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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
(AMENDMENT NO. 1)
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CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): MAY 23, 1994
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IDB COMMUNICATIONS GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-14972 93-0933098
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File No.) Identification No.)
</TABLE>
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<TABLE>
<S> <C>
10525 WEST WASHINGTON BOULEVARD, CULVER CITY,
CALIFORNIA 90232-1922
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
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(213) 870-9000
(Registrant's Telephone Number, Including Area Code)
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ITEM 5. OTHER EVENTS.
On June 13, 1994, Deloitte & Touche ("Deloitte") provided IDB Communications
Group, Inc. (the "Registrant") with Deloitte's response to the Registrant's
Current Report on Form 8-K (the "Form 8-K") filed with the Securities and
Exchange Commission (the "SEC") on May 31, 1994. In Deloitte's response filed as
Exhibit 16.1 hereto (the "Deloitte letter"), Deloitte confirmed that the
unresolved items of concern to Deloitte were limited to the first quarter of
1994 and cited no irregularities relating to the Registrant's financial
statements. The Deloitte letter does not recommend restatement of any financial
statements relating to prior periods. Deloitte did not limit or withdraw any
report issued with respect to the Registrant's financial statements audited by
Deloitte for any of the ten fiscal years ended December 31, 1993 or any consent
provided by Deloitte with respect to any of the six registration statements
filed with the SEC by the Registrant in 1993 or the registration statement filed
with the SEC by the Registrant in the first quarter of 1994. The Deloitte letter
does not question the fundamentals or intrinsic value of the Registrant's
business. Deloitte acknowledged in its response that Deloitte submitted its
resignation to the Registrant at a time when Deloitte's disputes with the
Registrant were unresolved and subject to continuing discussion between Deloitte
and the Registrant. As noted in the Form 8-K, the Registrant was prepared to
delay filing of its Form 10-Q in an effort to satisfy Deloitte, but was unable
to advise Deloitte of its willingness to delay the filing before Deloitte
submitted its resignation to the Registrant. On the morning of Monday, May 23,
1994, prior to Deloitte's resignation, several members of management of the
Registrant attempted to contact Deloitte to reaffirm management's commitment to
continue to work with Deloitte until it was satisfied. However, the first
contact the Registrant's management had with Deloitte on May 23, 1994 was when
Deloitte called the Registrant to tender its resignation. The Registrant
subsequently filed its Form 10-Q later that day. [See paragraph (B) of the
Deloitte letter.]
Deloitte acknowledged that the Registrant was not informed of the existence
of any "disagreement" (within the meaning of Item 304 of Regulation S-K)
regarding the first quarter of 1994 until after Deloitte had resigned. In
addition, with respect to the first quarter of 1992, Deloitte acknowledged that
the Registrant was not informed of the existence of any "reportable event"
(within the meaning of Item 304) until May 23, 1994, after Deloitte had
resigned. Deloitte's letter does not discuss, refer to or otherwise call into
question any accounting period other than the first quarter of 1994 and the
first quarter of 1992. [See paragraph (A) of the Deloitte letter.] Deloitte had
expressed concerns, in connection with the Registrant's first quarter 1992
financial results, regarding the accuracy of the Registrant's internally
generated financial statements. [See paragraph (C)(3) of the Deloitte letter.]
Deloitte, however, never stated prior to its resignation that such concerns
constituted a "reportable event" (as defined in Item 304), and subsequently
issued an unqualified audit report with respect to the 1992 fiscal year, which
report has never been modified, supplemented or rescinded. Deloitte's letter
agrees that its concerns regarding the first quarter of 1992 "were ultimately
resolved to Deloitte's satisfaction."
While Deloitte in its letter indicates that it "disagrees" with certain of
the statements contained in the Form 8-K, particularly those statements
describing the substance of disputes between the Registrant's management and
Deloitte [see paragraph (C) of the Deloitte letter], the Deloitte letter recasts
such statements, providing greater detail in certain instances, without directly
contradicting the text of the Form 8-K.
