1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
AMENDMENT NO. 2
TO
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1993
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
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THE ACTAVA GROUP INC.
(Exact name of registrant as specified in its charter)
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)
404/658-9000
(Registrant's telephone number, including area code)
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 (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practical date.
Common Stock -- 17,635,186 shares as of November 10, 1993
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2
PART I -- FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(In thousands except share data)
SEPTEMBER 30, DECEMBER 31,
1993 1992
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash..................................................................... $ 8,378 $ 20,792
Short-term investments................................................... 41,354 63,842
Receivables (less allowances for doubtful accounts of $16,599 in 1993
and $12,805 in 1992)................................................... 270,745 243,368
Inventories.............................................................. 98,449 63,987
Prepaid expenses......................................................... 48,546 38,365
Future income tax benefits............................................... 29,437 45,790
------------- ------------
TOTAL CURRENT ASSETS.............................................. 496,909 476,144
PROPERTY, PLANT AND EQUIPMENT.............................................. 476,837 409,330
Less allowances for depreciation......................................... (191,678) (165,720)
------------- ------------
285,159 243,610
NOTES RECEIVABLE FROM TRITON GROUP LTD..................................... 31,726 31,726
OTHER ASSETS............................................................... 33,344 45,754
LONG-TERM INVESTMENTS...................................................... 26,419 24,719
INTANGIBLES................................................................ 386,307 395,913
------------- ------------
TOTAL ASSETS...................................................... $ 1,259,864 $1,217,866
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities......... $ 240,752 $ 225,255
Notes payable............................................................ 114,605 64,795
Current portion of long-term debt........................................ 9,971 10,013
------------- ------------
TOTAL CURRENT LIABILITIES......................................... 365,328 300,063
DEFERRED INCOME TAXES...................................................... 57,050 58,651
LONG-TERM DEBT............................................................. 211,554 220,357
SUBORDINATED DEBT.......................................................... 190,429 193,566
MINORITY INTEREST IN PHOTOFINISHING SUBSIDIARY............................. 206,182 205,382
REDEEMABLE COMMON STOCK.................................................... 12,000 --
STOCKHOLDERS' EQUITY
Common Stock (22,767,744 shares in 1993 and 1992)........................ 22,768 22,768
Additional capital....................................................... 45,519 46,362
Retained earnings........................................................ 270,583 292,266
Less treasury stock -- at cost (6,223,467 shares in 1993 and 1992)....... (121,549) (121,549)
------------- ------------
217,321 239,847
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $ 1,259,864 $1,217,866
============ ============
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(In thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1993 1992 1993 1992
-------- -------- -------- --------
NET SALES............................................. $344,479 $307,585 $921,627 $872,117
Operating Costs and Expenses
Cost of products sold............................ 258,847 205,753 692,383 612,555
Selling, general and administrative expenses..... 62,520 69,054 184,835 205,279
Provision for doubtful accounts.................. 1,901 988 4,944 1,788
Provision (reduction) for plant consolidations... 600 (1,590) 646 (1,590)
Provision (reduction) for settlement of employee
agreements and related cost.................... -- (558) -- (558)
-------- -------- -------- --------
OPERATING PROFIT............................... 20,611 33,938 38,819 54,643
Interest (expense).................................... (10,748) (10,658) (31,888) (24,368)
Other income (expense) -- net......................... (202) 3,459 3,454 4,133
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE........................ 9,661 26,739 10,385 34,408
Income taxes.......................................... 11,472 14,683 15,175 19,246
-------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST........... (1,811) 12,056 (4,790) 15,162
Minority interest..................................... (7,236) (7,343) (9,088) (9,624)
-------- -------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE........................ (9,047) 4,713 (13,878) 5,538
Cumulative effect of change in accounting principle... -- -- (2,730) 1,034
-------- -------- -------- --------
Net Income (Loss)................................ $ (9,047) $ 4,713 $(16,608) 6,572
