<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1994 COMMISSION FILE NUMBER 1-5706
- - --------------------------------------------------------------------------------
THE ACTAVA GROUP INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-0971455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4900 GEORGIA-PACIFIC CENTER, ATLANTA, GEORGIA 30303
(Address of principal executive office) (ZIP Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 404/658-9000
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report
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 AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES 'X' NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK AS OF AUGUST 8, 1994 -- 18,335,186 SHARES OF COMMON STOCK.
- - --------------------------------------------------------------------------------
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash................................................................ $ 14,015 $ 18,770
Short-term investments.............................................. 31,922 29,635
Receivables (less allowances for doubtful accounts of $8,768 in 1994
and $10,227 in 1993)............................................. 171,972 276,018
Current portion of notes receivable................................. 5,300 --
Inventories......................................................... 67,051 108,439
Prepaid expenses.................................................... 4,710 43,809
Future income tax benefits.......................................... 25,343 32,434
----------- ------------
Total current assets........................................ 320,313 509,105
Investment in Qualex.................................................. 142,832 --
Property, plant and equipment......................................... 113,455 474,235
Less allowances for depreciation.................................... (44,351) (198,881)
----------- ------------
69,104 275,354
Notes receivable from Triton Group Ltd................................ 19,226 26,726
Other assets.......................................................... 5,610 50,702
Long-term investments................................................. 15,473 26,611
Intangibles........................................................... 19,048 386,626
----------- ------------
Total assets................................................ $ 591,606 $1,275,124
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable, accrued expenses and other current liabilities.... $ 120,121 $ 263,883
Notes payable....................................................... 100,447 135,114
Current portion of long-term debt................................... 4,604 6,665
----------- ------------
Total current liabilities................................... 225,172 405,662
Deferred income taxes................................................. 33,621 56,715
Long-term debt........................................................ 2,107 220,887
Subordinated debt..................................................... 187,787 190,551
Minority interest in photofinishing subsidiary........................ -- 205,395
Redeemable common stock............................................... 12,000 12,000
Stockholders' equity
Common stock (22,767,744 shares in 1994 and 1993)................... 22,768 22,768
Additional capital.................................................. 37,153 46,361
Retained earnings................................................... 178,876 236,334
Less treasury stock -- at cost (4,432,558 shares in 1994 and
5,132,558 in 1993)............................................... (107,878) (121,549)
----------- ------------
130,919 183,914
----------- ------------
Total liabilities and stockholders' equity.................. $ 591,606 $1,275,124
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE> 3
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1994 1993(A) 1994 1993(A)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales..................................... $123,943 $112,753 $279,214 $212,454
Operating costs and expenses
Cost of products sold....................... 105,417 91,543 233,488 170,474
Selling, general and administrative
expenses................................. 21,493 18,567 48,930 37,594
Provision for doubtful accounts............. 728 1,449 978 1,721
-------- -------- -------- --------
Operating profit (loss).................. (3,695) 1,194 (4,182) 2,665
Interest (expense)............................ (7,463) (6,443) (14,822) (12,568)
Other (expense) -- net........................ 797 1,887 741 3,755
-------- -------- -------- --------
Loss before income taxes, discontinued
operations and cumulative effect of
change in accounting principle......... (10,361) (3,362) (18,263) (6,148)
Income taxes (benefit)........................ (188) 306 -- (1,139)
-------- -------- -------- --------
Loss from continuing operations.......... (10,173) (3,668) (18,263) (5,009)
Discontinued operations
Income (loss) from operations............... 1,748 3,711 (2,835) 1,852
(Loss) on disposal of business.............. (37,858) -- (37,858) --
-------- -------- -------- --------
Income (loss) from discontinued
operations............................... (36,110) 3,711 (40,693) 1,852
(Loss) before cumulative effect of change
in accounting principle................ (46,283) 43 (58,956) (3,157)
Cumulative effect of change in accounting
principle................................... -- -- -- (4,404)
-------- -------- -------- --------
Net income (loss)........................ $(46,283) $ 43 $(58,956) $ (7,561)
======== ======== ======== ========
Earnings (loss) per share of common stock
Continuing operations....................... $ (.56) $ (.22) $ (1.02) $ (.30)
Discontinued operations..................... (1.98) .22 (2.27) .11
Cumulative effect of change in accounting
principle................................ -- -- -- (.26)
-------- -------- -------- --------
Primary and fully diluted................ $ (2.54) $ -- $ (3.29) $ (.45)
======== ======== ======== ========
Cash dividends per common share.......... $ -- $ .09 $ -- $ .18
======== ======== ======== ========
Average common and common equivalent
shares................................. 18,197 16,820 17,918 16,683
======== ======== ======== ========
</TABLE>
- - ---------------
(a) Restated for discontinued operations.
See Notes to Consolidated Financial Statements.
2
<PAGE> 4
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN
CASH
------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------
1994 1993(A)
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations................................... $ (18,263) $ (5,009)
Cumulative effect of change in accounting principle............... -- 4,404
--------- --------
Loss before cumulative effect of change in accounting principle... (18,263) (605)
Items providing cash from operations.............................. 46,157 3,391
--------- --------
Net cash provided by continuing operations..................... 27,894 2,786
--------- --------
Income (loss) from discontinued operations.......................... (40,693) 1,852
Items providing cash from discontinued operations................. 29,363 41,886
--------- --------
Net cash provided (used) by discontinued operations............ (11,330) 43,738
--------- --------
Net cash provided by operating activities...................... 16,564 46,524
--------- --------
Cash flows from investing activities:
Purchases of investments (maturities over 90 days)................ (52,584) (11,633)
Sales of investments (maturities over 90 days).................... 51,232 9,543
Net sales of other investments (maturities less than 90 days)..... (935) 19,435
Payments for property, plant & equipment.......................... (19,552) (31,355)
Proceeds from disposals of property, plant & equipment............ 4,362 2,041
Collections on notes receivable................................... 483 927
Payments for purchases of businesses.............................. -- (21,243)
Payments from Triton Group Ltd.................................... 2,500 --
Payments for other intangibles.................................... -- --
Other investing activities -- net................................. (3,750) (7,217)
--------- --------
Net cash (used) by investing activities........................ (18,244) (39,502)
Cash flows from financing activities:
Net borrowings under short-term bank agreements................... (27,617) 13,895
Borrowings under other long-term debt agreements.................. 228,000 10,611
Payments on long-term debt agreements............................. (194,470) (21,376)
Payments of subordinated debt..................................... (3,000) (1,536)
Proceeds from issuance of Actava common stock..................... 4,462 --
Cash dividends paid by Qualex to minority interest................ (10,450) (7,714)
Cash dividends paid by The Actava Group........................... -- (3,076)
--------- --------
Net cash (used) by financing activities........................ (3,075) (9,196)
--------- --------
Decrease in cash.......................................... (4,755) (2,174)
Cash at beginning of year........................................... 18,770 20,792
--------- --------
Cash at June 30........................................... $ 14,015 $ 18,618
========= ========
</TABLE>
- - ---------------
(a) Restated for discontinued operations.
