<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
AMENDMENT NO. 4
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------
Commission file number 1-5706
---------------------
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>
404/658-9000
Registrant's telephone number, including area code
Former name, former address and former fiscal year, if changed since last report
NOT APPLICABLE
---------------------
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 March 31, 1994 -- 17,635,186 shares of Common Stock.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................... $ 11,684 $ 18,770
Short-term investments............................................. 30,418 29,635
Receivables (less allowances for doubtful accounts of $9,937 in
1994 and $10,227 in 1993)....................................... 277,872 276,018
Current portion of notes receivable................................ 5,000 --
Inventories........................................................ 99,188 108,439
Prepaid expenses................................................... 43,361 43,809
Future income tax benefits......................................... 35,371 32,434
---------- ------------
TOTAL CURRENT ASSETS....................................... 502,894 509,105
PROPERTY, PLANT AND EQUIPMENT........................................ 462,725 474,235
Less allowances for depreciation................................... (191,679) (198,881)
---------- ------------
271,046 275,354
NOTES RECEIVABLE FROM TRITON GROUP LTD............................... 20,476 26,726
OTHER ASSETS......................................................... 60,721 50,702
LONG-TERM INVESTMENTS................................................ 27,456 26,611
INTANGIBLES.......................................................... 390,243 386,626
---------- ------------
TOTAL ASSETS............................................... $1,272,836 $1,275,124
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities..... $ 251,289 $ 263,883
Notes Payable........................................................ 147,742 135,114
Current portion of long-term debt.................................... 6,453 6,665
---------- ------------
TOTAL CURRENT LIABILITIES.................................. 405,484 405,662
DEFERRED INCOME TAXES................................................ 56,564 56,715
LONG-TERM DEBT....................................................... 248,336 220,887
SUBORDINATED DEBT.................................................... 187,671 190,551
MINORITY INTEREST IN PHOTOFINISHING SUBSIDIARY....................... 190,586 205,395
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................................................. 46,362 46,362
Retained earnings.................................................. 224,614 236,333
Less treasury stock -- at cost (6,223,467 shares in 1994 and
1993)........................................................... (121,549) (121,549)
---------- ------------
172,195 183,914
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $1,272,836 $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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1994 1993
-------- --------
(UNAUDITED)
<S> <C> <C>
NET SALES............................................................ $303,678 $263,887
Operating costs and expenses
Cost of products sold.............................................. 256,713 202,485
Selling, general and administrative expenses....................... 60,613 63,046
Provision for doubtful accounts.................................... 824 859
-------- --------
OPERATING LOSS............................................. (14,472) (2,503)
Interest (expense)................................................... (11,308) (10,129)
Other (expense) -- net............................................... (457) (1,733)
-------- --------
LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................. (26,237) (10,899)
Income taxes (benefit)............................................... (8,980) (5,839)
-------- --------
LOSS BEFORE MINORITY INTEREST.............................. (17,257) (5,060)
Minority interest.................................................... 4,584 1,860
-------- --------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................ $(12,673) (3,200)
Cumulative effect of change in accounting principle.................. -- (4,404)
-------- --------
NET LOSS................................................... $(12,673) $ (7,604)
======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Before cumulative effect of change in accounting principle......... $ (.72) $ (.19)
Cumulative effect of change in accounting principle................ $ -- $ (.27)
-------- --------
Primary and fully diluted.......................................... $ (.72) $ (.46)
======== ========
CASH DIVIDENDS PER COMMON SHARE............................ -- $ .09
======== ========
AVERAGE COMMON AND COMMON EQUIVALENT SHARES................ 17,635 16,544
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 4
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN
CASH
-----------------------
THREE MONTHS ENDED
MARCH 31,
-----------------------
1994 1993
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................... $(12,673) $ (7,604)
Cumulative effect of change in accounting principle................ -- 4,404
-------- --------
Loss before cumulative effect of change in accounting principle.... (12,673) (3,200)
Items not providing cash from operations........................... (13,450) (20,724)
-------- --------
Net Cash Used by Operating Activities...................... (26,123) (23,924)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (maturities over 90 days)................. (29,572) (33,452)
Sales of investments (maturities over 90 days)..................... 21,546 51,881
Net sales of other investments (maturities less than 90 days)...... 7,243 2,891
Payments for property, plant & equipment........................... (7,344) (6,523)
Proceeds from disposals of property, plant & equipment............. 376 241
Collections on notes receivable.................................... 1,473 332
Payments for purchases of businesses............................... -- (8,842)
Payments from Triton Group Ltd..................................... 1,250 --
Other investing activities -- net.................................. (2,575) (4,425)
-------- --------
Net Cash Provided (Used) by Investing Activities........... (7,603) 2,103
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under short-term bank agreements.................... 12,628 30,837
Borrowings under other long-term debt agreements................... 48,000 986
Payments on long-term debt agreements.............................. (20,763) (2,817)
Payments of subordinated debt...................................... (3,000) (1,536)
Cash dividends paid by Qualex to minority interest................. (10,225) (7,714)
Cash dividends paid by The Actava Group............................ -- (1,489)
-------- --------
Net Cash Provided by Financing Activities.................. 26,640 18,267
-------- --------
DECREASE IN CASH........................................... (7,086) (3,554)
Cash at beginning of year............................................ 18,770 20,792
-------- --------
CASH AT MARCH 31........................................... $ 11,684 $ 17,238
======== ========
</TABLE>
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 three months ended March 31, 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)
(UNAUDITED)
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.