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Before cumulative effect of change in accounting
principle...................................... $ (.51) $ .28 $ (.82) $ .33
Cumulative effect of change in accounting
principle...................................... -- -- (.16) .06
-------- -------- -------- --------
Primary and fully diluted........................ $ (.51) $ .28 $ (.98) $ .39
======== ======== ======== ========
CASH DIVIDENDS PER COMMON SHARE.................. $ .09 $ .09 $ .27 $ .27
======== ======== ======== ========
AVERAGE COMMON AND COMMON EQUIVALENT SHARES...... 17,635 16,544 17,003 16,544
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
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4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
INCREASE (DECREASE) IN
CASH
------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1993 1992
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)............................................................. $ (16,608) $ 6,572
Cumulative effect of change in accounting principle......................... (2,730) 1,034
--------- ----------
Income (Loss) before cumulative effect of change in accounting principle.... (13,878) 5,538
Items providing cash from operations........................................ 33,410 26,510
--------- ----------
Net Cash Provided by Operating Activities............................ 19,532 32,048
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments -- maturities over 90 days......................... (54,280) (72,563)
Sales of investments -- maturities over 90 days............................. 73,289 87,163
Net sales of other investments -- maturities less than 90 days.............. 3,479 3,549
Payments for property, plant & equipment.................................... (49,710) (60,026)
Proceeds from disposals of property, plant & equipment...................... 17,573 5,710
Collections on notes receivable............................................. 1,760 9,141
Payments for purchases of businesses........................................ (28,311) (24,765)
Loans to Triton Group Ltd................................................... -- (1,426)
Payments for other intangibles.............................................. (872) (8,296)
Other investing activities -- net........................................... (6,159) 3,152
--------- ----------
Net Cash (Used) by Investing Activities.............................. (43,231) (58,361)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under short-term bank agreements............................. 34,900 4,689
Borrowings under other long-term debt agreements............................ 958 810,063
Payments on long-term debt agreements....................................... (10,349) (754,189)
Payments of subordinated debt............................................... (1,847) --
Cash dividends paid by Qualex to minority interest.......................... (7,714) (2,986)
Cash dividends paid by the Actava Group..................................... (4,663) (4,467)
--------- ----------
Net Cash Provided by Financing Activities............................ 11,285 53,110
--------- ----------
INCREASE (DECREASE) IN CASH...................................... (12,414) 26,797
Cash at beginning of year..................................................... 20,792 26,586
--------- ----------
CASH AT SEPTEMBER 30............................................. $ 8,378 $ 53,383
========= ===========
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(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 nine months ended September 30, 1993 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1993.
CHANGES IN ACCOUNTING PRINCIPLES
Change in Method of Accounting for Certain Advertising Costs
Effective January 1, 1992, Qualex changed its method of accounting for the
cost of its proof advertising program to recognize these costs at the time the
advertising is placed by the customer. Under the proof advertising program,
Qualex reimburses certain advertising costs incurred by its customers up to a
percentage of sales to that customer. Qualex previously accrued such costs at
the time of the initial sale. Qualex believes that this new method is preferable
because it recognizes advertising expense as it is incurred rather than at the
time of the initial sale to the customer. The 1992 adjustment of $1,034,000, net
of income taxes of $1,437,000 and minority interest of $1,033,000, is included
in income for the first quarter of 1992 to apply retroactively the new method.
The 1992 adjustment before income taxes and minority interest is $3,504,000.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
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
$2,730,000 charge (after tax benefit) to net income as the cumulative effect of
a change in accounting principle. Additionally, the annual net periodic
postretirement benefit expense for 1993 will be approximately $500,000, which is
comprised of service cost of approximately $105,000 and imputed interest cost of
approximately $395,000. Postretirement benefit expense for 1992, recorded on a
cash basis, has not been restated. The assumed health care cost trend rates used
to measure the expected cost of benefits covered by the plan for 1993 is 14%.