See Notes to Consolidated Financial Statements.
3
<PAGE> 5
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, such
financial statements reflect all adjustments necessary for a fair statement of
the results of operations and financial position for the interim periods
presented. All such adjustments are of a normal recurring nature. Operating
results for the six months ended June 30, 1994 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1994.
CHANGES IN ACCOUNTING PRINCIPLES
Change in Method of Accounting for Income Taxes
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes". Under Statement 109, the liability method is used
in accounting for income taxes: deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of Statement 109, income tax expense was determined using the
deferred method: deferred tax expense was based on items of income and expense
that were reported in different years in the financial statements and tax
returns and were measured at the tax rate in effect in the year the difference
originated.
As permitted by Statement 109, the Company has elected not to restate the
financial statements of any prior years. The presentation of some items, such as
depreciation, has changed; however, the cumulative effect of the change in
accounting principle on pre-tax income from continuing operations, net income,
and the effective tax rate was not material.
Change in Method of Accounting for Postretirement Benefits
Effective January 1, 1993, the Company adopted FASB Statement No. 106,
"Accounting for Postretirement Benefits Other Than Pensions". The Company and
its subsidiaries provide group medical plans and life insurance coverage for
certain employees subsequent to retirement. The plans have been funded on a
pay-as-you-go (cash) basis. The plans are contributory, with retiree
contributions adjusted annually, and contain other cost-sharing features such as
deductibles, coinsurance and life-time maximums. The plan accounting anticipates
future cost-sharing changes that are consistent with the Company's expressed
intent to increase the retiree contribution rate annually for the expected
medical trend rate for that year. The coordination of benefits with medicare
uses a supplemental, or exclusion of benefits, approach.
As permitted by Statement 106, the Company elected to immediately recognize
the effect in the statement of operations for the first quarter of 1993 as a
$4,404,000 charge to net income as the cumulative effect of a change in
accounting principle. The annual net periodic postretirement benefit expense for
1993 decreased by $38,000 as a result of adopting the new rules. The annual net
periodic postretirement benefit expense for 1994 will be $240,000. The assumed
health care cost trend rate used to measure the expected cost of benefits by the
plan for 1993 was 14%, with 1% decrements to 6% in 2001 and years thereafter. A
7% discount rate per year, compounded annually, was assumed to measure the
accumulated postretirement benefit obligation as of December 31, 1993. A 1%
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1993, by 16%
and the net periodic postretirement benefit cost by 18%.
4
<PAGE> 6
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Change in Method of Accounting for Postemployment Benefits
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits." The Company and its subsidiaries provide benefits to former or
inactive employees after employment but before retirement such as severance
benefits, disability-related benefits (including workers' compensation), and
continuation of health care benefits and life insurance coverage. The cumulative
effect as of January 1, 1994, of this change in accounting was not material.
Prior to January 1, 1994, the Company recognized the cost of providing some
postemployment benefits on a cash basis while substantially all other
postemployment benefits were accounted for in the Company's self-insurance
program. Under the new method of accounting, the Company will accrue benefits
when it becomes probable that such benefits will be paid and when sufficient
information exists to make reasonable estimates of the amounts to be paid. As
required by the Statement, prior year financial statements have not been
restated to reflect the change in accounting method.
Change in Method of Accounting for Certain Investments in Debt and Equity
Securities
The Company and its subsidiaries invest in various debt and equity
securities. The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", which requires certain debt securities to be
reported at amortized cost, certain debt and equity securities to be reported at
market with current recognition of unrealized gains and losses, and certain debt
and equity securities to be reported at market with unrealized gains and losses
as a separate component of shareholders' equity. The Company adopted the
provisions of the new standard for investments held as of or acquired after
January 1, 1994. In accordance with the Statement, prior period financial
statements have not been restated to reflect the change in accounting principle.
The cumulative effect as of January 1, 1994, of adopting Statement 115 was not
material.
REDEEMABLE COMMON STOCK
Redeemable common stock represents 1,090,909 shares of common stock which
were issued in the acquisition of substantially all the assets and liabilities
of Diversified Products Corporation. These shares are subject to a right of
redemption at the option of the holder with an exercise date of February 17,
1995.
SALE OF SPORTS GROUP
On July 20, 1994 the Company entered into a definitive agreement with
Roadmaster Industries, Inc. (Roadmaster) to combine the Company's four sports
companies with Roadmaster in exchange for common stock of Roadmaster which would
represent an approximate 39% ownership interest in Roadmaster.
QUALEX INC. -- DISCONTINUED OPERATIONS
Qualex, Inc. is a photofinishing business formed in March 1988 by the
combination of Actava's photofinishing operations with the domestic
photofinishing operations of Eastman Kodak Company. Prior to June 30, 1994,
Actava owned 51% of the voting stock of Qualex, was entitled to and elected a
majority of the members of the Board of Directors of Qualex, and had the ability
through its control of the Board of Directors to declare dividends, remove the
executive officers of Qualex and otherwise direct the management and policies of
Qualex, except for policies relating to certain designated actions requiring the
consent of at least one member of the Board of Directors of Qualex designated by
Kodak. Because of these rights, the Company believes that it has effective
unilateral control of Qualex which was not temporary during the period from 1988
until the second quarter of 1994. As a result, the Company consolidated the
results of operations of Qualex with the results of operations of the Company
for periods ending prior to June 30, 1994.
Upon the formation of Qualex in 1988, the Company and Kodak entered into a
Shareholders Agreement (the "Qualex Shareholders Agreement") that provided,
among other things, for a reduction in the Company's voting control of Qualex
from 51% to 50% and for changes in the composition of the Board of Directors of
Qualex in the event of a "change of control" of the Company. The Qualex
Shareholders Agreement defined
5
<PAGE> 7
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the term "change in control" to include a "transaction or occurrence the effect
of which is to give a person or group of affiliated persons or entities the
power to direct the management and policies" of the Company. In 1991, Charles R.
Scott was elected President and Chief Executive Officer of the Company. At the
time of his election, Mr. Scott was also serving as Chairman and Chief Executive
Officer of a company that owned approximately 25% of the Company's voting stock
and was the Company's single largest stockholder. Because Mr. Scott was serving
at the same time as the chief executive officer of both the Company and the
Company's single largest stockholder, the Company and Kodak agreed that a
"change in control" of the Company had occurred for purposes of the Qualex
Shareholders Agreement. Despite this "change in control" of the Company, Kodak
agreed that the Company would continue to own 51% of the voting control of
Qualex and to elect a majority of the directors of Qualex. The Qualex
Shareholders Agreement, however, was amended to provide that Kodak had the right
to change the Company's control of Qualex on March 1, 1992 or on any subsequent
March 1. During the period from 1991 until the second quarter of 1994, the
Company did not believe that Kodak would exercise the right to change the
Company's control of Qualex, and Kodak, in fact, did not exercise this right on
March 1, 1992, 1993 or 1994.
