Inc. and U.S. Trust
Company of Texas, N.A., as Trustee, re: Contingent Value Rights
(filed as Exhibit 4.3 to the Company's 1992 Form 10-K
(Commission File No. 1-9724) and incorporated herein by
reference)
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<PAGE>
(A)(3) EXHIBITS (CONTINUED)
Exhibit No. Description
----------- -----------
4.5 Form of Indenture dated as of October 1, 1993 by and among SPI
Holding, Inc., Spectradyne, Inc., SPI Newco, Inc. and First
Trust National Association, as Trustee, re: 11 1/2% Senior
Discount Notes due 2001 (filed as Exhibit 4.5 to the Company's
Registration Statement on Form S-1/S-3 (Registration No. 33-
66762) and incorporated herein by reference)
4.6 Loan and Security Agreement between Spectradyne, Inc. and
Foothill Capital Corporation dated June 9, 1995.
10.9 Agreement dated January 1, 1990 between Spectradyne, Inc. and
International Alliance Theatrical Stage Employees and Moving
Picture Machine Operators of the United States and Canada, AFL-
CIO (filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-4 (Registration No. 33-43199) and
incorporated herein by reference)
10.12 Warrant Agreement dated as of October 8, 1987, between SPI
Holding, Inc. and the rights agent thereunder (filed as Exhibit
10(u) to the Company's 1988 Form 10-K (Commission File No. 1-
9724) and incorporated herein by reference)
10.13 Terms and conditions of Credit Facilities dated as of April 5,
1990 between The Royal Bank of Canada and Spectravision of
Canada, Inc. (filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-4 (Registration No. 33-43199)
and incorporated herein by reference)
10.14 Management Services Agreement dated as of November 23, 1992
between SPI Holding, Inc. and Rainbow Company (filed as Exhibit
10.11 to the Company's 1992 Form 10-K (Commission File No. 1-
9724) and incorporated herein by reference)
10.15 Employment Agreement dated as of January 28, 1992 between SPI
Holding, Inc., Spectradyne, Inc. and Albert D. Jerome (filed as
Exhibit 10.15 to the Company's Registration Statement on Form S-
4 (Registration No. 33-43199) and incorporated herein by
reference)
10.16 Employment Agreement dated August 31, 1994 between SpectraVision
and Gary Weik (filed as the corresponding exhibit to the
Company's 1994 Form 10-K and incorporated herein by reference)
10.17 Amendment Number One dated January 1, 1995 to Employment
Agreement between SpectraVision and Gary Weik (filed as the
corresponding exhibit to the Company's 1994 Form 10-K and
incorporated herein by reference)
10.18 Restated Employment Agreement dated September 21, 1994 between
SpectraVision, Inc. and Richard M. Gozia (filed as the
corresponding exhibit to the Company's 1994 Form 10-K and
incorporated herein by reference)
10.19 Personal Services Agreement dated April 5, 1994 between
Spectradyne, Inc. and Harry S. Budow and Amendment to the
Personal Services Agreement dated March 24, 1994 between
Spectradyne, Inc. and Harry S. Budow (filed as Exhibits 10.14
and 10.15 to the Company's 1993 Form 10-K (Commission File No.
1-9724) and incorporated herein by reference)
10.20 Employment Agreement dated January 1, 1995 between
SpectraVision, Inc. and Howard D. Gardner (filed as the
corresponding exhibit to the Company's 1994 Form 10-K and
incorporated herein by reference)
70
<PAGE>
(A)(3) EXHIBITS (CONTINUED)
Exhibit No. Description
----------- -----------
10.21 Restated Employment Agreement dated December 5, 1994 between
SpectraVision, Inc. and Elaine W. Parrish (filed as the
corresponding exhibit to the Company's 1994 Form 10-K and
incorporated herein by reference)
10.22 Executive Retirement Plan (filed as Exhibit 10(g) to
Spectradyne, Inc.'s 1986 Form 10-K (Commission File No. 0-9312)
and incorporated herein by reference)
10.23 Management Incentive Bonus Plan of SpectraVision, Inc. dated
February 2, 1994 (filed as Exhibit 10.17 to the Company's 1993
Form 10-K (Commission File No. 1-9724) and incorporated herein
by reference.)
10.24 Agreement for Phase 1 Information Technology Services between
Spectradyne, Inc. and Electronic Data Systems Corporation dated
as of July 28, 1993 (filed as the corresponding exhibit to the
Company's 1994 Form 10-K/A and incorporated herein by reference)
10.25 Phase 2 Information Technology Product and Service Agreement
between Electronic Data Systems Corporation and Spectradyne,
Inc., dated as of August 27, 1993 (filed as the corresponding
exhibit to the Company's 1994 Form 10-K/A and incorporated
herein by reference)
10.26 Addendum No. 3 to Phase 2 Operating Lease, between Spectradyne,
Inc. and Electronic Data Systems Corporation, dated as of August
27, 1993 (filed as the corresponding exhibit to the Company's
1994 Form 10-K/A and incorporated herein by reference)
10.27 Addendum No. 4 to Phase 1 Operating Lease, between Spectradyne,
Inc. and Electronic Data Systems Corporation, dated as of August
27, 1993 (filed as the corresponding exhibit to the Company's
1994 Form 10-K/A and incorporated herein by reference)
10.28 Special Provisions Agreement among Spectradyne, Inc.,
SpectraVision, Inc., and Electronic Data Systems Corporation,
dated as of January 1, 1993 (filed as the corresponding exhibit
to the Company's 1994 Form 10-K/A and incorporated herein by
reference)
10.29 Technology Services Agreement between Spectradyne, Inc. and
Certech Technology, Inc., dated as of December 17, 1993 (filed
as the corresponding exhibit to the Company's 1994 Form 10-K/A
and incorporated herein by reference)
10.30 Personal Computer Functionality Management Agreement between SPI
Holding, Inc. and EDS Technical Products Corporation, dated July
28, 1993 (filed as the corresponding exhibit to the Company's
1994 Form 10-K/A and incorporated herein by reference)
10.31 Retention and Severance Agreement dated December 20, 1995
between Spectradyne, Inc. and Gary G. Weik
10.32 Retention and Severance Agreement dated December 4, 1995 between
Spectradyne, Inc. and Richard M. Gozia
10.33 Amendment Number One to Employment Agreement dated August 1,
1995 between SpectraVision, Inc., Spectradyne, Inc. and Elaine
Parrish
71
<PAGE>
(A)(3) EXHIBITS (CONTINUED)
Exhibit No. Description
----------- -----------
10.34 Amendment Number One to Employment Agreement dated August 1,
1995 between SpectraVision, Inc., Spectradyne, Inc., and Howard
D. Gardner
10.35 Loan and Security Agreement by and between Spectradyne, Inc. and
Foothill Capital Corporation, dated June 9, 1995 (filed as
Exhibit 10.24 to the Company's Form 10-Q for the quarter ended
June 30, 1995 and incorporated herein by reference)
10.36 Amendment Number One to Loan and Security Agreement by and
between Spectradyne, Inc. and Foothill Capital Corporation,
dated July 20, 1995 (filed as Exhibit 10.25 to the Company's
Form 10-Q for the quarter ended June 30, 1995 and incorporated
herein by reference)
21 Subsidiaries of SpectraVision, Inc. (filed as Exhibit 22 to the
Company's 1994 Form 10-K and incorporated herein by reference)