PHOTOFINISHING TRANSACTION
Photofinishing operations are conducted by Qualex Inc., which was formed in
March, 1988 by the combination of Actava's photofinishing operations with the
domestic photofinishing operations of Eastman Kodak Company. While the Company
and Kodak currently share Qualex's equity, income and dividends equally, the
Company owns 51% of the voting stock of Qualex, is entitled to and has elected a
majority of the members of the Board of Directors of Qualex, and has 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 is not temporary. As a result, the Company
consolidates the results of operations of Qualex with the results of operations
of the Company.
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 in control" of the Company. The Qualex
Shareholders Agreement defined 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"
5
<PAGE> 7
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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. The Company does not believe that Kodak will 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.
John D. Phillips was elected as President and Chief Executive Officer of
the Company on April 19, 1994. In late April 1994, the Company's management
became aware of Kodak's position that the election of Mr. Phillips as President
and Chief Executive Officer of the Company resulted in a "change in control" of
the Company under the Qualex Shareholders Agreement. The Company, however, does
not believe that the election of Mr. Phillips constitutes a "change in control"
of the Company as defined in the Qualex Shareholders Agreement. This belief is
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. Although Kodak has
informed the Company of its position that a "change in control" of the Company
had occurred, the Company believes that the issue will be resolved without a
change in control of Qualex. If a "change in control" of the Company has
occurred, the Company's ownership of the voting stock of Qualex will be reduced
to 50% and the Company and Kodak each will become entitled to elect an equal
number of members of the Board of Directors of Qualex. These changes would
require the Company to discontinue its practice of consolidating the accounts of
Qualex and begin accounting for its ownership in Qualex under the equity method.
The Company consolidates the accounts of Qualex and presents Kodak's
portion of ownership and equity in the income of Qualex as minority interest.
Should Kodak withdraw its waiver or if an additional change in control of
the Company were to occur and if the Qualex preferred stock were redeemed, the
Company would own 50% of the voting securities of Qualex. While the Company's
voting stock would be reduced from 51% to 50%, this change would not alter the
Company's and Kodak's current equal interest in the equity, earnings and cash
dividends of Qualex. In addition, the Board of Directors of Qualex would be
composed of 11 members, comprised of five representatives of the Company, five
representatives of Kodak and the chief executive officer of Qualex, and all
actions of the board would require the affirmative vote of at least seven board
members. In the event these changes were to occur, the Company may possibly be
deemed to no longer control Qualex and the Company would no longer be in a
position unilaterally to control, among other things, the declaration of
dividends to the Company and Kodak by Qualex.
If the Company were deemed in the future to no longer be in control of
Qualex, the Company would cease to consolidate the accounts of Qualex. In that
event, the Company would account for its ownership of Qualex by using the equity
method of accounting. Such a development would not affect the net income or
shareholders' equity of the Company. However, the Company's consolidated total
assets, liabilities, sales and costs and expenses would be reduced as they would
no longer include the specific accounts of Qualex. If the Company had accounted
for Qualex using the equity method for the first quarter of 1994, the Company's
total assets and liabilities would have been $692,415,000 and $508,220,000,
respectively, and sales and total costs and expenses would have been
$155,271,000 and $163,173,000, respectively.