The Registrant agrees that Deloitte advised it on May 13, 1994 (the business
day prior to the prescribed due date for the Form 10-Q), that Deloitte would
resign if the Registrant filed its Form 10-Q in its then current version. [See
paragraph (C)(1) of the Deloitte letter.] In fact, on that date, Deloitte
presented the Registrant's management with three alternatives: (1) file the Form
10-Q in its then current form, (2) file the Form 10-Q as modified to conform to
Deloitte's suggestions, or (3) delay the filing. The third alternative, which
had been strongly recommended by Deloitte, was accepted by the
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Registrant's management and agreed to that same day by the Audit Committee of
the Registrant's Board of Directors. A Form 12b-25 was filed on May 16, 1994 to
delay the prescribed due date of the Form 10-Q until May 23, 1994.
Deloitte's letter states that Deloitte "disagreed with the recording of
revenue" related to a certain transaction "because the information and
documentation presented to Deloitte did not support the recording of the sale as
of March 31, 1994." [See paragraph (C)(1) of the Deloitte letter.] Deloitte's
letter does not question the substance of the transaction, but merely its timing
(i.e., whether the transaction should properly be recorded in or subsequent to
the first quarter of 1994). The Registrant's management offered Deloitte the
opportunity to directly confirm the transaction in a writing to be signed by the
other party to the transaction. Deloitte, however, declined to seek the
confirmation and the Registrant is unaware of any attempt by Deloitte to confirm
the transaction.
Deloitte's letter states that Deloitte needed additional support for the
Registrant's proposed $2.9 million increase in its provision for doubtful
accounts. [See paragraph (C)(1) of the Deloitte letter.] Subsequent to the
Registrant's press release of its financial results for the first quarter of
1994 on April 26, 1994, management became aware of the bankruptcy filing of a
major customer of the Registrant. Such customer was then indebted to the
Registrant in an amount in excess of $3 million. The bankruptcy filing of such
customer constituted a Type 1 Subsequent Event that should be accounted for and
reflected on the Registrant's balance sheet as of March 31, 1994. Deloitte did
not request any supporting documents relating to the bankruptcy of such customer
prior to its resignation.
Deloitte's letter states that, at the time of Deloitte's resignation, it
informed management and the Registrant's Audit Committee that it was "no longer
willing to rely on management's representations." [See paragraph (C)(4) of the
Deloitte letter.] Deloitte's letter, however, does not offer any reasons for
such statement. Prior to its resignation, Deloitte made no attempt to express
its concerns independently to either the outside board members of the Audit
Committee or other members of the Registrant's management (notably, the
Registrant's chief executive officer or its general counsel).
In sum, Deloitte's response confirmed that the Registrant's financial
statements do not contain any irregularities. Deloitte does not even suggest any
limitation or withdrawal of reports issued and consents previously provided by
it. Deloitte resigned while certain issues relating to the first quarter of 1994
remained unresolved and subject to further discussion.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
None.
(b) Pro Forma Financial Information.
None.
(c) Exhibits.
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<CAPTION>
EXHIBIT
NO. DESCRIPTION
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<C> <S>
16.1 Letter re Change in Certifying Accountant
99.1 Press Release dated June 14, 1994
</TABLE>
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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, thereunto duly authorized, in the City of Culver City, State of
California, on June 13, 1994.
IDB COMMUNICATIONS GROUP, INC.
By: /s/ Edward R. Cheramy
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Edward R. Cheramy
President
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EXHIBIT 16.1
Securities and Exchange Commission
Mail Stop 9-5
Washington, DC 20549
Dear Sirs/Madams:
We have read Item 4 of Form 8-K of IDB Communications Group, Inc. (the
"Registrant") as filed with the Securities and Exchange Commission on May 31,
1994 (the "Form 8-K"), and have the following comments:
(A) We agree with the statements made in paragraphs 1 and 2; sentence 4 of
paragraph 4; and sentence 1 of paragraph 5.
We agree with the statements made in sentence 8 of paragraph 4 and sentence 5
of paragraph 5, if read in the context of specific discussions held between
the Registrant and Deloitte & Touche ("Deloitte") regarding the requirements
of Item 304 of Regulation S-K. However, prior to the time of its
resignation, Deloitte, on numerous occasions, had discussed with the
Registrant the unresolved and disputed items related to the first quarter of
1994 and the weaknesses in internal controls and procedures relating to the
Registrant's interim reporting identified in the first quarters of 1994 and
1992, as discussed further in (C)(3) below.