This trend rate is assumed to decrease in 1% decrements to 6% in 2001 and years
thereafter. A 9% discount rate per year, compounded annually, was assumed to
measure the accumulated postretirement benefit obligation. A 1% increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation as of January 1, 1993, by 15% and the net
periodic postretirement benefit cost by 19%.
The following table presents the plans' funded status reconciled with
amounts recognized in the Company's consolidated balance sheet as of January 1,
1993 (in thousands):
Accumulated postretirement benefit obligation.................... $4,404
Plan assets...................................................... 0
------
Accumulated postretirement benefit obligation in excess of plan
assets......................................................... 4,404
Unrecognized prior service cost.................................. 0
Unrecognized net (gain) or loss.................................. 0
Unrecognized transition obligation............................... 0
------
Accrued postretirement benefit cost.............................. $4,404
======
POSTEMPLOYMENT BENEFITS
The Company and its subsidiaries provide benefits to former or inactive
employees after employment, but before retirement, such as severance benefits,
continuation of health care benefits and life insurance coverage. The costs of
these are currently accounted for on a pay-as-you-go (cash) basis. The Financial
Accounting Standards Board has issued Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits", which
requires employers to recognize the obligation to provide these benefits when
certain conditions are met. The Company is required to adopt the new method of
accounting for these benefits no later than January 1, 1994. The adoption of
Statement No. 112 will not have a significant effect on the Company's financial
position or results of operations.
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 is required to
adopt the new method of accounting no later than January 1, 1994. The adoption
of Statement No. 115 will not have a significant impact on the Company's
financial position or results of operations.
PHOTOFINISHING TRANSACTION
Photofinishing operations are conducted by Qualex Inc., which was formed in
March, 1988 by the combination of the Company's photofinishing operations with
the domestic photofinishing operations of Eastman Kodak Company. While the
Company and Kodak currently share Qualex's equity, income and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
dividends equally, the Company has 51% voting control by virtue of its ownership
of 50% of Qualex's common stock and 100% of Qualex's voting preferred stock. The
Company also has majority representation on the Qualex Board of Directors,
although certain decisions, not including the declaration of dividends, require
the concurrence of Kodak's board representatives.
The Company consolidates the accounts of Qualex and presents Kodak's
portion of ownership and equity in the income of Qualex as minority interest.
The Qualex Shareholders' Agreement between the Company and Eastman Kodak
Company stipulates that upon a change of control at the Company certain Qualex
preferred stock, including the voting preferred owned by the Company, will be
redeemed. On March 28, 1991, the Qualex Shareholders' Agreement between the
Company and Kodak was amended to stipulate that a change of control of the
Company, as defined in the Shareholders' Agreement, occurred on February 6,
1991. However, in the amendment Kodak waived its change of control rights under
the Shareholders' Agreement with respect to the February 6, 1991 change of
control. Kodak may withdraw its waiver, and enforce its rights under the
Agreement beginning March 1, 1992 and each subsequent March 1, by providing the
Company with 30 days written notice. Kodak did not elect to withdraw its waiver
on March 1, 1993. The amendment also provided that the Board of Directors of
Qualex be increased from seven to nine members, comprised of five
representatives of Actava, three representatives of Kodak and the chief
executive officer of Qualex.
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 Actava's voting
stock would be reduced from 51% to 50%, this change would not alter Actava'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 Actava, 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 Actava. However, Actava'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 nine month period ended September 30,
1993, Actava's total assets and liabilities would have been $678,381,000 and
$449,060,000, respectively, and sales and total costs and expenses would have
been $326,200,000 and $349,046,000, respectively.