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
6
<PAGE> 8
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Common Stock valued at $12,000,000, and the assumption or payment of certain
liabilities including trade payables and a revolving credit facility. See
"Redeemable Common Stock" in Notes to Consolidated Financial Statements. The
company also entered into an agreement which may provide the seller the right to
additional payments approximately one year after the purchase date, depending
upon the value of the issued shares at that time. The payment of cash or the
issuance of additional shares will not increase the cost of DP; since the cost
of DP will be increased by the amount of such item and simultaneously reduced by
a corresponding amount due to an 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>
MARCH 31, DECEMBER 31,
1994 1993
--------- -------------
<S> <C> <C>
Finished goods and goods purchased for resale................. $ 75,993 $ 82,559
Raw materials and supplies.................................... 43,768 46,018
--------- -------------
119,761 128,577
Reserve for LIFO cost valuation............................... (20,573) (20,138)
--------- -------------
$ 99,188 $ 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 ENDED
MARCH 31,
---------------------
1994 1993
------- -------
<S> <C> <C>
Interest and investment income................................. $ 1,353 $ 2,906
Miscellaneous income........................................... 965 1,241
Miscellaneous (expense)........................................ (2,775) (2,414)
------- -------
$ (457) $ 1,733
======= =======
</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) -- net. The early payment interest
credit expense was $1,163,000 and $1,140,000 for the three month periods ended
March 31, 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.
In accordance with Federal tax regulations, the Company cannot file a
consolidated income tax return with Qualex. Qualex generally has an annual book
effective tax rate which exceeds statutory rates primarily due to the
amortization of goodwill which is not deductible for tax purposes. The Company's
other 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. As the Company does not file a
consolidated tax return with Qualex, the
7
<PAGE> 9
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
percentage of the Company's consolidated income composed of Qualex's income, as
opposed to the Company's other businesses, can cause the Company's consolidated
book tax provision to be above or below statutory rates and vary from quarter to
quarter and year to year. The Company's effective tax rate is affected since
Qualex's income tax expense and the Company's consolidated income tax expense
are calculated independently while income before taxes is consolidated for
financial reporting and the Company, excluding Qualex, is not able to recognize
a tax benefit for its losses due to limitations from prior period recognition.
For the three month period ended March 31, 1994, the Company's consolidated
effective tax rate has decreased as compared to the same prior period because
Qualex, with its higher effective tax rate, contributed approximately 5% less
loss before taxes then in the previous comparable quarter.
During the year, the Company provides for income taxes using anticipated
effective annual tax rates for Qualex and for all other Company operations. The
rates are based on expected operating results for the year and estimated
permanent differences between book and tax income.
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.
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 7,
1995.
LITIGATION
On February 18, 1994, Photographic Concepts Inc. ("PCI"), a Florida
corporation, sued Qualex in the United States District Court for the Middle
District of North Carolina, in a lawsuit captioned Photographic Concepts, Inc.
v. Qualex, Inc. Civil Action No. 1:94-CV-00081. PCI's claims arise out of
allegations that Qualex entered into and then breached an agreement with PCI
relating to the marketing of on-site "microlab" photofinishing services. During
1993, Qualex's microlab business resulted in $33,300,000 in revenues and
$7,300,000 in gross profits, and Qualex expects such business to increase in the
future. PCI alleges, among other things, that Qualex breached an agreement with
PCI, and misappropriated trade property and other information from PCI. PCI is
seeking an injunction against Qualex's alleged use and misappropriation of PCI's
allegedly confidential and proprietary trade methods and techniques, an
accounting for and payment over to PCI of Qualex's profits from such alleged use
and misappropriate, unspecified consequential and punitive damages and
attorneys' fees and other costs of litigation. Qualex intends to defend the case
vigorously, but the Company is unable to determine the probable impact of the
suit at this early stage in the proceeding.
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.
8
<PAGE> 10
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
While these actions are in their preliminary stages, management currently
believes the actions will not materially affect the operations or financial
position 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 15, 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.
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.
Actava is contingently liable under various guarantees of debt totaling
approximately $8,600,000. 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 or 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 $9,100,000. The leased properties
generally have financially sound subleases.
In January 1992, Qualex entered into an agreement whereby it sells an
undivided interest in a designated pool of trade accounts receivable on an
ongoing basis. The maximum allowable amount of receivables to be sold, initially
set at $50,000,000, was increased to $75,000,000 in August 1992. As collections
reduce the pool of sold accounts receivable, Qualex sells participating
interests in new receivables to bring the amount sold up to the desired level.