27 Financial Data Schedule for the year ended December 31, 1995.
_______________
(B) REPORTS ON FORM 8-K
None
72
<PAGE>
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 27, 1996.
SpectraVision, Inc.
By: /s/ GARY G. WEIK
---------------------------------
Gary G. Weik
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ GARY G. WEIK Chairman of the Board and March 27, 1996
- ----------------------------- Chief Executive Officer
Gary G. Weik (Principal Executive Officer)
/s/ RICHARD M. GOZIA Executive Vice President March 27, 1996
- ----------------------------- and Chief Financial Officer
Richard M. Gozia (Principal Financial Officer)
/s/ MICHAEL SCOTT SMITH Vice President and Corporate March 27, 1996
- ----------------------------- Controller
Michael Scott Smith (Principal Financial Officer)
Director
- -----------------------------
Michael C. Colleran
Director
- -----------------------------
John Davis
/s/ MARVIN DAVIS Director March 27, 1996
- -----------------------------
Marvin Davis
Director
- -----------------------------
Leonard Goldberg
/s/ GERALD S. GRAY Director March 27, 1996
- -----------------------------
Gerald S. Gray
/s/ SIDNEY POITIER Director March 27, 1996
- -----------------------------
Sidney Poitier
/s/ MICHAEL J. SEIBERT Director March 27, 1996
- -----------------------------
Michael J. Seibert
/s/ KENNETH ZIFFREN Director March 27, 1996
- -----------------------------
Kenneth Ziffren
73
<PAGE>
SPECTRAVISION, INC.
Schedule II
VALUATION ACCOUNTS
------------------
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL.E
<S> <C> <C> <C> <C> <C>
Additions
----------------------------------
Balance at
Beginning of Charged to Costs Balance at
Description Period & Expenses Charged to Other Deductions End of Period
- -------------------------------------------- ------------- ---------------- ---------------- ---------- -------------
From January 1, 1995 to December 31, 1995
Deferred tax asset valuation allowance $113,375,000 $26,057,000 $ - $ - $139,432,000
Bad debt allowance 1,072,268 739,732 - - 1,812,000
From January 1, 1994 to December 31, 1994
Deferred tax asset valuation allowance $ 38,240,000 $75,135,000 $ - $ - $113,375,000
Bad debt allowance 967,000 285,197 - 179,929 1,072,268
From January 1, 1993 to December 31, 1993
Deferred tax asset valuation allowance $ 14,584,000 $23,656,000 $ - $ - $ 38,240,000
Bad debt allowance 524,000 900,000 - 457,000 967,000
</TABLE>
74
<PAGE>
EXHIBIT 10.31
RETENTION AND SEVERANCE AGREEMENT
This Retention and Severance Agreement (the "Agreement") is entered into
this ______ day of December, 1995 by and between Spectradyne, Inc., a Texas
corporation, with offices at 1501 North Plano Road, Richardson, Texas (together
with its affiliates, "Employer") and Gary Weik, an individual whose address is
3803 Canyon Bluff, Houston, Texas ("Employee").
RECITALS
1. Employer is a debtor in possession in Chapter 11 case number 95-659
(PJW) filed on June 8, 1995, in the United States Bankruptcy Court for the
District of Delaware.
2. Employee was hired by Employer prior to the bankruptcy filing to serve
as its Chief Executive Officer and Chairman of the Board of SpectraVision, Inc..
The terms of Employee's employment were set forth in an Employment Agreement
dated as of August 31, 1994, as amended by an Amendment Number One to Employment
Agreement dated January 1, 1995 (the "Employment Agreement").
3. Employer wishes to retain the services of Employee throughout the
bankruptcy proceeding and, as a result of a settlement with the Official
Unsecured Creditors Committee of Employer, has agreed to provide Employee with
the protections and incentives set forth below.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter contained, it is agreed as follows:
AGREEMENT
1. Employment.
----------
(a) Employer hereby agrees to employ Employee, and Employee hereby
agrees to serve Employer, as Chief Executive Officer and to perform such duties,
functions and responsibilities commensurate with and appropriate to such
position, and as the same may be from time to time set forth in the By-laws of
Employer or otherwise delegated to Employee.
(b) Employee shall receive from Employer the necessary power and
authority to carry out and discharge such duties, functions and
responsibilities.
(c) Employee shall be a full time employee of Employer and shall
devote his best efforts to the performance, discharge and fulfillment of all
such duties, functions and responsibilities.
<PAGE>
(d) Employee will perform his services primarily in Dallas County,
Texas, U.S.A., or at such other location as may be mutually agreed upon by the
Board of Directors of Employer, or their designates, and Employee.
2. Term.
----
Employer shall employ Employee from the date of this Agreement until
the effective date of a plan of reorganization confirmed in Employer's
bankruptcy case. Employee may terminate this Agreement at any time by giving
Employer thirty (30) days notice of his intention to terminate the Agreement.
3. Compensation.
------------
(a) Employer shall pay Employee an annual base salary of $580,570
payable in equal bi-weekly installments.
(b) Employee shall receive a bonus for 1995 in the amount of $290,272
payable in accordance with Employer's normal bonus policy, but no later than
December 31, 1995. If Employee is employed by Employer on the effective date of
Employer's plan, Employee shall receive a bonus for 1996 payable on the
effective date of Employer's plan of reorganization and equal to $290,272 times
a fraction the numerator of which is the number of days between December 31,
1995 and the effective date of such plan and the denominator of which is 365.