TRITON GROUP LTD. LOAN
The Company has a $31.7 million note receivable with Triton Group Ltd.
secured by 4,338,598 shares of the Company Common Stock. Effective June 25,
1993, the Company and Triton modified the terms of the loan as part of a plan of
reorganization filed by Triton under Chapter 11 of the U.S. Bankruptcy Code. The
modifications include: extending the due date of the Loan to April 1, 1997;
reducing the interest rate to prime plus 1 1/2% for the first six months
following June 25, 1993, prime plus 2% for the next six months, and prime plus
2 1/2% for the remainder of the term of the note; revising the collateral
maintenance (margin call) requirements; and providing for release of collateral
under certain circumstances. Under the modified agreements, Actava's right of
first refusal with respect to any sale by Triton of its Actava Common Stock will
continue in effect until the loan is paid in full. The Stockholder Agreement was
amended to permit Triton to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
designate two directors (who are not officers or employees of Triton) on an
expanded nine-member Board of Directors as long as Triton continues to own 20%
or more of Actava's outstanding Common Stock. On July 19, 1993, Richard C.
Nevins, a financial advisor to Triton, was elected as one of Triton's designated
members of the Board of Directors of Actava. On July 22, 1993, Triton filed an
amendment to its Schedule 13D reporting that it had purchased an additional
75,000 shares of Actava Common Stock, resulting in ownership of 4,413,598 shares
(25.03%) of the outstanding Common Stock.
Triton filed a motion on July 30, 1993, with the United States Bankruptcy
Court for the Southern District of California seeking to modify Triton's
recently approved Plan of Reorganization. The modifications sought by Triton
would amend or eliminate the collateral maintenance (margin call) provisions
that are an integral part of the Amended and Restated Loan Agreement. On Monday,
August 2, 1993, the Bankruptcy Court entered a temporary restraining order
suspending the effectiveness of the margin call provisions until the Court had
an opportunity to hear Triton's motion seeking a preliminary injunction. The
motion seeking a preliminary injunction was heard on August 10, 1993, and was
denied. Triton then withdrew its motion to modify its Plan of Reorganization.
Therefore, the provisions of the Amended and Restated Loan Agreement continue to
remain in effect. On August 19, 1993, the Amended and Restated Loan Agreement
was amended to allow Triton to satisfy certain margin call requirements by
making deposits to a Collateral Deposit Account in lieu of delivering
certificates of deposit. The margin call provisions for principal repayments and
transfers of shares of Company Common Stock were not amended. As of November 11,
1993, Triton had complied with all margin call requirements and had deposited
$5,217,709 as additional collateral for the loan in the Collateral Deposit
Account. The amount required to be deposited in the Collateral Deposit Account
can change on a daily basis with changes in the market value of Company Common
Stock.
ACQUISITION
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 in cash, 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 may provide the seller with the
right to receive additional payments, or additional shares of the Company's
Common Stock, depending upon the value of the issued shares over a period of not
longer than one year from the purchase. The transaction has been 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 results of operations of the acquired business have been
included in the consolidated financial statements since the date of acquisition.
Effective June 30, 1991, prior to the acquisition of the DP(R) assets by
the Company DP(R) had revised the estimated useful lives for all categories of
its property, plant and equipment based upon management's expectations of the
extended economic benefit. The change in estimated useful lives had the effect
of reducing depreciation expense for DP(R) and increasing the net earnings of
DP(R). The estimated useful lives were revised pursuant to an analysis of the
remaining expected economically beneficial life of the assets by the engineering
staff of DP(R), including consultation with another company with similar assets
in the same business to determine the productive life experienced for the
assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
The following data represents the combined unaudited operating results of
Actava on a pro forma basis as if the above transaction had taken place at the
beginning of 1992. The pro forma information does not necessarily reflect the
results of operations as they would have been had the transaction actually taken
place at that time. Adjustments include amounts of depreciation to reflect the
fair value and economic lives of property, plant and equipment and amortization
of intangible assets. (In thousands, except per share amounts):
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
1993 1992
-------- --------
Sales.................................................... $981,413 $966,199
Net Income (Loss)........................................ (22,847) 351
Income (Loss) per share -- primary....................... (1.30) .02
During 1992, Qualex acquired Samiljan Foto L.P. and certain other
photofinishing operations for $21,228,000 and $22,997,000, respectively,
including expenses. These transactions were accounted for using the purchase
method of accounting; accordingly, the assets and liabilities of the purchased
businesses have been recorded at their estimated fair value at the dates of
acquisition. The results of operations of the businesses acquired have been
included in the consolidated financial statements since the dates of
acquisition. Pro forma information for the 1992 acquisitions by Qualex would not
be significantly different from the results reported due to the timing of the
acquisitions.