Mr. Phillips was elected as President and Chief Executive Officer of the
Company on April 19, 1994. The Company did not believe that the election of Mr.
Phillips constituted a "change in control" of the Company as defined in the
Qualex Shareholders Agreement. This belief was based in part on the fact that
(i) Mr. Phillips beneficially owned less than 4% of the Company's voting stock
at the time of his election, (ii) Delaware corporate law, under which the
Company is governed, provides that the business and affairs of a corporation
shall be managed by and under the direction of the board of directors -- not the
president, and (iii) eight of the nine members of the Board of Directors of the
Company after the election of Mr. Phillips were serving as directors before the
election of Mr. Phillips. Kodak informed the Company that it believed that the
election of Mr. Phillips constituted "change in control" of the Company under
the Qualex Shareholders Agreement and requested that changes be made in the
Company's voting control of Qualex and in the composition of the Board of
Directors of Qualex. The disagreement between the Company and Kodak as to
whether or not a "change in control" had occurred was resolved on June 8, 1994
when the Company agreed that it would not contest Kodak's interpretation of the
Qualex Shareholders Agreement. As a result, on June 30, 1994, the Company's
ownership of the voting stock of Qualex was reduced to 50% and the Company and
Kodak each became entitled to elect an equal number of members of the Board of
Directors of Qualex. Because of these changes affecting the Company's control of
Qualex, the Company discontinued its practice of consolidating the accounts of
Qualex and began accounting for its ownership in Qualex under the equity method
effective as of June 30, 1994.
FINANCIAL POSITION OF QUALEX
(000'S)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
<S> <C> <C>
Cash and short-term investments.............................. $ -- $ 4,060
Net accounts receivable...................................... 82,272 69,015
Inventories.................................................. 28,078 29,381
Other assets................................................. 30,745 38,153
-------- ------------
Total current assets............................... 141,095 140,609
Net property, plant and equipment............................ 198,642 202,150
Other assets................................................. 40,632 30,413
Long-term investments........................................ 26,868 26,611
Intangibles.................................................. 367,188 371,106
-------- ------------
Total assets....................................... $774,425 $770,889
======== ==========
</TABLE>
6
<PAGE> 8
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
<S> <C> <C>
Current liabilities.......................................... $119,928 $130,845
Deferred income taxes........................................ 22,402 22,446
Long-term debt............................................... 260,167 217,987
Stockholders' equity......................................... 371,928 399,611
-------- ------------
Total liabilities and stockholders' equity......... $774,425 $770,889
======== ==========
</TABLE>
In June 1994, the Company decided to sell its interest in Qualex and
engaged in negotiations with Kodak regarding the sale of such interest.
Accordingly, the results of Qualex for all years presented are reported in the
accompanying statements of operations under discontinued operations. In the
second quarter of 1994, the Company provided for an anticipated loss of
$37,858,000 on the sale of its interest in Qualex and the related covenant not
to compete and release. No income tax expenses or benefits were recognized due
to the Company's net operating loss carryforwards and recognition of tax
benefits in prior periods.
On August 12, 1994, Kodak purchased all of the Company's interest in Qualex
and obtained a covenant not to compete and related releases from the Company in
exchange for $50,000,000 in cash and a promissory note in the principal amount
of $100,000,000. The promissory note is payable in installments of $50,000,000
each, without interest, on February 13, 1995 and August 11, 1995. Because the
principal amount due under the note does not bear interest, the Company
discounted the value of the note to $92,832,000 and will record imputed interest
income of $7,168,000 over the term of the note. All amounts received in exchange
for the covenant not to compete and release were included in the computation of
the anticipated loss on sale of Qualex.
Effective with the second quarter of 1994, the results of operations of
Qualex have been reclassified from income from continuing operations to income
from discontinued operations and are as follows:
RESULTS OF OPERATIONS OF QUALEX
(000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................... $185,563 $200,508 $333,970 $364,694
Operating expenses...................... 179,742 180,991 342,134 349,151
-------- -------- -------- --------
Operating profit (loss)................. 5,821 19,517 (8,164) 15,543
Interest (expense)...................... (4,633) (4,568) (8,582) (8,572)
Other income (expense).................. (38) 36 (439) (99)
-------- -------- -------- --------
Income before tax....................... 1,150 14,985 (17,185) 6,872
Income taxes (benefit).................. (2,346) 7,562 (11,514) 3,168
-------- -------- -------- --------
Net income (loss) from discontinued
operations before minority interest... 3,496 7,423 (5,671) 3,704
Minority interest....................... (1,748) (3,712) 2,836 (1,852)
-------- -------- -------- --------
Net income (loss) from discontinued
operations............................ $ 1,748 $ 3,711 $ (2,835) $ 1,852
======== ======== ======== ========
</TABLE>
ACQUISITIONS
On June 8, 1993, the Company acquired substantially all the assets of
Diversified Products Corporation ("DP") for a net purchase price consisting of
$11,629,500, the issuance of 1,090,909 shares of the Company's Common Stock
valued at $12,000,000, and the assumption or payment of certain liabilities
including trade payables and a revolving credit facility. The Company also
entered into an agreement which obligated the
7
<PAGE> 9
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company under certain conditions, all of which have been satisfied, to
repurchase the shares of Common Stock issued in the acquisition for $12,000,000
at the option of the holder of such shares. SEE "REDEEMABLE COMMON STOCK" in
Notes to Consolidated Financial Statements. The repurchase of such shares will
not increase the Company's investment in DP since the cost of DP will be
increased by the amount of the cash payment and simultaneously reduced by the
same amount due to a corresponding adjustment to the respective redeemable
common stock. This transaction was accounted for using the purchase method of
accounting; accordingly, the purchased assets and liabilities have been recorded
at their estimated fair value at the date of the acquisition. The purchase price
resulted in an excess of costs over net assets acquired of approximately
$11,417,000. The results of operations of the acquired business have been
included in the consolidated financial statements since the date of acquisition.
INVENTORIES
Inventory balances are summarized as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
<S> <C> <C>
Finished goods and goods purchased for resale.................. $ 64,554 $ 82,559
Raw materials and supplies..................................... 23,141 46,018
-------- ------------
87,695 128,577
Reserve for LIFO cost valuation................................ (20,644) (20,138)
-------- ------------
$ 67,051 $108,439
======== ==========
</TABLE>
Work in process is not considered significant.