At March 31, 1994 and 1993, the uncollected balance of receivables sold amounted
to $59,000,000 and $40,000,000, respectively. The proceeds are reported as
operating cash flows in the statement
9
<PAGE> 11
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
of cash flows and a reduction of receivables in Qualex's balance sheet. Total
proceeds received by Qualex during the first quarter were $133,500,000 for 1994
and $70,000,000 for 1993. There has been no adjustment to the allowance for
doubtful accounts because Qualex has retained substantially the same risk of
credit loss as if the receivables had not been sold. Qualex pays fees based on
the purchaser's level of investment and borrowing costs. During the first
quarter of 1994 and 1993, Qualex recorded $580,000 and $381,000, respectively,
of these fees as other expenses.
Qualex has a supply contract with Kodak for the purchase of sensitized
photographic paper and purchases substantially all of the chemicals used in
photoprocessing from Kodak. Qualex also purchases various other production
materials and equipment from Kodak.
Qualex and DP handle and store various materials in the normal course of
business that have been classified as hazardous by various federal, state and
local regulatory agencies. Qualex and DP are continuing to conduct tests at
various 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.
In January 1993, Qualex signed a ten year agreement to purchase its
information systems services from an outside agency. Annual service charges
under this agreement are approximately $13,000,000.
At March 31, 1994, approximately $5,000,000 of Actava's cash and short-term
investments were pledged to secure a Snapper credit line and approximately
$16,230,000 of cash and short-term investments were pledged to support
outstanding letters of credit.
10
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Actava provides high-quality, brand-name products through distribution
channels to retail markets across the United States. The Company's businesses
encompass the broad leisure industry, including photofinishing, fitness
equipment and sporting goods, as well as lawn and garden equipment.
Actava owns 51% of the voting stock of Qualex, the largest photofinisher in
the United States, processing approximately 20% of all color print rolls of
film. Qualex also processes black and white and movie film. Qualex is a
wholesale photofinisher, obtaining substantially all of its sales from
independent retailers in 1993. Qualex's business also includes a limited amount
of direct sales to consumers through owned and operated retail photographic
stores and mail-order operations.
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.
Actava's long-range strategy is to maximize stockholder wealth by
concentrating its capital resources on its companies which offer the highest
potential returns. As a result, the Company continues to analyze its businesses
with a view toward enhancing their value through marketing alliances, licensing
arrangements and joint ventures, with particular emphasis on cost efficiencies
through plant consolidations or product-line expansions or improvements.
The following is a discussion of the operating results of each of these
business segments and the operating results and financial position of Actava on
a consolidated basis.
Photofinishing: In 1988 the Company combined its photofinishing operations
with the domestic photofinishing operations of Eastman Kodak Company in a
transaction accounted for as a purchase, forming a jointly-owned company, Qualex
Inc. SEE "PHOTOFINISHING TRANSACTION" IN NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
Actava, which owns 51% of the voting shares of Qualex, consolidates the
accounts of Qualex with its accounts. Kodak's interest in the earnings and
equity of Qualex are reflected as minority interest.
Photofinishing sales decreased $15.8 million or 9.6% to $148.4 million in
the first quarter of 1994 as compared to $164.2 million for the same period in
1993 due primarily to the effect of extreme weather conditions, particularly in
the Northeast, on print volume during January and February. As sales decreased
and per print price declines continued, gross profit as a percent of sales
decreased to 13.3% in 1994 in comparison to 24.7% in 1993 and gross profit
dollars decreased by $20.9 million, or 51.4%. Per print price decreases occurred
due to price reductions offered by competitors and the associated demand for
similar prices from the customers of Qualex. The decrease in gross profit,
however, was partially offset by decreases in selling, general and
administrative expenses as a result of decreases associated with sales related
expenses such as advertising. Selling, general and administrative expenses
decreased from $44.2 million in 1993 to $33.3 million in 1994, a $10.9 million
decrease. The photofinishing industry is very seasonal, with the first quarter
of each year being the lowest volume quarter, which in some cases results in a
loss. As a result of these factors, Qualex incurred an operating loss of $14.0
million in the first quarter of 1994 compared to a loss of $4.0 million
experienced in the first quarter of 1993.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
Management anticipates that additional business volume and price reductions
from major suppliers will continue to offset pricing pressures in the wholesale
photofinishing industry. However, the relative effect of these items will
continue to be impacted by market changes.