4. Employee Benefits and Business Expenses.
---------------------------------------
(a) During the term hereof, Employee shall be entitled to participate
in such employee benefit plans and programs maintained by Employer for the
benefit of its employees, as such plans and programs may be amended from time to
time hereafter, and to participate in applicable new or amended programs,
including, but not limited to, medical, dental, health, life, accident and
disability insurance programs, savings for retirement plans, bonus, stock option
plans, and any other incentive compensation plans.
(b) Employee shall be reimbursed for any necessary business expenses
reasonably incurred by Employee in carrying out Employee's duties, functions and
responsibilities hereunder.
5. Severance Benefits.
------------------
In the event that Employer terminates Employee's employment by Employer
without cause (as defined below) during the term of this Agreement but prior to
the time Employer reaches an agreement in principle or executes a term sheet for
a sale, merger, equity infusion, partnership or other transaction which
2
<PAGE>
forms the basis for a reorganization of Employer (a "Transaction"), Employee
shall receive a lump sum severance payment of $870,842 within five(5) business
days of the date of termination. Employee shall also receive a sum equal to
$290,272 multiplied by a fraction the numerator of which is the number of days
Employee has worked in the calendar year and the denominator of which is 365.
Employee shall have no duty to mitigate damages.
In the event Employee is terminated without cause after Employer has
reached an agreement in principle for a Transaction, Employer shall pay to
Employee on the date of termination (as defined in paragraph 7), or as soon
thereafter as fiscally practicable, but in no event later than the effective
date of Employer's plan of reorganization, an amount equal to the Deal Bonus
defined in paragraph 6 of this Agreement. Employer shall also continue to pay
Employee his base salary through the earlier of (i) the effective date of
Employer's plan of reorganization or (ii) the expiration of ninety (90) days
following the date of termination. With Employee's last salary payment,
Employer shall also pay Employee a sum equal to $290,272 multiplied by a
fraction the numerator of which is the number of days between the first day of
the then current calendar year and the last day for which Employee is entitled
to receive his base salary and the denominator of which is 365.
The following events constitute cause for Employer's discharge of Employee:
(i) Employee's willful misconduct or gross negligence in the
performance or discharge of any of Employee's duties, functions and
responsibilities hereunder;
(ii) Employee's conviction of any felony offense during the term of
this Agreement; or
(iii) Employee's breach of any of Employee's material obligations
hereunder and the continuation thereof for a period of twenty (20) days
after written notice of such breach is received by Employee.
6. Deal Bonus.
----------
(a) Definitions.
(i) "Alliance Transaction" shall mean an alliance or business venture
between Employer and other corporations or business entities (each a Partner)
which may involve a contractual arrangement between Employer and such Partner, a
direct investment by such Partner in Employer or other similar transaction.
3
<PAGE>
(ii) "Sale Transaction" shall mean a sale of all or part of Employer
to another corporation or business entity (a "Buyer") which transaction might
take the form of a merger with, or a sale of assets or equity securities to a
Buyer(s).
(iii) "Aggregate Consideration" shall mean the total amount of cash
and the fair market value (on the date of payment) of all other property paid or
payable directly or indirectly to Employer, its employees, or its debt and/or
equity security holders by a Buyer and/or Partner in connection with a Sale
Transaction and/or Alliance Transaction or a transaction related thereto.
Aggregate Consideration shall also include the value of any long-term
liabilities of Employer (including the principal amount of any indebtedness for
borrowed money (x) repaid in connection with or in anticipation of a Sale
Transaction and/or Alliance Transaction or (y) existing on Employer's balance
sheet both (i) at the time of a Sale Transaction and/or Alliance Transaction and
(ii) immediately after the confirmation of Employer's plan of reorganization (if
such Sale Transaction and/or Alliance Transaction takes the form of a merger or
sale of stock) or assumed by a Buyer and/or Partner in connection with a Sale
Transaction and/or Alliance Transaction (if such Sale Transaction and/or
Alliance Transaction takes the form of a sale of assets)).
(b) Deal Bonus.
If Employee continues to be employed by Employer until employer's plan
becomes effective and a Sale or Alliance Transaction closes, Employer shall pay
Employee on the later of (i) the effective date of such plan or (ii) the closing
of a Sale Transaction and/or Alliance Transaction, a deal bonus (the "Deal
Bonus") equal to .3% of the Aggregate Consideration received in an Alliance
Transaction or Sale Transaction or in the event of a stand-alone plan, the
enterprise value of reorganized Employer as determined by Salomon Brothers, Inc.
7. Employee termination or Employer termination for cause or without
-----------------------------------------------------------------
cause.
-----
In the event Employee terminates this Agreement pursuant to paragraph 2
herein, or Employer terminates this Agreement without cause, or for cause
pursuant to paragraph 5 (i), (ii) or (iii), notwithstanding such event of
termination, in addition to the other provisions of this Agreement that provide
for benefits/compensation to Employee in the preceding situations, Employee
shall also be entitled to:
(i) receive salary compensation pursuant to 3(a) through the date of
termination; and
4
<PAGE>
(ii) any benefits under paragraph 6 that inured to Employee prior to
the date of termination.
For purposes of this paragraph and Agreement, the date of termination
is:
(i) in the event Employee terminates, the thirtieth day of Employee's
30 day notice set forth in paragraph 2, or
(ii) in the event of Employee's termination for cause under paragraph
5(i) or (ii), on the date of notice of termination; in the event of Employee's
termination for cause under paragraph 5 (iii), on the 20th day after written
notice of such cause is received by Employee, provided such cause for
termination continues to exist after the 20th day.
8. Death and Disability.
--------------------
(a) This Agreement shall terminate upon Employee's total permanent
disability, as defined herein, or death. Notwithstanding the preceding, any
benefits that inured to Employee under paragraph 6 herein prior to death or
disability of Employee shall still be due Employee and shall survive the
termination of this Agreement as a result of this provision.
(b) In the event of Employee's total permanent disability, the salary
compensation that would have otherwise been earned, pursuant to paragraph 3(a)
herein, will continue to be paid for six (6) months. For purposes of this
Agreement, the phrase "total permanent disability" shall mean the inability of
Employee substantially to perform his duties hereunder for a continuous period
of more than sixty (60) days. Such disability shall be determined by Employee's
attending physician, and if Employer disagrees with the determination of such
physician, Employer shall have the right to employ physicians of its choosing to
examine Employee and make an independent determination of whether or not
Employee is, in fact, totally and permanently disabled.
(c) In the event of death of Employee, his estate will receive
$290,272.