We agree with sentence 1 of paragraph 8, however, it should be noted that
such meetings were held telephonically and, in addition to the one member of
management on the Audit Committee, included other members of management of
the Registrant.
We agree with paragraph 9, however, it should be noted that authorization to
respond to inquiries of the Registrant's prospective successor accountants
was provided in a letter dated June 6, 1994.
(B) We have no basis to agree or disagree with the statements made in paragraph
3; sentence 6 of paragraph 4; and sentence 2 of paragraph 8, but would make
the following observations:
With respect to the Registrant's statements in paragraph 3 and in sentence 2
of paragraph 8, at the time of Deloitte's resignation on May 23, 1994,
Deloitte disagreed with certain items that the Registrant was proposing to
include in its results of operations for the quarter ended March 31, 1994,
which were to be reported in the Registrant's report on Form 10-Q for that
quarter, and there were other items included in the Registrant's proposed
report on Form 10-Q for that quarter that Deloitte believed were not
adequately supported by documentation presented to Deloitte through that
date. Additionally, with respect to the Registrant's assertion in sentence 6
of paragraph 4, on May 20, 1994 management of the Registrant informed
Deloitte that it intended to file its quarterly report on Form 10-Q
reporting the same income before income taxes as the Registrant had
previously reported in its press release, notwithstanding the disagreements
and unresolved issues raised by Deloitte. At no time subsequent to May 20,
1994 through the date of Deloitte's resignation on May 23, 1994 did
management of the Registrant inform Deloitte that it was prepared to further
delay filing its report on Form 10-Q for the quarter ended March 31, 1994.
(C) We disagree with the statements made in sentences 1, 2, 3, 5, and 7 of
paragraph 4; sentences 2, 3, and 4 of paragraph 5; paragraph 6; and
paragraph 7, and believe the statements made in the indicated sentences
within the referenced paragraphs should be modified as follows:
(1) With respect to sentences 1, 2, 3, and 5 of paragraph 4, on April 25,
1994, prior to the Registrant's press release of its financial results
for the quarter ended March 31, 1994, and in connection with Deloitte's
performance of the procedures specified by the American Institute of
Certified Public Accountants for a review of interim financial
information as described in SAS No. 71, INTERIM FINANCIAL INFORMATION, on
the Registrant's unaudited condensed consolidated financial statements
for the three months ended March 31, 1994, Deloitte informed the
Registrant that Deloitte disagreed, based on the information and
documentation provided to Deloitte by the Registrant to that date, with
recognizing as income before income taxes approximately $10.5 million of
recorded items that constituted a material portion of the
<PAGE>
$15.1 million of income before income taxes that the Registrant intended
to report in its press release. Deloitte requested that the Registrant
not make its press release, but the Registrant's management, with the
concurrence of the Audit Committee (as Deloitte was advised at the time),
nevertheless released its earnings for the quarter ended March 31, 1994.
Subsequent to the press release, the Registrant presented Deloitte with
additional information and documentation relating to the $10.5 million of
income before income taxes that Deloitte had disagreed with, and based on
this additional information and documentation, $1.9 million of the $10.5
million was resolved to Deloitte's satisfaction. Of the $8.6 million
remaining unresolved, the Registrant agreed that $4.5 million was
recorded in error and, in its place, presented Deloitte with various new
and previously unrecorded items aggregating approximately $4.5 million of
income before income taxes. Deloitte reviewed additional information and
documentation presented by the Registrant in support of this $4.5 million
and was satisfied as to $3.1 million of the items. This left, at May 13,
1994, items aggregating $5.5 million of income before income taxes
unresolved. Of this amount, Deloitte disagreed with items aggregating
approximately $4.1 million recognized by the Registrant as income before
income taxes. The remaining $1.4 million was unresolved pending
additional information and documentation to be provided by the
Registrant. On May 13, 1994, Deloitte advised the Registrant that the
$5.5 million constituted a material portion of the $15.1 million of
income before income taxes and, if the Registrant filed its quarterly
report on Form 10-Q including the $5.5 million, Deloitte would resign.