Lawn and Garden: Snapper's sales to distributors increased by $6.0
million, or 8.8%, to $74.7 million for the first quarter of 1994 from $68.7
million for the same period last year. This sales increase is primarily due to
increased orders from distributors in anticipation of increased sales to
consumers during the 1994 selling season. Snapper's gross profit increased by
$2.6 million, or 18.4%, to $16.7 million for the first quarter of 1994 from
$14.1 million for the same period last year. The gross profit increase is
primarily due to the lack of new product introductions in 1994, as the start-up
costs and low per unit price margins for the 1993 new products were not
experienced in 1994. Snapper also improved its gross profit by achieving greater
manufacturing efficiencies on its traditional product lines during the first
quarter of 1994 as compared to the same 1993 quarter. Selling, general and
administrative expenses increased by $2.5 million, or 21.2%, to $14.0 million
for the first quarter of 1994 from $11.5 million for the comparable 1993
quarter, due to special promotions and the effect of higher first quarter 1994
sales on sales volume related expenses such as advertising.
The $2.6 million increase in gross profit was offset by a $2.5 million
increase in selling, general and administrative expenses which resulted in a
$142,000 increase in Snapper's operating profit for the first quarter of 1994
over the same 1993 quarter. Operating profit experienced in the 1994 quarter was
$2.7 million, a 5.5% increase over the 1993 quarter operating profit of $2.6
million.
Sporting Goods: Sales at Actava Sports increased by $49.5 million or
159.5% to $80.6 million in the first quarter of 1994 as compared to $31.1
million for the same period in 1993. This increase is primarily due to sales of
$48.2 million recorded by DP, which was acquired by the Company in June 1993.
Actava Sports, excluding DP, experienced an increase in first quarter sales of
$1.3 million, a 4.2% increase, from $31.0 million for 1993 to $32.3 million for
1994.
Gross profit increased by $3.8 million, or 56.7% from $6.7 million for the
1993 first quarter to $10.5 million for the first quarter of 1994, primarily due
to the gross profit of $4.1 million experienced by DP. The gross profit of
Actava Sports, excluding DP, remained stable from the first quarter of 1993 to
the comparable 1994 quarter as it decreased by $248,000. Selling, general and
administrative expenses increased from $5.3 million to $9.7 million for the
first quarter of 1993 and 1994, respectively. This $4.4 million increase is
primarily due to $4.0 million of selling, general and administrative expenses
experienced by DP. The Actava Sports operating profit for the first quarters of
1994 and 1993 was $863,000 and $1.4 million, respectively. The 1994 first
quarter operating profit for DP was $118,000; therefore, Actava Sports,
excluding DP, experienced a decrease in operating profit of $745,000 from the
comparable 1993 period.
Consolidated Operations: Actava's consolidated sales increased $39.8
million or 15.1% in the first quarter of 1994 as compared to the first quarter
of 1993, principally because of the sales of DP, which was acquired in June
1993. Gross profit as a percentage of sales for the first quarter of 1994 of
15.5% is a decrease of 7.8% from the comparable 1993 quarter while gross profit
dollars decreased by $14.4 million. Selling, general and administrative expenses
also decreased by $3.9 million for these periods and included a provision of
$1.3 million for the settlement of employee severance agreements. The $1.3
million provision was accrued in accordance with FAS 112 when it became probable
that the postemployment benefit agreement for the then Chief Executive officer
of the Company would become effective. The decline in gross profit was
principally due to the performance at Qualex.