9. Employee's Covenants.
--------------------
(a) The Employee hereby covenants and agrees that during the term of
his employment and at any time thereafter he will not disclose to any person not
employed by the Employer or any affiliated entity and not engaged to render
services to the Employer or any affiliated entity any confidential information
obtained while in the employ of the Employer; provided, however, that the
restrictions contained herein shall not apply to information that (i) was in the
Employee's possession prior to the commencement of his employment by the
Employer, (ii) is or becomes generally
5
<PAGE>
available to the public other than as a result of disclosure by the Employee or
his representatives in violation of this Agreement, (iii) is or becomes
available to the Employee on a non-confidential basis from a source (other than
the Employer or its representatives) which is not, to the Employee's knowledge,
prohibited from transmitting the information to the Employee or his
representatives by a contractual, legal, fiduciary or other obligation, (iv) was
independently acquired or developed by the Employee without violating the
Employee's obligations under this Agreement, or (v) is furnished to a third
party by the Employer or any representative of the Employer without similar non-
disclosure restrictions or reasonable expectations of confidentiality on the
third party's use of such information. In addition, this subparagraph 9(a)
shall not preclude the Employee from the use or disclosure of information known
generally to the public or of information not considered confidential by the
Employer or any affiliated entity or from making disclosures required by law or
court order.
For the purposes of this Agreement, the term "confidential
information" shall include all information of any nature and in any form which
is owned by the Employer and which is not publicly available or generally known
to persons engaged in businesses similar to that of the Employer, including, but
not limited to, research techniques; patents and patent applications; inventions
and improvements, whether patentable or not; development projects; computer
software and related documentation and materials; designs, practices, processes,
methods, know-how and other facts relating to the business of the Employer;
practices, processes, methods, know-how and other facts related to sales,
advertising, promotions, financial matters, customers, customer lists or
customers' purchases of goods or services from the Employer; industry contracts;
and all other secrets and information of a confidential and proprietary nature.
(b) The Employee hereby covenants and agrees that prior to the
effective date of Employer's plan of reorganization or conversion of Employer's
case to Chapter 7 he will not, for himself or any third party, directly or
indirectly employ or solicit for employment any person employed by the Employer
during the period of such person's employment.
(c) The Employee hereby covenants and agrees that during the term of
his employment and at any time thereafter, upon the reasonable request of the
Employer's Board of Directors or Chief Executive Officer, he shall cooperate
fully in (i) consulting with the Employer with respect to all matters concerning
the Employer in which the Employee had personal involvement during his period of
employment with the Employer, (ii) assisting the Employer in the consummation of
any business matters pending during the term of his employment, and (iii)
assisting the Employer in defending and testifying in any legal and other
proceedings relating to the affairs of the Employer. With respect to the
preceding, Employer agrees to pay for all
6
<PAGE>
reasonable and necessary expenses and costs/1/ incurred by Employee. The
parties agree that Employee will not be required to expend more than a nominal
amount of time and attention with respect to any of the above referenced items.
(d) The Employee and the Employer agree that the Employer will be
irreparably harmed by any violation or threatened violation of any of the
provisions of subparagraphs 9(a), (b), or (c) if such provisions are not
specifically enforced and therefore that the Employer shall be entitled to an
injunction restraining any violation of these paragraphs by the Employee
(without any bond or other security being required), or any other appropriate
decree of specific performance. Such remedies shall not be exclusive and shall
be in addition to any other remedy to which the Employer may be entitled.
(e) Notwithstanding the provisions of paragraph 9(a)-(d), Employer
recognizes and acknowledges Employee's high degree of experience and expertise
in the interactive television, pay per view industry, that such high degree of
expertise and experience existed prior to Employer employing Employee and was
one of the primary reasons Employer employed Employee. Further, notwithstanding
the provisions of paragraph 9(a)-(d), Employer recognizes and acknowledges the
mere employment of Employee by one of Employer's competitors shall not be a
violation of paragraph 9 unless such employment is coupled with Employee's
violation of paragraph 9(a).
10. Insurance.
---------
Employer will, for the benefit of Employee and his beneficiaries,
continue its present group hospitalization and life insurance program. In
addition, Employer will provide, for the period of Employee's employment, term
life insurance for Employee, payable to such beneficiary as the Employee may
designate, in a principal amount of not less than TWO MILLION ($2,000,000)
DOLLARS, and long term disability insurance providing for monthly payments of
sixty (60%) percent of Employee's monthly base salary in the event of total
disability .
11. Waivers.
-------
Neither the failure nor any delay on the part of either party hereto
to exercise any right, remedy, power or privilege (collectively, "Right") under
this Agreement shall operate as a waiver, abandonment or release thereof, nor
shall any single or partial exercise of any Right preclude any other or further
exercise of the same or of any other Right, nor shall any waiver of any Right
with respect to any occurrence be construed as a waiver of such Right with
respect to any other occurrence.
- ----------------
/1/ Including, but not limited to, transportation, food, lodging and reasonable
compensation.
7
<PAGE>
12. Severability.
------------
If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect or impair
the validity or enforceability of the remaining provisions of this Agreement,
which provisions shall remain in full force and effect, and the parties hereto
shall continue to be bound thereby.
13. Entire Agreement.
----------------
This Agreement contains the entire agreement between the parties
relating to the subject matter hereof and supersedes all previous agreements and
understandings between the parties, whether written or oral, with respect to the
subject matter hereof. This Agreement shall not be modified, altered or amended
except by a writing executed by both parties. Employee acknowledges and agrees
that no such agreement will be effective unless it is approved by formal
resolution of the Board of Directors of Employer.
14. Legal Fees and Expenses.
-----------------------
The prevailing party in any legal action relating to this Agreement
shall be entitled to recover its or his legal fees and expenses, in addition to
any other remedies it or he may have. Employer agrees that it will advance to
Employee the reasonable legal fees and expenses that are incurred by him in any
legal action relating to this Agreement within five business days after
Employee's submission to Employer of invoices or other evidence of legal fees or
expenses incurred by Employee. Employee agrees to repay such advances pursuant
to the first sentence of this paragraph if Employer is the prevailing party in
the legal action.
15. Governing Law.
-------------
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed in such State without giving effect to the principles of
conflicts of laws.
16. Injunctive Relief.
-----------------
During the term of this Agreement, Employer shall, in addition to any
other remedies available to it at law or in equity, be entitled to injunctive
relief to enforce the terms of paragraph 9 of this Agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year above first written.
SPECTRADYNE, INC.