OTHER INCOME (EXPENSE)
Other income (expense) is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1994 1993 1994 1993
------- ------ ------- ------
<S> <C> <C> <C> <C>
Interest and investment income...................... $ 927 $1,440 $ 1,845 $3,762
Miscellaneous income................................ 1,010 1,177 1,764 2,060
Miscellaneous (expense)............................. (1,140) (730) (2,868) (2,067)
------- ------ ------- ------
$ 797 $1,887 $ 741 $3,755
======= ====== ======= ======
</TABLE>
Early payment interest credit expense results from cash payments received
by Snapper from distributors prior to receivable due dates which reduce accrued
interest and increase miscellaneous (expense). The early payment interest credit
expense was $947,000 and $637,000 for the three month periods ended June 30,
1994 and 1993, respectively, and $2,110,000 and $1,778,000 for the six month
periods ended June 30, 1994 and 1993, respectively.
INCOME TAXES
Income tax expense is based upon statutory tax rates and book income or
loss adjusted for permanent differences between book and taxable income or loss.
The Company's businesses may have an annual effective tax rate which is above or
below statutory rates depending upon the amount of earnings from any short-term
tax advantaged investments and other items. For the six month period ended June
30, 1994, the Company's
8
<PAGE> 10
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated effective tax rate has decreased as compared to the same prior
period because the Company is not able to recognize a tax benefit for its losses
due to limitations from prior period recognition.
During the year, the Company provides for income taxes using anticipated
effective annual tax rates for all Company operations. The rates are based on
expected operating results for the year, estimated permanent differences between
book and tax income, and estimated utilization of any net operating loss
carryovers.
Effective January 1, 1993, the Company changed its method of accounting for
income taxes as required by FASB Statement No. 109, "Accounting for Income
Taxes" (See "Changes in Accounting Principles -- Change in Method of Accounting
for Income Taxes"). The adoption of Statement No. 109 did not have a material
effect on net income and the Company's effective tax rate.
LITIGATION
In 1991, three lawsuits were filed against the Company, certain of the
Company's current and former directors and Intermark, Inc., which owned
approximately 26% of the Company's Common Stock. One complaint alleged, among
other things, a long-standing pattern and practice by the defendants of misusing
and abusing their power as directors and insiders of the Company by manipulating
the affairs of the Company to the detriment of the Company's past and present
stockholders. The complaint sought monetary damages from the director
defendants, injunctive relief against the Company, Intermark and its current
directors, and costs of suit and attorneys' fees. The other two complaints
alleged, among other things, that members of the Company's Board of Directors
contemplate either a sale, a merger, or other business combination involving
Intermark and the Company or one or more of its subsidiaries or affiliates. The
complaints sought costs of suit and attorneys' fees and preliminary and
permanent injunctive relief and other equitable remedies, ordering the director
defendants to carry out their fiduciary duties and to take all appropriate steps
to enhance the Company's value as a merger/acquisition candidate. These three
suits were consolidated on May 1, 1991. While these actions are in their
preliminary stages, management currently believes the actions will not
materially affect the results of operations, financial position or liquidity of
the Company.
On November 30, 1993, a lawsuit was filed by the Department of Justice
("DOJ") against American Seating Company ("American Seating"), a former
subsidiary of Actava, in the United States District Court for the Western
District of Michigan. The lawsuit is captioned United States v. American Seating
Co., Civil Action No. 1:93-CV-956. Pursuant to an asset purchase agreement
between Actava and Amseco Acquisition, Inc., dated July 5, 1987, Actava assumed
the obligation for certain liabilities incurred by American Seating arising out
of litigation or other disputes, involving events occurring on or before June
22, 1987. The DOJ alleges among other things that American Seating failed to
disclose certain information relating to its price discount practices that it
contends was required in an offer submitted by American Seating to the General
Services Administration for possible contracts for sales of systems furniture
and related services. The complaint seeks recovery of unspecified single and
treble damages, penalties, costs and prejudgment and post-judgment interest. The
parties have engaged in settlement discussions but have not agreed on a
disposition of the case. A trial, if necessary, has been scheduled for June
1995. The DOJ has asserted damages of approximately $3,500,000. If such damages
were awarded and then trebled, the total damages, excluding penalties, costs and
interest, could exceed $10,000,000. In addition, penalties, if assessed, could
range from several thousand dollars to several million dollars. As a result, the
lawsuit could have a material effect on the results of operations and financial
condition of the Company. Management, however, believes that American Seating
has meritorious defenses to the allegations made by the DOJ and does not expect
the Company to incur any material liability as a result of this suit.
Actava is a defendant in various other legal proceedings. However, the
Company is not aware of any action which, in the opinion of management, would
materially affect the financial position, results of operations or liquidity of
the Company.
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THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES AND COMMITMENTS
Actava, on behalf of its Snapper division, has an agreement with a
financial institution which makes available to dealers floor plan financing for
Snapper products. This agreement provides financing for dealer inventories and
accelerates cash flow to Snapper's distributors and to Snapper. Under the terms
of the agreement, a default in payment by one of the dealers on the program is
non-recourse to both the distributor and to Snapper. However, the distributor is
obligated to repurchase any equipment recovered from the dealer and Snapper is
obligated to repurchase the recovered equipment if the distributor defaults. At
December 31, 1993 and 1992, there was approximately $23,000,000 and $20,000,000,
respectively, outstanding under these floor plan financing arrangements. At June
30, 1994 and 1993, there was approximately $31,000,000 and $25,000,000,
respectively, outstanding under these floor plan financing arrangements.
Actava is contingently liable under various guarantees of debt totaling
approximately $5,600,000. The debt is primarily Industrial Revenue Bonds which
were issued by former subsidiaries to finance their manufacturing facilities and
equipment, and is secured by the facilities and equipment. In addition, upon the
sale of the subsidiaries, Actava received lending institution guarantees of bank
letters of credit to support Actava's contingent obligations. There are no
material defaults on the debt agreements.
Actava is contingently liable under various real estate leases of former
subsidiaries. The total future payments under these leases, including real
estate taxes, is estimated to be approximately $8,600,000. The leased properties
generally have financially sound subleases.
At June 30, 1994, approximately $5,000,000 of Actava's cash and short-term
investments were pledged to secure a Snapper credit line. At August 12, an
additional $12,000,000 was pledged to secure a letter of credit issued with
regard to the Company's redeemable stock.
DP handles and stores various materials in the normal course of business
that have been classified as hazardous by various federal, state and local
regulatory agencies. DP is continuing to conduct tests at its sites and will
perform any necessary cleanup where and to the extent legally required. At those
sites where tests have been completed, cleanup costs have been immaterial. The
Company may also be liable for remediation of environmental damage relating to
businesses previously sold in excess of amounts accrued. At the sites currently
being tested, it is management's opinion that cleanup costs will not have a
material effect on Actava's financial position or results of operations.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Actava currently provides high-quality, brand-name consumer products
through distribution channels to retail markets across the United States. As a
result of the sale of its interest in Qualex, Actava presently operates in two
distinct businesses; lawn and garden equipment and sporting goods. Actava has
announced plans to combine its four sporting goods companies with Roadmaster.