Interest expense for the first quarter of 1994 of $11.3 million is an
increase of $1.2 million from the first quarter of 1993. This increase is
partially attributable to $.3 million of higher interest due to higher average
borrowing at Snapper under the revolving credit facilities established to
provide working capital. This increase is primarily attributable to the
inclusion of $.9 million of DP interest expense for the three months ended March
31, 1994 and none for the comparable previous pre-acquisition period. At March
31, 1994, Qualex,
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
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 $2.2 million in the first
quarter of 1994 when compared to the first quarter of 1993. This decrease is
primarily the result of a decrease in investment income because of 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 for Qualex and for all other Actava operations. The
rates are based on expected operating results for the year and estimated
permanent differences between book and taxable income. SEE "INCOME TAXES" IN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The minority interest shown on the Company's Consolidated Statements of
Operations represents Kodak's portion of the earnings of Qualex. In accordance
with the Shareholders' Agreement, the Company and Kodak are each entitled to 50%
of Qualex's net income for income reporting purposes. Although Qualex accounted
for 49% of Actava's 1994 first quarter revenues and had a pre-tax loss of $18.3
million, only approximately 25% of its pre-tax loss ($4.6 million) is reported
in Actava's consolidated net loss due to Qualex's income tax provision at an
effective rate of 50% and the 50% minority interest effect. SEE "PHOTOFINISHING
TRANSACTION" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 "SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- CHANGES IN ACCOUNTING PRINCIPLES" 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 investments held as of or acquired after
January 1, 1994. In accordance with the Statement, prior period
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
As a result of the items described above, Actava reported a net loss for
the first quarter of 1994 of $12.7 million in comparison to a net loss of $7.6
for the comparable 1993 period.
Financial Position: Actava's working capital was $97.4 million at March
31, 1994 as compared to $103.4 million at December 31, 1993. The decrease
reflects the loss incurred by Actava in the first quarter of 1994 and the
payment of certain sinking fund requirements. The seasonal increase in accounts
receivable at Snapper was principally financed by borrowing from working capital
lines of credit. In addition, due to amendments in the Triton loan agreement
regarding quarterly principal payments, $5 million was classified as a current
note receivable at March 31, 1994. Cash and short-term investments at Actava,
excluding Qualex, decreased by $2.2 million in the first quarter of 1994 to
$42.1 million. At March 31, 1994, approximately $5.0 million of the Company's
cash and short-term investments were pledged to secure a Snapper credit line and
approximately $16.2 million of cash and short-term investments were pledged to
support outstanding letters of credit.
For the three month period ended March 31, 1994, cash flows of $26.1 and
$7.6 million were used by operating and investing activities, respectively,
while financing activities provided $26.6 million of cash. For operations,
accounts receivable increased by $1.9 million, inventories decreased by $9.3
million, prepaid expenses decreased by $.4 million, and accounts payable and
other similar items decreased by $7.9 million. Depreciation of $12.6 million and
amortization of $5.9 million are included in determining cash flow used by
operations.
Investing activities used $7.6 million of cash, including payments for
property, plant and equipment (net of disposals) of $7.0 million.
Financing activities provided $26.6 million during the quarter with
borrowings under short-term bank agreements of $12.6 million, net borrowings of
$27.2 million under long-term debt agreements, payments of $3.0 million for
subordinated debt and payments of dividends by Qualex to minority interest of
$10.2 million.
Actava's senior long-term debt, including the current portion, increased
from $223.8 million at December 31, 1993 to $251.0 million at March 31, 1994.
This is primarily attributable to additional borrowings by Qualex under
long-term borrowing agreements.
The Company is subject to various contingent liabilities and commitments.
These include a floor plan agreement entered into by Snapper under which
approximately $23.0 million is outstanding for 1993, various guaranties of debt
totaling approximately $8.6 million, various real estate leases with estimated
future payments of approximately $9.1 million, an agreement for Qualex which
involves sales of an undivided interest in certain accounts receivable with a
maximum of $75.0 million, a supply agreement between Qualex and Kodak, various
environmental matters, a ten year agreement entered into by Qualex to purchase
information systems services for annual charges of approximately $13.0 million,
and various pledges of cash and short-term investments. SEE "CONTINGENT
LIABILITIES AND COMMITMENTS" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Qualex and DP handle and store various materials in the normal course of
business that have been classified as hazardous by various federal, state and
local regulatory agencies. Qualex and DP are continuing to conduct tests at
various 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.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
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 fair
value of the currency swap as of March 31, 1994 and December 31, 1993 was
approximately $13.0 million and $10.8 million, respectively; however, this is
subject to change as domestic interest rates, foreign currency markets, and debt
service payments made are determining factors. The Company would receive the
proceeds payable upon the termination of the currency swap.
Actava's subordinated debt position, including the current portion, of
$191.4 million at March 31, 1994 is a decrease of $2.9 million from year-end
1993. Subordinated debt is 43.3% of Actava's total long-term debt, including the
current portion, with the first significant maturity due in 1996.