-----------------------------------------
By:
Its:
-----------------------------------------
By By: Gary Weik
9
<PAGE>
EXHIBIT 10.32
RETENTION AND SEVERANCE AGREEMENT
This Retention and Severance Agreement (the "Agreement") is entered into
this ______ day of ___________, 1995 by and between Spectradyne, Inc., a Texas
corporation, with offices at 1501 North Plano Road, Richardson, Texas (together
with its affiliates, "Employer") and Richard M. Gozia, an individual whose
address is 4815 Belmont, Dallas, Texas ("Employee").
RECITALS
1. Employer is a debtor in possession in Chapter 11 case number 95-659
(PJW) filed on June 8, 1995, in the United States Bankruptcy Court for the
District of Delaware.
2. Employee was hired by Employer prior to the bankruptcy filing to serve
as its Executive Vice President and Chief Financial Officer. The terms of
Employee's employment were set forth in a Restated Employment Agreement dated as
of September 21, 1994 (the "Employment Agreement").
3. Employer wishes to retain the services of Employee throughout the
bankruptcy proceeding and, as a result of a settlement with the Official
Unsecured Creditors Committee of Employer, has agreed to provide Employee with
the protections and incentives set forth below.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter contained, it is agreed as follows:
AGREEMENT
1. Employment.
----------
(a) Employer hereby agrees to employ Employee, and Employee hereby
agrees to serve Employer, as Executive Vice President and Chief Financial
Officer and to perform such duties, functions and responsibilities commensurate
with and appropriate to such position, and as the same may be from time to time
set forth in the By-laws of Employer or otherwise delegated to Employee.
(b) Employee shall receive from Employer the necessary power and
authority to carry out and discharge such duties, functions and
responsibilities.
(c) Employee shall be a full time employee of Employer and shall
devote his best efforts to the performance, discharge and fulfillment of all
such duties, functions and responsibilities.
-1-
<PAGE>
(d) Employee will perform his services primarily in Dallas County,
Texas, U.S.A., or at such other location as may be mutually agreed upon by the
Board of Directors of Employer, or their designates, and Employee.
2. Term.
----
Employer shall employ Employee from the date of this Agreement until
the Effective Date of a plan of reorganization confirmed in Employer's
bankruptcy case. Employee may terminate this Agreement at any time by giving
Employer and the Official Creditors' Committee thirty (30) days notice of his
intention to terminate the Agreement.
3. Compensation.
------------
(a) Employer shall pay Employee an annual base salary of $268,840
payable in equal bi-weekly installments.
(b) Employee shall receive a bonus for 1995 in the amount of $134,420
payable in accordance with Employer's normal bonus policy. In the event
Employee is employed by Employer on the Effective Date of Employer's plan,
Employee shall receive a bonus for 1996 payable on the effective date of
Employer's plan of reorganization and equal to $134,420 times a fraction the
numerator of which is the number of days between December 31, 1995 and the
effective date of such plan and the denominator of which is 365.
4. Employee Benefits and Business Expenses.
---------------------------------------
(a) During the term hereof, Employee shall be entitled to participate
in such employee benefit plans and programs maintained by Employer for the
benefit of its employees, as such plans and programs may be amended from time to
time hereafter, and to participate in applicable new or amended programs,
including, but not limited to, medical, dental, health, life, accident and
disability insurance programs, savings for retirement plans, bonus, stock option
plans, and any other incentive compensation plans.
(b) Employee shall be reimbursed for any necessary business expenses
reasonably incurred by Employee in carrying out Employee's duties, functions and
responsibilities hereunder.
-2-
<PAGE>
5. Severance Benefits.
------------------
In the event that Employer terminates Employee's employment by Employer
without cause (as defined below) during the term of this Agreement but prior to
the time Employer reaches an agreement in principle or executes a term sheet for
a sale, merger, equity infusion, partnership or other transaction which forms
the basis for a reorganization of Employer (a "Transaction"), Employee shall
receive a lump sum severance payment of $403,260 within ten (10) business days
of the date of termination. Employee shall also receive a sum equal to $134,420
multiplied by a fraction the numerator of which is the number of days Employee
has worked in the calendar year and the denominator of which is 365. Employee
shall have no duty to mitigate damages.
In the event Employee is terminated without cause after Employer has
reached an agreement in principle for a Transaction, Employer shall pay to
Employee on the date of such termination, or as soon thereafter as fiscally
practicable, but in no event later than the effective date of Employer's plan of
reorganization, an amount equal to the Deal Bonus defined in paragraph 6 of this
Agreement. Employer shall also continue to pay Employee his base salary through
the earlier of (i) the effective date of Employer's plan of reorganization and
(ii) the expiration of ninety (90) days following the date of termination. With
Employee's last salary payment, Employer shall also pay Employee a sum equal to
$134,420 multiplied by a fraction the numerator of which is the number of days
between the first day of the then current calendar year and the last day for
which Employee is entitled to receive his base salary and the denominator of
which is 365.
The following events constitute cause for Employer's discharge of Employee:
(i) Employee's willful misconduct or gross negligence in the
performance or discharge of any of Employee's duties, functions and
responsibilities hereunder;
(ii) Employee's conviction of any felony offense during the term of
this Agreement; or
(iii) Employee's breach of any of Employee's material obligations
hereunder and the continuation thereof for a period of twenty (20) days
after written notice of such breach is received by Employee.
In the event Employer elects to terminate Employee for cause pursuant
to this Section 5, Employer shall give written notice to Employee specifically
stating each fact and reason which is the basis for such termination. Following
such termination, Employer shall have no further obligation to Employee except
for
-3-
<PAGE>
accrued and unpaid cash and non-cash compensation payments then due and owing to
Employee under this Agreement.
6. Deal Bonus.
----------
(a) Definitions.
(i) "Alliance Transaction" shall mean an alliance or business
venture between Employer and other corporations or business entities (each a
Partner) which may involve a contractual arrangement between Employer and such
Partner, a direct investment by such Partner in Employer or other similar
transaction.
(ii) "Sale Transaction" shall mean a sale of all or part of
Employer to another corporation or business entity (a "Buyer") which transaction
might take the form of a merger with, or a sale of assets or equity securities
to a Buyer(s).
(iii) "Aggregate Consideration" shall mean the total amount of
cash and the fair market value (on the date of payment) of all other property
paid or payable directly or indirectly to Employer, its employees, or its debt
and/or equity security holders by a Buyer and/or Partner in connection with a
Sale Transaction and/or Alliance Transaction or a transaction related thereto.