During the second quarter of 1994, certain events occurred which resulted
in a change in the voting control of Qualex and a corresponding change in the
method of accounting for Actava's investment in Qualex from consolidation to the
equity method and the presentation of Qualex as a discontinued operation as of
June 1994. Also during the second quarter of 1994, the Company made a decision
to dispose of its interest in Qualex. On August 12, 1994, Actava sold its
investment in Qualex to Kodak. Accordingly, the results of Qualex for all
periods presented are reported in the accompanying consolidated statements of
operations as discontinued operations. See "Qualex Inc. -- Discontinued
Operations" in Notes to Consolidated Financial Statements.
Actava's Snapper Division manufactures Snapper(R) brand power lawnmowers,
lawn tractors, garden tillers, snow throwers, and related products, parts and
accessories and distributes blowers, string trimmers and edgers. The lawnmowers
include rear engine riding mowers, front engine riding mowers or lawn tractors,
and walk-behind mowers. Snapper also manufactures a line of commercial lawn and
turf equipment and markets a fertilizer line under the Snapper(R) brand.
Actava Sports companies manufacture, import and distribute products for a
broad cross-section of the sporting goods, fitness and leisure markets. Products
are sold under a variety of Actava companies' own brand names, as well as under
licenses from the National Football League, National Basketball Association,
Major League Baseball, The Walt Disney Company, Inc., Remington Arms Company,
Inc., The Keds Corporation (Keds(R) and Pro-Keds(R)), Body by Jake Licensing
Corporation (Body by Jake(R)), and numerous colleges and universities. On July
20, 1994, Actava and Roadmaster entered into a definitive agreement under which
the four Actava Sports companies will be combined with Roadmaster. Under the
terms of the agreement, and upon consummation of the transaction, Actava would
transfer its sporting goods companies to Roadmaster in exchange for
approximately 19.2 million shares of Roadmasters' common stock, which will
represent approximately 39% of Roadmaster's outstanding stock. The value of
Actava's investment in Roadmaster would be approximately $70.7 million based on
the $3.6875 closing price for Roadmaster common stock on June 30, 1994 and
approximately $75.5 million based on the $3.9375 closing price for Roadmaster
common stock on August 11, 1994. Completion of the transaction is subject to a
number of conditions, including approval by the shareholders of both Roadmaster
and Actava. The accounting treatment of the transaction for Actava will depend
upon the value of Roadmaster Common Stock (the "Stock Value") as of the
consummation of the transaction ("Closing Date") and Actava's book value in the
Sports Companies as of the Closing Date (the "Book Value"). If the Stock Value
exceeds the Book Value as of the Closing Date, no gain will be realized by
Actava for accounting purposes, and Actava will record the Exchange Shares on
its books at an amount equal to the Book Value. On the other hand, if the Book
Value exceeds the Stock Value as of the Closing Date, then Actava will record a
loss upon consummation of the Exchange Transaction in an amount equal to the
difference between the Book Value and the Stock Value. The value of the
Roadmaster common stock received in the combination will be determined by its
market price on the closing date of the transaction. The book value of the
Actava sporting goods companies, as adjusted by certain debt which will be
repaid to Actava as a result of the transaction, as of June 30, 1994 was $70.7
million. Actava will not classify the sporting goods companies as a discontinued
operation due to the interest retained by Actava as represented by its
approximately 39% equity investment in Roadmaster.
The following is a discussion of the operating results of each of the
continuing operations of the Company and the operating results and financial
position of the Company on a consolidated basis. Financial information
summarizing the operating performance of Qualex Inc., which is classified as a
discontinued operation, is presented in "Qualex Inc. -- Discontinued Operations"
in Notes to Consolidated Financial Statements.
Lawn and Garden: Snapper's second quarter sales to distributors decreased
$18.8 million, or 25.3%, to $55.5 million in 1994 from $74.3 million in 1993.
Snapper's gross profit decreased $3.6 million, or 26.6% for
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the second quarter, to $9.8 million in the 1994 period from $13.4 million in
1993. Sales for the six month period ended June 30, 1994 decreased to $130.2
million from $142.9 million, an 8.9% decrease from the same 1993 period. Gross
profit for the six month period ended June 30, 1994 decreased by $986,000 or
3.6% to $26.5 million from $27.5 million for the same period in the prior year.
The sales decrease in the second quarter and six month periods reflects the
trend by Snapper distributors and dealers to order products only as needed by
them to replenish retail inventories as required by actual consumer demand. The
25% decrease in sales in the second quarter, compared to the second quarter of
1993, also reflects the fact that in June 1993 Snapper began production and
shipment of products for the 1994 selling season, whereas in 1994 production for
the 1995 selling season will not begin until the third fiscal quarter. The
decrease in gross profit during the second quarter of 1994 is due to the lower
than prior year sales level of core products as well as higher margin
accessories. Also contributing to the decline in gross profit for the second
quarter and the slight decrease in the gross profit for the 1994 year-to-date
period when compared to the same 1993 periods was the impact in the 1994 periods
of the 1993 transfer or sale of inventory at four company owned domestic
distributors to independent distributors. During 1993 the Company closed three
Company-owned domestic distributors and sold one such distributor. Selling,
general and administrative expenses decreased by $1.7 million, or 14.7%, to
$10.2 million for the second quarter of 1994 from $11.9 million for the
comparable 1993 quarter, primarily due to the effect of lower second quarter
1994 sales on sales volume related expenses such as advertising. Selling,
general and administrative expenses increased by $699,000, or 3%, to $24.2
million from $23.5 million for the six month period ended June 30, 1994 compared
to the prior year period primarily due to special promotions for the period,
which were implemented to encourage distributors to sell aged inventory items to
dealers.
A slight operating loss of $328,000 was experienced for the second quarter
of 1994, compared to an operating profit of a $2.6 million for the second
quarter of 1993. The operating profit for the six month period ended June 30,
1994 of $2.4 million represents a $2.4 million decrease from the $4.8 million
operating profit for the same 1993 period.
Sporting Goods: Sales for Actava Sports increased by $30.0 million, or
78%, to $68.5 million for the second quarter of 1994 from $38.5 million for the
second quarter of 1993 and to $149.0 million from $69.5 million, a $79.5 million
or 114.4%, increase for the 1994 year-to-date period as compared to the same
period in 1993. This increase was primarily due to sales recorded by DP, which
was acquired by the Company in June 1993. Actava Sports, excluding DP,
experienced an increase in second quarter sales of $4.5 million, a 13.4%
increase, from $33.7 million for 1993 to $38.2 million for 1994. Actava Sports,
excluding DP, experienced an increase in year-to-date sales of $5.8 million, or
8.9%, from $64.8 million for 1993 to $70.6 million for 1994.