On May 18, 1994, the Registrant agreed that the items aggregating
approximately $4.1 million of income before income taxes that Deloitte
had disagreed with on May 13, 1994, would not be included in the
Registrant's reported income before income taxes, and that the remaining
$1.4 million was yet unresolved. During the next two days, the Registrant
presented Deloitte with yet additional new and previously unrecorded
items aggregating $4.5 million of income before income taxes. On May 20,
1994, after reviewing additional information and documentation presented
by the Registrant, Deloitte informed the Registrant that it was satisfied
as to approximately $0.5 million of the newly identified $4.5 million.
The remaining $4.0 million, the components of which were the subject of
discussions between the Registrant and Deloitte, consisted of three
items: (i) approximately $5.0 million of revenue relating to the sale of
underlying lease rights to certain satellite transponder capacity ("sale
of transponder capacity"); (ii) approximately $1.9 million reduction in
cost of sales relating to certain "purchase accounting adjustments"
recorded in connection with earlier business acquisitions; and (iii)
approximately $2.9 million increase in the Registrant's provision for
doubtful accounts. Deloitte informed the Registrant that: (a) it
disagreed with the recording of revenue in connection with the "sale of
transponder capacity," because the information and documentation
presented to Deloitte did not support the recording of the sale as of
March 31, 1994; (b) it was awaiting further information and documentation
from the Registrant to support the "purchase accounting adjustments"; and
(c) it needed additional support from the Registrant for the Registrant's
proposed $2.9 million increase in its provision for doubtful accounts,
because in all previous discussions regarding the Registrants' first
quarter results, management of the Registrant had represented to Deloitte
that the provision for doubtful accounts was adequate.
(2) With respect to sentence 7 of paragraph 4, we believe the word
"abruptly" is inappropriate considering the events described herein.
(3) With respect to sentences 2, 3, and 4 of paragraph 5, Deloitte was
engaged to perform a review of the Registrant's unaudited condensed
consolidated financial statements for the quarter ended March 31, 1992,
after the Registrant had filed such statements on Form 10-Q. In
connection with this review, Deloitte expressed concerns regarding the
accuracy of the Registrant's reported results of operations for such
quarter, which were ultimately resolved
2
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to Deloitte's satisfaction. However, because of weaknesses in internal
controls and procedures relating to the Registrant's interim financial
reporting identified in performing this review, Deloitte insisted on
performing timely quarterly reviews for subsequent interim periods and
suggested that, prospectively, the Registrant's management meet with the
outside directors on the Registrant's Audit Committee prior to the
release of the Registrant's quarterly results. Deloitte did, in fact,
perform timely quarterly reviews for each subsequent quarter. In an oral
communication to the Audit Committee at the conclusion of the audit of
the Registrant's financial statements for the year ended December 31,
1992, Deloitte noted that the condition of the Registrant's underlying
accounting records had improved "dramatically". However, in the meeting
held with the Registrant's Audit Committee on May 23, 1994, the day of
Deloitte's resignation, Deloitte advised the Registrant that its internal
controls and procedures relating to the Registrant's interim financial
reporting that had improved in the latter part of 1992 and in 1993 had
again deteriorated in the first quarter of 1994.
(4) With respect to paragraph 6, as a result of the events surrounding the
release and reporting of the Registrant's financial results for the first
quarter of 1994, on May 23, 1994 Deloitte concluded, and so advised the
Registrant's management and its Audit Committee, that there had been a
serious breakdown in the process of identifying, analyzing and recording
the Registrant's business transactions which prohibited the satisfactory
completion of a quarterly review, recognizing the limitations of such an
engagement. Deloitte also informed the Registrant's management and its
Audit committee that it was no longer willing to rely on management's
representations regarding its interim financial statements.
(5) With respect to paragraph 7, management of the Registrant, with the
concurrence of the Audit Committee, requested that Deloitte not issue
formal written reports relating to internal controls and procedures or
other comments arising from its audit of the Registrant's annual
financial statements or its review of the Registrant's quarterly
financial statements, but instead report orally on these matters at Audit
Committee meetings. Such discussions did occur at Audit Committee
meetings. In addition, Deloitte communicated the substance of the matters
which constituted the disagreements and reportable events discussed
herein to the Registrant's management on April 25, 1994, May 13, 1994,
May 20, 1994, and May 23, 1994 and to the Registrant's Audit Committee on
May 13, 1994 and May 23, 1994.