Aggregate Consideration shall also include the value of any long-term
liabilities of Employer (including the principal amount of any indebtedness for
borrowed money (x) repaid in connection with or in anticipation of a Sale
Transaction and/or Alliance Transaction or (y) existing on Employer's balance
sheet both (i) at the time of a Sale Transaction and/or Alliance Transaction and
(ii) immediately after the confirmation of Employer's plan of reorganization (if
such Sale Transaction and/or Alliance Transaction takes the form of a merger or
sale of stock) or assumed by a Buyer and/or Partner in connection with a Sale
Transaction and/or Alliance Transaction (if such Sale Transaction and/or
Alliance Transaction takes the form of a sale of assets)).
(b) Deal Bonus.
If Employee continues to be employed by Employer until Employer's plan
becomes effective and a Sale or Alliance Transaction closes, Employer shall pay
Employee on the later of (i) the effective date of such plan or (ii) the closing
of a Sale Transaction and/or Alliance Transaction, a deal bonus (the "Deal
Bonus") equal to .15% of the Aggregate Consideration received in an Alliance
Transaction or Sale Transaction or in the event of a stand-alone plan, the
enterprise value of reorganized Employer as determined by Salomon Brothers, Inc.
-4-
<PAGE>
7. Confidentiality, Proprietary Information and Trade Secrets.
----------------------------------------------------------
(a) During the term of this Agreement and at all times thereafter,
Employee shall not use for his personal benefit, or disclose, communicate or
divulge to, or use for the direct or indirect benefit of any person, firm,
association or company other than Employer, any material referred to in
subsections (c), (i) or (j) of this Section 7, or any proprietary information
regarding the business methods, business policies, procedures, techniques,
research or development projects or results, trade secrets or other knowledge or
processes of, or developed by, Employer or any names and addresses of customers
or clients or any data on or relating to past, present or prospective customers
or clients or any other confidential information relating to or dealing with the
business operations or activities of Employer, made known to Employee or learned
or acquired by Employee while employed by Employer.
(b) During the term of this Agreement and for a period of two (2) years
after the termination of this Agreement, Employee shall not, directly or
indirectly, in any geographic area served by Employer or its affiliates induce
or attempt to influence any employee of Employer or its affiliates to terminate
his or her employment with Employer or its affiliates or to hire any such
employee of Employer or its affiliates.
(c) All information, inventions, original works of authorship,
developments, trade secrets and discoveries, including improvements, conceived,
developed, made, reduced to practice or completed by Employee, either alone or
with others, during his employment by Employer at any time within or outside of
normal working hours (the "Work Product"), shall be and remain the sole property
of Employer.
(d) Employee shall:
(i) during the term of this Agreement, disclose promptly to an
authorized representative of Employer all Work Product and all
information in Employee's possession as to possible applications
thereof to industry and other uses thereof or therefor;
(ii) during the term of this Agreement, not file any patent or
copyright applications relating to any Work Product, except with the
prior written consent of an authorized representative of Employer;
(iii) assist Employer at any time during his employment by
Employer, or after termination of his employment by Employer with
reimbursement by Employer for all reasonable expenses incurred by him,
in the preparation, execution, and delivery of any assignments,
disclosures, patent applications, or other papers on any Work Product,
-5-
<PAGE>
and perform such other acts as Employer deems necessary, in any
jurisdictions, to assign to Employer or its designees such Work
Product, patent and copyright applications, whether or not active, and
patents and copyrights relating thereto; and
(iv) keep and maintain adequate and current written records of
all Work Product during the term of his employment with Employer. The
records will be in the form of notes, sketches, drawings and any other
format that may be specified by Employer. Such records will be
available to and remain the sole property of Employer at all times;
provided, however, that any invention as to which the Employee can prove the
following is exempt from this Section:
(i) it was developed entirely on Employee's own time; and
---
(ii) no equipment, supplies, facilities, trade secretes or
proprietary information of Employer was used in its development; and
---
(iii) it either (A) does not relate, at the time the invention
was conceived or reduced to practice, to Employer's business or to
Employer's actual or demonstrably anticipated research and
development, or (B) does not result from any work performed by
--
Employee for Employer.
(e) All information, inventions, original works of authorship,
developments, trade secrets and discoveries developed, made or conceived prior
to Employee's employment by Employer that as of the date of commencement of such
employment Employee owned or in which Employee had an interest or right, other
than those patented prior to such employment, are identified on Exhibit A
---------
attached hereto. Any such information, inventions, original works of
authorship, developments, trade secrets and discoveries not so patented or
listed on Exhibit A shall be deemed to be Work Product. Subject to the
---------
foregoing, Employee shall not be requested or required to assign or disclose any
information, inventions, original works of authorship, developments, trade
secrets and discoveries developed, made or conceived prior to Employee's
employment with Employer.
(f) Employee acknowledges and agrees that the provisions and restrictions
contained in this Section (the "Restrictions"), in view of the nature of the
business in which Employer is engaged, are reasonable and necessary in order to
protect the legitimate business interests of Employer, and that any violation
thereof would result in irreparable harm to Employer, and Employee therefore
further acknowledges and agrees that, in the event Employee violates, or
threatens to violate, any of such Restrictions, Employer shall be entitled to
obtain from any court of competent jurisdiction, without the posting of any bond
or other security, preliminary
-6-
<PAGE>
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 Employer may be entitled.
(g) If any Restriction, or any part thereof, is determined in any
judicial or administrative proceeding to be invalid or unenforceable, the
remainder of the Restrictions shall not thereby be affected and shall be given
full effect, without regard to the invalid provisions.
(h) If Employee violates any of the Restrictions, the restrictive
period shall not run in favor of Employee from the time of the commencement of
any such violation until such time as such violation shall be cured by Employee
to the satisfaction of Employer.
(i) It is recognized that Employee will have access to certain
confidential information of Employer and its affiliates, and that such
information constitutes valuable, special and unique property of Employer and
its affiliates. Employee shall not at any time disclose any such confidential
information to any party for any reason or purpose except as may be made in the
normal course of business of Employer and for its benefit.
(j) All advertising, sales, and other materials or articles of
incorporation, including, without limitation, data processing reports, customer
sales analyses, invoices, or any other materials or data of any kind furnished
to Employee by Employer or developed by Employee on behalf of Employer or at
Employer's direction or for Employer's use or otherwise in connection with
Employee's employment hereunder, are and shall remain the sole, exclusive and
confidential property of Employer. In the event that Employer requests the
return of such materials at any time during, upon or after the termination of
Employee's employment, Employee shall immediately deliver the same, and any and
all copies thereof, to Employer.