Gross profit increased $890,000, or 11.4%, from $7.8 million for the 1993
second quarter to $8.7 million for the second quarter of 1994. The gross profit
of Actava Sports, excluding DP, increased by $844,000 from the second quarter of
1993 to the comparable 1994 quarter. The gross profit for the 1994 year-to-date
period, when compared to the same 1993 period, increased from $14.5 million to
$19.2 million primarily due to a gross profit increase of $4.1 million
attributable to the inclusion of DP for the full six month period for 1994 as
compared to three weeks in 1993.
Selling, general and administrative expenses increased from $11.5 million
to $18.9 million for the first six months of 1993 and 1994, respectively. This
$7.4 million increase is primarily due to a $6.6 million increase in selling,
general and administrative expenses resulting from the inclusion of DP's
expenses for the full six month 1994 period compared to only three weeks for
1993. Selling, general and administrative expenses for the second quarter of
1994 increased by $3.0 million to $9.2 million from $6.2 million for the 1993
period. This 47.6% increase is primarily due to a $2.7 million increase
attributable to the inclusion of DP for the entire 1994 quarter compared to only
three weeks in the 1993 quarter.
Actava Sports experienced a $558,000 operating loss for the second quarter
of 1994, a $2.0 million decrease from the $1.5 million operating profit for the
1993 second quarter. The Actava Sports operating profit for the 1994
year-to-date period of $305,000 represents a $2.6 million, or 89.6%, decrease
from the $2.9 million operating profit reported for the same 1993 period. Both
the second quarter and year-to-date
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decreases are due to the inclusion of DP's operations for the entire 1994 period
as compared to three weeks for the 1993 period.
Consolidated Continuing Operations: Actava's consolidated sales
increased $11.2 million, or 9.9%, for the second quarter of 1994 as compared to
the second quarter of 1993, principally because of the inclusion of $25.5
million in sales from DP, which was acquired in June 1993, as partially offset
by the $18.8 million Snapper sales decrease. Actava's year-to-date consolidated
sales increase of $66.8 million, or 31.4%, from $212.5 million for 1993 to
$279.2 million for 1994 is primarily due to a $73.7 million increase
attributable to DP, and a $5.8 million increase from all other Actava Sports
companies, partially offset by a $12.8 million decrease from Snapper.
The 1994 second quarter consolidated gross profit percentage of 14.9%
represents gross profit dollars of $18.5 million, a $2.7 million decrease in
gross profit dollars as compared to the same 1993 quarter. The increase of $3.7
million to $45.7 million for 1994 year-to-date gross profit from $42.0 million
for 1993 represents a $3.7 million increase in gross profit dollars. The 1994
year-to-date gross profit percentage decreased to 16.4% from 19.8% for 1993.
The 1994 second quarter $1.4 million increase in consolidated selling,
general and administrative expenses to $22.2 million from $20.8 million for 1993
and the 1994 year-to-date increase of $8.6 million to $48.6 million from $40.0
million for 1993 are primarily due to the inclusion of DP, which was acquired in
June 1993, and a 1994 first quarter provision of $1.3 million for the settlement
of employment agreements.
Actava's consolidated operating loss from continuing operations for the
1994 second quarter of $3.7 million represents a $4.9 million decrease from the
$1.2 million 1993 second quarter operating profit. The 1994 year-to-date
consolidated operating loss of $4.2 million represents a decrease of $6.8
million from the $2.7 million 1993 year-to-date operating profit.
Interest expense for the second quarter of 1994 of $7.5 million is an
increase of $1.0 million from the second quarter of 1993. Interest expense for
the six months ended June 30, 1994 of $14.8 million is an increase of $2.3
million from the $12.5 million of interest expense for the same 1993 period.
These increases are primarily due to increases in interest expense for Snapper
of $.7 million and an increase of $1.7 million for DP, which was acquired in
June 1993 and thus included for only a part of the 1993 year to date period. The
higher average borrowings at Snapper under the revolving credit facilities
established to provide working capital and higher interest rates for the 1994
period were the reason for the Snapper increase in interest expense to $3.6
million for the period ended June 30, 1994 from $2.9 million for the same 1993
period. The inclusion of $1.8 million of DP interest expense for the entire six
month period ended June 30, 1994 as compared to $.1 million for only the
post-acquisition period in the same 1993 period is the principal reason for the
consolidated increase in interest expense. During the second quarter of 1994,
Snapper and all of the Actava Sports companies had separate credit lines in
place, which has substantially reduced their reliance on Actava for working
capital needs.
Other income (net of other deductions) decreased by $1.1 million in the
second quarter of 1994 and by $3.0 for the 1994 year-to-date period when
compared to 1993. This decrease is primarily the result of a decrease in
investment income from lower investment levels due to liquidations of short-term
investments to fund corporate purposes such as the purchase of DP and DP's
initial working capital needs.
During the year Actava provides for income taxes using anticipated
effective annual tax rates. The rates are based on expected operating results
for the year and estimated permanent differences between book and taxable
income. As a result of the sale of Qualex, the Company will no longer include
any income tax expense related to Qualex in continuing operations because Qualex
is now reported as a discontinued operation rather than as a consolidated
subsidiary for financial reporting purposes and is still not included in the
Company's consolidated federal income tax return. See "Income Taxes" in Notes to
Consolidated Financial Statements.
Discontinued Operations: In 1988 the Company combined its photofinishing
operations with the domestic photofinishing operations of Kodak in a transaction
accounted for as a purchase, forming a jointly-owned company, Qualex. During the
second quarter of 1994, a change of control of the Company occurred under the
Shareholders Agreement between the Company and Kodak relating to Qualex. The
change of control
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occurred when the Board of Directors of Actava elected a new president and chief
executive officer. Prior to the change of control, the Company had owned 51% of
the voting stock of Qualex and had designated a majority of the members of the
Board of Directors of Qualex. As a result of the change of control, the
Company's ownership of the voting stock of Qualex was reduced to 50% and the
Company and Kodak each became entitled to elect an equal number of members of
the Board of Directors of Qualex. Because of these changes affecting the
Company's control of Qualex, the Company discontinued its practice of
consolidating the accounts of Qualex and began accounting for its ownership in
Qualex under the equity method. In addition, the Company made a decision during
the second quarter to dispose of its interest in Qualex. On August 12, 1994,
Actava sold its investment in Qualex to Kodak. Accordingly, the Qualex results
for all periods presented are reported in the accompanying consolidated
statements of operations as discontinued operations. A loss of $37.9 million for
loss on the disposal of discontinued operations and a loss of $2.8 million from
operations of discontinued operations is reflected in Actava's year-to-date net
loss as a result. See "Qualex Inc. -- Discontinued Operations" in Notes to
Consolidated Financial Statements.