During 1993, Qualex has acquired various photofinishing operations
including both tangible and intangible assets for an aggregate cash cost of
$18,896,000, including $11,400,000 for prepaid expenses. Pro forma information
for the 1993 acquisitions by Qualex would not be significantly different from
the results reported due to the nature and timing of the acquisitions.
INVENTORIES
Inventory balances are summarized as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
1993 1992
------------- ------------
Finished goods and goods purchased for resale... $ 74,649 $ 49,279
Raw materials and supplies...................... 43,676 33,537
------------- ------------
118,325 82,816
------------- ------------
Reserve for LIFO cost valuation................. (19,876) (18,829)
------------- ------------
$ 98,449 $ 63,987
============= ============
Work-in-process is not considered significant.
NOTES PAYABLE
As of April 29, 1993, a Revolving Loan and Security Agreement with respect
to a revolving credit facility of up to $10,000,000 was entered into by a
subsidiary and a financial institution. Interest is payable at a prime rate plus
1%. The agreement provides for a facility fee of $25,000. The loan is
principally secured by certain receivables and inventory of the subsidiary and
requires the subsidiary to comply with various restrictive financial covenants.
DP is in the process of entering into a proposed revolving credit agreement
with a financial institution to replace a similar agreement with Westinghouse
Commercial Credit Corporation which expires on December 31, 1993. The
outstanding balance under the existing agreement was $35,100,000 as of September
30,
8
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
1993. The replacement agreement would require the Company to fund DP's cash
needs which exceed the new agreement's financing limits. At September 30, 1993,
such excess cash needs provided under the existing credit agreement were
$5,700,000. The replacement facility would be principally secured by certain
receivables and inventory of DP and would require compliance with various
restrictive financial covenants.
OTHER INCOME (EXPENSE) -- NET
Other income (expense) is summarized as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1993 1992 1993 1992
------ ------ ------ ------
Interest and investment income................................ $1,697 $1,703 $6,608 $4,455
Miscellaneous income (expense) -- net......................... (1,899) 1,756 (3,154) (322)
------ ------ ------ ------
$ (202) $3,459 $3,454 $4,133
====== ====== ====== ======
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 $819,000 and $364,000 for the three month periods ended
September 30, 1993 and 1992, respectively, and $2,597,000 and $2,631,000 for the
nine month periods ended September 30, 1993 and 1992, 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. As the Company does not file a consolidated tax return with
Qualex, the percentage of Actava's consolidated income composed of Qualex's
income, as opposed to Actava's other businesses, can cause Actava's consolidated
book tax provision to be above or below statutory rates and vary from quarter to
quarter and year to year. For the nine month period ended September 30, 1993,
the Company's consolidated book tax provision exceeds consolidated income before
taxes because 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. For the nine month period ended September
30, 1993, the Company's consolidated effective tax rate has increased as
compared to comparable prior periods because 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.