9. Waivers.
-------
Neither the failure nor any delay on the part of either party hereto to
exercise any right, remedy, power or privilege (collectively, "Right") under
this Agreement shall operate as a waiver, abandonment or release thereof, nor
shall any single or partial exercise of any Right preclude any other or further
exercise of the same or of any other Right, nor shall any waiver of any Right
with respect to any occurrence be construed as a waiver of such Right with
respect to any other occurrence.
-7-
<PAGE>
10. Severability.
------------
If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect or impair
the validity or enforceability of the remaining provisions of this Agreement,
which provisions shall remain in full force and effect, and the parties hereto
shall continue to be bound thereby.
11. Entire Agreement.
----------------
This Agreement contains the entire agreement between the parties
relating to the subject matter hereof and supersedes all previous agreements and
understandings between the parties, whether written or oral, with respect to the
subject matter hereof. This Agreement shall not be modified, altered or amended
except by a writing executed by both parties. Employee acknowledges and agrees
that no such agreement will be effective unless it is approved by formal
resolution of the Board of Directors of Employer.
12. Legal Fees and Expenses.
-----------------------
The prevailing party in any legal action relating to this Agreement
shall be entitled to recover its or his legal fees and expenses, in addition to
any other remedies it or he may have.
13. Governing Law.
-------------
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed in such State without giving effect to the principles of
conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year above first written.
SPECTRADYNE, INC.
----------------------------------------
By:
Its:
----------------------------------------
Richard M. Gozia
-8-
<PAGE>
EXHIBIT 10.33
AMENDMENT NO. 1 TO
RESTATED EMPLOYMENT AGREEMENT
This Amendment No. 1 (the "Amendment") to Restated Employment Agreement is
entered into as of the ____ day of August, 1995, between SpectraVision, a
Delaware corporation, having its principal place of business at 1501 North Plano
Road, Richardson, Texas ("Employer"), Spectradyne, Inc., a Texas corporation,
having its principal place of business at 1501 North Plano Road, Richardson,
Texas, and Elaine Parrish, an individual and a resident of the state of Texas,
with an address at 17011 Village Lane, Dallas, Texas 75248 ("Employee").
RECITALS
1. Employer and Employee entered into a Restated Employment Agreement
dated as of December __, 1994.
2. Employer filed a voluntary Chapter 11 petition under Title 11 of the
United States Code on June 8, 1995. Employer filed a motion to assume the
Restated Employment Agreement on June 21, 1995.
3. To improve the likelihood that the Bankruptcy Court would approve
assumption of the Restated Employment Agreement, Employer and Employee have
agreed to amend the Agreement.
In consideration of the mutual promises and covenants hereinafter
contained, it is agreed as follows:
AGREEMENT:
1. Paragraph 3(d) is amended by adding the following sentence:
For the year ending December 31, 1995, the amount of the Annual
Incentive Bonus shall be 50% of Employee's then Annual Base Salary
payable on the earlier to occur of (i) the effective date of a
confirmed plan of reorganization for Employer or Spectradyne, Inc., and
(ii) December 31, 1995 or January 1, 1996 at Employee's option.
Amendment to Parrish Employment Agreement
- -----------------------------------------
1
<PAGE>
2. The Agreement is amended by deleting paragraph 5 and substituting the
following in its place:
5. Breach by Employer
(a) Employee may terminate her employment with Employer upon a
material breach by Employer of this Agreement which remains uncured
for thirty (30) days after written notice thereof by Employee to
Employer. Employer agrees that the following events, among others,
constitute a material breach by Employer of this Agreement: (i)
Employee is assigned duties inconsistent with her position, duties,
responsibility and status with Employer as set forth in this
Agreement (other than a promotion or advancement); (ii) there is a
change in Employee's reporting responsibilities (other than a
promotion or advancement); (iii) Employer materially reduces the
Employee benefits, taken as a whole, available to Employee,
including the benefits described in Section 4(a) hereof; (iv)
Employee is relocated to any place other than Dallas County, Texas,
except for required travel by Employee on Employer's business;
provided however, other breaches by Employer of this Agreement may
-------- -------
also constitute a material breach.
(b) Upon termination of employment by Employee under Section 5(a),
Employer shall pay Employee as liquidated damages, and not as a
penalty, in a lump sum or on an annuity basis, at Employee's sole
option, an amount equal to 150% of Employee's Annual Base Salary
for one year. It is acknowledged and agreed to by the parties
hereto that because actual damages would be difficult to ascertain
in the event that Employer materially breaches this Agreement, the
amount of liquidated damages provided for herein is reasonable and
appropriate to remedy any such breach and to compensate Employee
for any damages incurred by her hereunder. If the amount due under
this Section 5(b) is paid in a lump sum, the amount paid to
Employee shall be discounted to a present value at a discount rate
equal to the prime rate of Texas Commerce Bank on the date of
payment plus 1%.
(c) Upon termination of employment by Employee under Section 5(a),
Employee shall have no obligation to seek other employment or
otherwise to mitigate damages. If Employee obtains other employment
after her termination of employment
Amendment to Parrish Employment Agreement
- -----------------------------------------
2
<PAGE>
with the Company but during the Employment Period (as if Employee
had not terminated her employment), the amount due her under this
Section 5 shall be reduced by the excess (the "Excess"), if any, of
(i) her annual base salary with her new employer, plus any
additional amounts the payment of which has been guaranteed by her
new employer, during the remainder of the Employment Period after
her termination of employment over (ii) the Annual Base Salary for
the remainder of the Employment Period. Employee shall pay any
Excess on the last day of each month during the remainder of the
Employment Period in an amount equal to the Excess for that month.
Except as provided in this Section 5(c), Employer shall not reduce
any payment to Employee under this Agreement by any compensation
received by Employee from other employment.
(d) Employee's receipt of amounts under this Section 5 shall not
effect or constitute a waiver of her rights to receive unpaid
amounts accrued under Section 3 of this Agreement to the date of
termination or her right to any benefits of reimbursement under
Section 4 or Section 13 of the Agreement.
3. The Agreement is amended by adding a new paragraph 17:
17. Assignment to Spectradyne. Employee acknowledges that the services
-------------------------
it provides under the terms of the Agreement are for the benefit of
Employer and its subsidiaries, including Spectradyne, and Employee
consents to the assignment of this Agreement to Spectradyne at any
time.exi
Amendment to Parrish Employment Agreement
- -----------------------------------------
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year above first written.