Net Income (Loss): Actava reported a loss from continuing operations of
$10.2 million for the second quarter of 1994, compared to a loss from continuing
operations of $3.7 million for the second quarter of 1993. Actava's net loss of
$46.3 million for the second quarter of 1994 included a loss from discontinued
operations of $36.1 million. The Company's $43,000 of income for the second
quarter of 1993 included income of $3.7 million from discontinued operations.
For the first six months of 1994, Actava had a loss from continuing operations
of $18.3 million, compared to a loss from continuing operations of $5.0 million
for the comparable 1993 period. Actava also experienced a $40.7 million loss
from discontinued operations for the first six months of 1994, resulting in a
net loss for the period of $59 million. Actava's $7.6 million net loss for the
first six months of 1993 included income from discontinued operations of $1.8
million, and a loss from the cumulative effect of a change in accounting
principle of $4.4 million.
Changes in Accounting Principles: The Financial Accounting Standards Board
has issued Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Actava adopted the new method of accounting for income taxes on
January 1, 1993. Statement No. 109 affects the manner and rates at which
deferred income taxes are reflected on the balance sheet and, therefore,
possibly the amount of taxes reflected in the statement of operations. The
adoption of Statement No. 109 did not result in a material effect on net income
for the first quarter of 1993. See "Summary of Significant Accounting
Policies -- Changes in Accounting Principles" in Notes to Consolidated Financial
Statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". Statement No. 106 requires the cost of postretirement
benefits to be recognized in the financial statements over an employee's active
working career. Actava adopted the new method of accounting for these benefits
as of January 1, 1993. The adoption of Statement No. 106 resulted in a charge to
net income of $4.4 million and was reported as the cumulative effect of a change
in accounting principle in the first quarter of 1993. See "Summary of
Significant Accounting Policies -- Changes in Accounting Principles" in Notes to
Consolidated Financial Statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". Statement No. 112 requires the recognition of the cost of benefits to
be provided after employment, but before retirement, in the financial statements
over an employee's active working career. Actava adopted the new method of
accounting for these benefits as of January 1, 1994. The adoption of Statement
No. 112 will not result in a material impact on the Company's financial
statements when reported. See "Postemployment Benefits" in Notes to Consolidated
Financial Statements.
The Company and its subsidiaries invest in various debt and equity
securities. The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires certain debt securities to be
reported at amortized cost, certain debt and equity securities to be reported at
market with current recognition of unrealized gains and losses, and certain debt
and equity securities to be reported at market with unrealized gains and losses
as a separate component of shareholders' equity. The Company adopted the
provisions of the new standard for
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investments held as of or acquired after January 1, 1994. In accordance with the
Statement, prior period financial statements have not been restated to reflect
the change in accounting principle. The cumulative effect as of January 1, 1994,
of adopting Statement 115 was not material, See "Summary of Significant
Accounting Policies -- Changes in Accounting Principles" in Notes to
Consolidated Financial Statements.
Financial Position: Actava's working capital, excluding Qualex, was $99.1
million at June 30, 1994 as compared to $93.7 million at December 31, 1993. The
increase is primarily due to changes in the Triton loan agreement which resulted
in classifying $5.0 million as a current note receivable. Cash and short-term
investments at Actava, excluding Qualex, increased by $1.6 million in the first
six months of 1994 to $45.9 million. At June 30, 1994, approximately $5.0
million of the Company's cash and short-term investments were pledged to secure
a Snapper credit line. In addition, subsequent to June 30, 1994, $12.0 million
was pledged to secure a letter of credit issued on August 12, 1994, with regard
to the Company's redeemable common stock. Approximately $16.2 million of cash
and short-term investments which were pledged to support outstanding letters of
credit at March 31, 1994 were released to Actava during the 1994 second quarter.
These letters of credit are now issued on an unsecured basis.
On August 12, 1994 the Company sold its interest in Qualex to Kodak. As a
result of this sale, the Company received, on August 12, 1994, cash of $50
million and will receive two additional payments of $50 million each in six
months and twelve months.
The Company has entered into a contract to sell a real estate investment
near Houston, Texas, which is known as Sienna Plantation. An investment group
has agreed to purchase the property from a partnership in which Actava has an
interest. Actava is expected to receive approximately $9.0 million in cash upon
consummation of the transaction. The purchase price is approximately equal to
Actava's book value and is expected to close in or before December 1994.
For the six month period ended June 30, 1994, cash flows of $16.6 million
were provided by operating activities while investing and financing activities
used $18.2 million and $3.1 million of cash, respectively. Cash flows of $27.9
million were provided by continuing operations while discontinued operations
used $11.3 million. For operations, accounts receivable decreased by $31.4
million, inventories decreased by $12.0 million, prepaid expenses decreased by
$10.9 million, and accounts payable and other similar items decreased by $14.2
million. Depreciation of $7.3 million and amortization of $213,000 are included
in determining cash flow provided by continuing operations.
Investing activities for the six months ended June 30, 1994 used $18.2
million of cash, including payments for property, plant and equipment (net of
disposals) of $15.2 million.
Financing activities for the six months ended June 30, 1994 used $3.1
million during the quarter with repayments under short-term bank agreements of
$27.6 million, net borrowings of $33.5 million under long-term debt agreements,
payments of $3.0 million for subordinated debt and payments of dividends by
Qualex prior to being discontinued to minority interest of $10.5 million.
Long-term debt, including the current portion, for Actava, excluding
Qualex, decreased from $3.3 million at December 31, 1993 to $3.0 million at June
30, 1994 due to payments thereon.
Actava's subordinated debt position, including the current portion, of
$191.5 million at June 30, 1994 reflects a decrease of $2.8 million from
year-end 1993. Subordinated debt is 98.4% of Actava's total long-term debt,
including the current portion, with the first significant maturity due in 1996.
The Company has a currency swap agreement with a financial institution in
order to eliminate exposure to foreign currency exchange rates for its 6% Senior
Subordinated Swiss Franc Bonds. A default by the financial institution that is a
party to the swap agreement would expose the Company to potential currency
exchange risk on the remaining bond interest and principal payments. The
approximate fair market value of the currency swap as of June 30, 1994, was
$15.0 million. The Company would receive the proceeds payable upon the
termination of the currency swap.
The Company is subject to various contingent liabilities and commitments.
These include a floor plan agreement entered into by Snapper under which
approximately $31.0 million and $25.0 million was
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outstanding at June 30, 1994 and 1993, respectively, various guaranties of debt
totaling approximately $5.6 million, various real estate leases with estimated
future payments of approximately $8.6 million, various potential liabilities
relating to environmental matters, various other litigation matters and various
pledges of cash and short-term investments. See "Contingent Liabilities and
Commitments" in Notes to Consolidated Financial Statements.