Deloitte & Touche
Los Angeles, California
June 13, 1994
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EXHIBIT 99.1
Contact: Peter Hartz
Sr. VP Sales & Marketing
IDB Communications Group, Inc.
(213) 240-3721
Michael Sitrick
Michael Kolbenschlag
Sitrick Krantz & Co.
(310) 788-2850
DELOITTE SAYS IT RESIGNED AS IDB'S AUDITORS OVER FIRST QUARTER 1994 ACCOUNTING
ISSUES TOTALING
$.04 PER SHARE; PREVIOUS AUDITS REAFFIRMED
LOS ANGELES, CA -- JUNE 14, 1994 -- In a letter to the Securities and
Exchange Commission yesterday, Deloitte & Touche stated that it resigned as IDB
Communications Group, Inc.'s auditors over the recording of items in the
company's 1994 first quarter which in aggregate totaled $5.4 million in pre-tax
income or $.04 per share. In its letter, Deloitte cited no irregularities in
IDB's financial statements and expressed no limitation or withdrawal of its
previous reports. Deloitte's letter, in its entirety, was included in a Form 8-K
filed by IDB today with the SEC.
Jeffrey P. Sudikoff, chairman and chief executive officer of IDB stated, "I
am astonished that after eight and one-half years, Deloitte & Touche would
resign as our auditors over what their letter confirms were accounting issues,
limited to the first quarter, without so much as a phone call to me."
In its letter, Deloitte stated: "(a) it disagreed with the recording of
revenue in connection with the 'sale of transponder capacity,' because the
information and documentation represented to Deloitte did not support the
recording of the sale as of March 31, 1994; (b) it was awaiting further
information and documentation from (IDB) to support the 'purchase accounting
adjustments'; (c) it needed additional support from (IDB) for (IDB's) proposed
$2.9 million increase in its provision for doubtful accounts, because in all
previous discussions regarding (IDB's) first quarter results, management of
(IDB) had represented to Deloitte that the provision for doubtful accounts was
adequate."
Deloitte stated that while it expressed concerns regarding the accuracy of
IDB's reported results of operations for the first quarter of 1992, these
concerns "were ultimately resolved to Deloitte's satisfaction."
In its letter, Deloitte said that it agreed with the statement in IDB's Form
8-K, filed May 31, 1994, that "the financial statements of (IDB) for each of the
two fiscal years in the period ended December 31, 1993 did not contain any
adverse opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principles."
The letter went on, "In an oral communication to the Audit Committee at the
conclusion of the audit of (IDB's) financial statements for the year ended
December 31, 1992, Deloitte noted that the condition of (IDB's) underlying
accounting records had improved 'dramatically.' However, in the meeting held
with (IDB's) Audit Committee on May 23, 1994, the day of Deloitte's resignation,
Deloitte advised (IDB) that its interim financial reporting that had improved in
the latter part of 1992 and in 1993 had again deteriorated in the first quarter
of 1994."
Mr. Sudikoff said that while he disputed Deloitte's statement relative to
the deterioration of IDB's financial controls, the company has taken steps to
address any such concerns.
"On June 9, we announced that the outside members of our audit committee
have been given the responsibility for the retention of our new auditors. They
will also, with the help of outside consultants, review our accounting systems
and controls. Both of these processes are underway. Even
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though we believe that Deloitte's letter validates our view that the market
over-reacted to our auditor's resignation, we are taking seriously the
credibility issues raised by the recent decline in the value of our stock," he
said.
"No one has ever questioned the potential or underlying value of our
company," Mr. Sudikoff said. "Now that this cloud of uncertainty has been
removed, we can once again concentrate all of our energies on growing our
business."
IDB Communications Group, Inc. is a global telecommunications company that
operates a domestic and international communications network providing its
customers with international private line and long distance telephone services,
radio and television transmission services, facsimile and data connections,
mobile satellite communications capabilities and the design and integration of
satellite networks worldwide.
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2