SPECTRAVISION, INC.
----------------------------------------
By: Gary Weik
Chief Executive Officer
SPECTRADYNE, INC.
----------------------------------------
By: Gary Weik
Chief Executive Officer
----------------------------------------
Elaine Parrish
Amendment to Parrish Employment Agreement
- -----------------------------------------
4
<PAGE>
EXHIBIT 10.34
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 (the "Amendment") to Employment Agreement is entered
into as of the ____ day of August, 1995, between SpectraVision, a Delaware
corporation, having its principal place of business at 1501 North Plano Road,
Richardson, Texas ("Employer"), Spectradyne, Inc., a Texas corporation, having
its principal place of business at 1501 North Plano Road, Richardson, Texas, and
Howard D. Gardner, an individual and a resident of the state of Texas, with an
address at 4906 Eversham Court, Colleyville, Texas 76034 ("Employee").
RECITALS
1. Employer and Employee entered into an Employment Agreement dated as of
January 1, 1995.
2. Employer filed a voluntary Chapter 11 petition under Title 11 of the
United States Code on June 8, 1995. Employer filed a motion to assume the
Restated Employment Agreement on June 21, 1995.
3. To improve the likelihood that the Bankruptcy Court would approve
assumption of the Restated Employment Agreement, Employer and Employee have
agreed to amend the Agreement.
In consideration of the mutual promises and covenants hereinafter
contained, it is agreed as follows:
AGREEMENT:
1. Paragraph 3(d) is amended by adding the following sentence:
For the year ending December 31, 1995, the amount of the Annual
Incentive Bonus shall be 50% of Employee's then Annual Base Salary
payable on the earlier to occur of (i) the effective date of a
confirmed plan of reorganization for Employer or Spectradyne, Inc., and
(ii) December 31, 1995 or January 1, 1996 at Employee's option.
Amendment to Gardner Employment Agreement
- -----------------------------------------
1
<PAGE>
2. The Agreement is amended by deleting paragraph 5 and substituting the
following in its place:
5. Breach by Employer
(a) Employee may terminate his employment with Employer upon a
material breach by Employer of this Agreement which remains uncured
for thirty (30) days after written notice thereof by Employee to
Employer. Employer agrees that the following events, among others,
constitute a material breach by Employer of this Agreement: (i)
Employee is assigned duties inconsistent with his position, duties,
responsibility and status with Employer as set forth in this
Agreement (other than a promotion or advancement); (ii) there is a
change in Employee's reporting responsibilities (other than a
promotion or advancement); (iii) Employer materially reduces the
Employee benefits, taken as a whole, available to Employee,
including the benefits described in Section 4(a) hereof; (iv)
Employee is relocated to any place other than Dallas County, Texas,
except for required travel by Employee on Employer's business;
provided however, other breaches by Employer of this
-------- -------
Agreement may also constitute a material breach.
(b) Upon termination of employment by Employee under Section 5(a),
Employer shall pay Employee as liquidated damages, and not as a
penalty, in a lump sum or on an annuity basis, at Employee's sole
option, an amount equal to 150% of Employee's Annual Base Salary
for one year. It is acknowledged and agreed to by the parties
hereto that because actual damages would be difficult to ascertain
in the event that Employer materially breaches this Agreement, the
amount of liquidated damages provided for herein is reasonable and
appropriate to remedy any such breach and to compensate Employee
for any damages incurred by him hereunder. If the amount due under
this Section 5(b) is paid in a lump sum, the amount paid to
Employee shall be discounted to a present value at a discount rate
equal to the prime rate of Texas Commerce Bank on the date of
payment plus 1%.
(c) Upon termination of employment by Employee under Section 5(a),
Employee shall have no obligation to seek other employment or
otherwise to mitigate damages. If Employee obtains other employment
after his termination of employment
Amendment to Gardner Employment Agreement
- -----------------------------------------
2
<PAGE>
with the Company but during the Employment Period (as if Employee
had not terminated his employment), the amount due him under this
Section 5 shall be reduced by the excess (the "Excess"), if any, of
(i) his annual base salary with his new employer, plus any
additional amounts the payment of which has been guaranteed by his
new employer, during the remainder of the Employment Period after
his termination of employment over (ii) the Annual Base Salary for
the remainder of the Employment Period. Employee shall pay any
Excess on the last day of each month during the remainder of the
Employment Period in an amount equal to the Excess for that month.
Except as provided in this Section 5(c), Employer shall not reduce
any payment to Employee under this Agreement by any compensation
received by Employee from other employment.
(d) Employee's receipt of amounts under this Section 5 shall not
effect or constitute a waiver of his rights to receive unpaid
amounts accrued under Section 3 of this Agreement to the date of
termination or his right to any benefits of reimbursement under
Section 4 or Section 13 of the Agreement.
3. The Agreement is amended by adding a new paragraph 17:
17. Assignment to Spectradyne. Employee acknowledges that the services
-------------------------
it provides under the terms of the Agreement are for the benefit of
Employer and its subsidiaries, including Spectradyne, and Employee
consents to the assignment of this Agreement to Spectradyne at any
time.
Amendment to Gardner Employment Agreement
- -----------------------------------------
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year above first written.
SPECTRAVISION, INC.
----------------------------------------
By: Gary Weik
Chief Executive Officer
SPECTRAVISION, INC.
----------------------------------------
By: Gary Weik
Chief Executive Officer
----------------------------------------
Howard D. Gardner
Amendment to Gardner Employment Agreement
- -----------------------------------------
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SPECTRAVISION, INC. 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,438
<SECURITIES> 0
<RECEIVABLES> 16,428
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,952
<PP&E> 274,177
<DEPRECIATION> 161,525
<TOTAL-ASSETS> 205,622
<CURRENT-LIABILITIES> 24,976
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> (447,632)
<TOTAL-LIABILITY-AND-EQUITY> 205,622
<SALES> 0
<TOTAL-REVENUES> 123,986
<CGS> 52,813
<TOTAL-COSTS> 52,813
<OTHER-EXPENSES> 110,426
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,177
<INCOME-PRETAX> 0
<INCOME-TAX> (840)
<INCOME-CONTINUING> (74,485)
<DISCONTINUED> 0
<EXTRAORDINARY> 915
<CHANGES> 0
<NET-INCOME> (74,560)
<EPS-PRIMARY> (3.11)
<EPS-DILUTED> (3.11)
</TABLE>