DP handles and stores various materials in the normal course of business
that have been classified as hazardous by various federal, state and local
regulatory agencies. DP is continuing to conduct tests at its sites and will
perform any necessary cleanup where and to the extent legally required. At those
sites where tests have been completed, cleanup costs have been immaterial. The
Company may also be liable for remediation of environmental damage relating to
businesses previously sold in excess of amounts accrued. At the sites currently
being tested, it is management's opinion that cleanup costs will not have a
material effect on Actava's financial position or results of operations.
On June 8, 1993, the Company acquired substantially all the assets of DP
for a net purchase price consisting of $11.6 million in cash, the issuance of
1,090,909 shares of the Company's Common Stock (the "Acquisition Shares") valued
at $12 million, and the assumption or payment of certain liabilities including
trade payables and a revolving credit facility. The Company recorded redeemable
Common Stock of $12 million upon the issuance of the Acquisition Shares. See
"Acquisitions" in Notes to Consolidated Financial Statements. The Company also
entered into an agreement providing the holder of the Acquisition Shares (the
"Holder") with the right to receive additional payments depending upon the value
of the Acquisition Shares over a period of not longer than one year from the
purchase date. The agreement gives the Holder the right under certain
circumstances, which have already occurred, to require the Company to purchase
the Acquisition Shares at a price equal to $11.00 per share. The repurchase of
the Acquisition Shares will not increase the cost recorded by Actava for DP
since the cost of DP will be increased by the amount of the cash payment and
simultaneously reduced by the same amount due to a corresponding adjustment to
the respective redeemable common stock. The right of the Holder to receive
additional payments of cash became exercisable after June 8, 1994 and would have
expired if not exercised on or before August 7, 1994. On August 3, 1994, the
Holder agreed to extend the exercise date to February 17, 1995 in exchange for a
$435,000 fee and an irrevocable letter of credit in the amount of $12.0 million
which is available and payable to the Holder on and after February 17, 1995 upon
demand and tender of the Acquisition Shares. The $435,000 fee will be amortized
over the term of the extension. Actava's debt agreements contain covenants
which, among other things, place restrictions upon the amount of stock the
Company may repurchase and dividends it may pay. The repurchase of the
Acquisition Shares may violate some of these covenants.
In November 1991, the Company entered into a Loan Agreement with its then
25.0% stockholder, Triton Group Ltd. ("Triton"), whereby Triton could borrow up
to $32.0 million from the Company secured by the stock in the Company owned by
Triton (the "Triton Loan"). The Triton Loan Agreement was modified in June 1993,
pursuant to the Plan of Reorganization filed by Triton in its Chapter 11
bankruptcy proceeding. The modification reduced the interest rate on the Triton
Loan, extended the maturity date from November 1994 to April 1997 and modified
the mandatory payment (margin call) provisions and the Stockholder Agreement
between Actava and Triton, as described in the Notes to the Consolidated
Financial Statements. As modified, the Triton Loan provided for quarterly
payments of interest only with no scheduled principal payments due until final
maturity in April 1997. In December 1993, Triton and Actava entered into a
further amendment to the Loan Agreement pursuant to which Triton made a
principal payment of $5.0 million plus accrued interest on the Triton Loan,
reducing the loan balance to approximately $26.7 million. In addition, the
December 1993 amendment provided for quarterly principal payments of $1.25
million commencing March 31, 1994 and modified the mandatory payment (margin
call) provisions of the loan. Triton has announced that on March 2, 1994, Triton
obtained a commitment from a bank which would enable Triton to prepay the entire
balance under the Loan Agreement, subject to the preparation of definitive
documents. Triton also announced that while the terms and cost of this new
financing would be less favorable than those of the existing arrangement, Triton
is willing to consider a refinancing as part of a broader strategy to enhance
the value of Actava. Triton has announced that the bank commitment, which was
originally scheduled to expire
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on June 30, 1994, has been extended until September 30, 1994. As of June 30,
1994 the outstanding balance under the Triton Loan was $24.2 million.
During the first and second quarters of 1994 the Company received cash
dividends from its subsidiaries of $12.0 million and $811,000, respectively. The
Company, excluding its operating subsidiaries and Snapper, had $63.4 million of
unpledged cash and short-term investments as of August 12, 1994. Such
subsidiaries, however, are restricted by financial covenants in their credit
agreements from paying the Company more than 70% of their net income as
dividends. The Company uses its existing cash and short-term investments, as
well as dividends from is subsidiaries and payments on the Triton Loan, to
provide for items such as operating expense payments and debt service. The
Company, excluding its subsidiaries and Snapper, has debt service payments
scheduled for the remainder of 1994 of approximately $10.4 million.
The credit agreements with Snapper and one of the Company's sporting goods
subsidiaries contain financial covenants (involving tangible net worth, book net
worth and other matters) which the Company must comply with to prevent a
default. A default under these credit agreements would have serious adverse
consequences, including the elimination of funding for the operations of Snapper
and the sporting goods company, as well as the prohibition on payment of any
dividends to the Company by these businesses. As a result of the loss incurred
by the Company in connection with the sale of Qualex, the Company obtained
financial covenant amendments from its lenders so that the Company would remain
in compliance with these covenants through August 31, 1994. It will be necessary
for the Company to negotiate additional amendments to these financial covenants
in order for the Company to be in compliance with these covenants after August
31, 1994. Management believes that it will be successful in negotiating these
additional amendments.
The Company's subsidiaries and division, excluding Qualex, had unused
borrowing capacity of approximately $47.7 million at June 30, 1994, under credit
agreements which are secured by assets such as accounts receivable or inventory.
The assets which serve as collateral are determined by reference to the
outstanding balance under the credit agreements and the qualification of the
assets as collateral as defined in the credit agreements; however, the assets
potentially available as collateral are, in the aggregate, $335.1 million.
On April 19, 1994, John D. Phillips was elected president and chief
executive officer of the Company. He was also elected to the Board of Directors
of the Company. Mr. Phillips succeeds Charles R. Scott, who had served as the
Company's president and chief executive officer since 1991. In connection with
the election of Mr. Phillips, Renaissance Partners, an investment partnership in
which Mr. Phillips serves as a general partner, purchased from the Company
700,000 shares of the Company's Common Stock for $4,462,500, representing a
price of $6.375 per share. Mr. Phillips also received an immediately vested
option to purchase 300,000 shares of the Company's Common Stock at a price of
$6.375 per share. This price represents the last sale price of the Company's
Common Stock on the New York Stock Exchange on April 11, 1994, the day before
the Company announced that it had received the investment and employment
proposals from Mr. Phillips. The Company has entered into a Registration Rights
Agreement with Renaissance Partners pursuant to which the Company has agreed to
register with Securities and Exchange Commission the 700,000 shares of Common
Stock purchased by Renaissance Partners.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
THE ACTAVA GROUP INC.
Registrant
/s/ FREDERICK B. BEILSTEIN, III
--------------------------------------
Frederick B. Beilstein, III
Senior Vice President, Treasurer and
Chief Financial Officer
Date: October 31, 1994
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