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 valued at $12 million (the
"Acquisition Shares"), 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 which may provide the seller with
additional payments depending upon the value of the issued shares over a period
of not longer than one year from the purchase date. The agreement gives the
seller the right under certain circumstances, to require the Company to purchase
the 1,090,909 shares issued to the seller in connection with the acquisition
(the "Acquisition Shares") at a price equal to $11.00 per share. The payment of
additional cash or the issuance of additional shares will not increase the cost
recorded by Actava for DP since the cost of DP will be increased by the amount
of such item and simultaneously reduced by a corresponding amount due to an
adjustment to the respective redeemable common stock. The right of the seller to
receive additional payments of cash or additional shares of Company Common Stock
becomes exercisable after June 8, 1994. In the event that a registration
statement under the Securities Act of 1933, as amended, is in effect with
respect to the Acquisition Shares, the Company may require the seller to sell
the Acquisition Shares to purchasers other than the Company and pay to the
seller the difference between the price received and $11.00 per share. The
Company has filed a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Acquisition Shares. If the Registration Statement
is not declared effective on or before June 8, 1994, the Company will be
required to repurchase the Acquisition Shares for $12.0 million in cash. Any
such repurchase would violate covenants in the Company's credit and subordinated
debt agreements.
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. Under the terms of Actava's 6% Senior Subordinated Swiss Franc Bonds
due 1996, Actava may not make any cash redemptions (in excess of the aggregate
net cash proceeds from the sale of Common Stock) of its Common Stock or declare
any cash dividends after September 30, 1985 in excess of $25 million plus (or
minus) the net income (or loss) of Actava subsequent to September 30, 1985. As
of March 31, 1994 there were no amounts available for dividends or redemptions
pursuant to this covenant. The Qualex credit agreement and the Shareholders'
Agreement with Eastman Kodak Company also restrict the amount of net assets of
Qualex which may be transferred to the Company or Kodak by dividend or other
means. In addition, the DP credit agreement requires that Actava maintain, at
all times, an unrestricted cash and short-term investment position of $20
million after September 30, 1994. Non-compliance with this requirement subjects
this agreement to termination by the lender upon seventy-five days notice to
Actava.
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.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
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 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 it is seeking to make arrangements to prepay the remaining
balance due under the Triton Loan and has obtained a bank commitment, subject to
certain conditions, that would enable Triton to repay its obligations in full.
Triton has also announced, however, that it may seek to impose additional
requirements on Actava as a condition to Triton's repayment of the loan. As of
March 31, 1994 the outstanding balance under the Triton Loan was $25.5 million.
During the first quarter of 1994 the Company received from its subsidiaries
$12.0 million in cash dividends. The dividends received from subsidiaries during
the first quarter of 1994 constitute substantially all of the dividends the
company expects to receive from its subsidiaries in 1994, due to the restrictive
covenants in the subsidiaries credit agreements. The Company, excluding its
subsidiaries and division, had $14.2 million of unpledged cash and short-term
investments. 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. Qualex is subject to similar restrictions under its credit
agreements. In addition, Qualex is subject to the Change of Control provisions
in the Shareholders Agreement between the Company and Kodak. These Change of
Control provisions could have the effect of eliminating the Company's ability to
control the payment of dividends by Qualex. The Company uses its existing cash
and short-term investments, as well as dividends from its 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 in 1994 of approximately $21.3 million, and
the Company anticipates that its total cash needs in 1994 will exceed the
anticipated amount of additional cash to be received by the Company, including
dividends from its subsidiaries. As a result, if the Company does not receive
additional cash through either a refinancing, the repayment of the Triton Loan
or the realization of value from the sale or partial sale of one of its
operating entities, the Company will end 1994 with less unrestricted cash and
short-term investments than it held at the end of the first quarter of 1994.
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. Management expects the Company to
remain in compliance with these covenants, as amended, for the second quarter of
1994 and thereafter if certain events take place, including increased earnings.
Management expects that the Company would continue to be in compliance after the
second quarter of 1994 without regard to increased earnings if the Triton Loan
is repaid because the Triton Loan is excluded for purposes of determining
compliance with certain covenants in the credit agreements. If existing cash,
dividends from subsidiaries and payments on the Triton Loan are not sufficient
to meet its cash requirements, the Company will seek to generate additional cash
by selling or pledging certain assets, and will consider additional options to
reduce its cash expenditures.
The Company's subsidiaries and division, excluding Qualex, had unused
borrowing capacity of approximately $31.3 million at March 31, 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, $350.2 million.
16
<PAGE> 18
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: November 4, 1994
17