The Company has a net operating loss carryforward for Federal income tax
purposes of approximately $60,000,000 at December 31, 1992, which will expire in
2006 and 2007.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE ACTAVA GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
Statement No. 109 requires certain disclosures which relate to deferred tax
liabilities and assets; however, since income tax expense for interim financial
statements is based on an estimated annual effective rate, these disclosures may
be as of the date of adoption. Therefore significant components of the Company's
deferred tax liabilities and assets as of January 1, 1993, are as follows (in
thousands):
Deferred Tax Liabilities:
Tax over book depreciation............................................... $25,593
Gain on Qualex formation................................................. 36,552
Safe Harbor Lease Investment............................................. 10,322
Other.................................................................... 9,955
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Total Deferred Tax Liabilities................................... 82,422
-------
Deferred Tax Assets:
Reserves for losses and write-down of certain assets..................... 24,085
Net operating loss recognition........................................... 12,496
Other.................................................................... 22,716
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Total Deferred Tax Assets........................................ 59,297
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Net Deferred Tax Liabilities............................................... $23,125
=======
The Company has not recognized a valuation allowance for deferred tax
assets because management will utilize tax planning strategies to prevent the
expiration of net operating losses, including the sale of a subsidiary such as
Qualex or the assets of a division such as Snapper. The increase in corporate
tax rates from 34% to 35% for taxable income exceeding $10,000,000 in the
recently enacted Revenue Reconciliation Act of 1993 is not expected to have a
material effect on the Company's results of operations.
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, as amended on
August 17, 1994, of February 7, 1995.
LITIGATION
In 1991, three lawsuits were filed against the Company, certain of the
Company's current and former directors and Triton Group, Ltd., formerly
Intermark, Inc., which owns approximately 25% 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, Triton
Group, Ltd. and its 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 Triton Group, Ltd. 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 Actava's value as a merger/acquisition
candidate. These three suits were consolidated on May 1, 1991. Management
currently believes the actions will not materially affect the operations or
financial position of the Company.
The Company 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 Company's liquidity or results of operations.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Actava provides high-quality, brand name consumer 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, and 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 a Blackhawk(TM) line of mowers 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 strategic acquisitions and
dispositions, and marketing alliances, i.e. 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 the
Company 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 increased $1.4 million or .6% in the third quarter of
1993 as compared to the same 1992 quarter due primarily to income from
classifying former microlab operating leases to financing leases as a result of
the expiration of early cancellation periods for such leases. Sales for the nine
months ended September 30, 1993 increased, due to the third quarter lease
reclassifications and an overall increase in equivalent prints processed, by
$3.5 million or .6%, in comparison to the same nine month period of 1992.
Although sales increased, per print price continued to decline, resulting in a
decrease in gross profit as a percent of sales from 35.5% for the third quarter
of 1992 to 31.5% for the third quarter of 1993 and from 32.3% for the nine
months ended September 30, 1992 as compared to 29.3% for the same 1993 period.
Gross profit decreased by $8.8 million and $16.9 million for the quarter and
year-to-date, respectively. Selling, general and administrative expenses
decreased by $8.9 million or 17.9% for the third quarter of 1993 from the same
1992 period primarily as a result of benefits derived from the restructuring
programs implemented in 1992. These expenses decreased by $19.7 million or 13.5%
for the year-to-date period for the same reasons and reduced vacation accrual
expense due to changes in the personnel policy related to vacation benefits for
1993. A provision for plant relocation and consolidation of $600,000 was made in
the third quarter of 1993 and $1.4 million for the year-to-date period. Qualex
had operating income of $31 million in the third quarter of 1993
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compared to operating income of $33.3 million for the third quarter of 1992, a
$2.2 million, or 6.5%, decrease. Operating income for the nine months ended
September 30, 1993 was $46.6 million compared to $47 million for the same 1992
period; a $400,000, or .8%, decrease.
Management anticipates lower pricing trends in the wholesale photofinishing
industry for the remainder of 1993. However, improved product mix, gains on the
sale of certain microlab leases and continuing consolidations of plant
facilities and administrative offices are expected to offset the effects of
lower pricing.
Lawn and Garden: Snapper's sales to distributors decreased by $4.9
million, or 12.6%, for the third quarter of 1993 in comparison to the third
quarter of last year as Snapper continued to balance production to estimated
retail sales by reducing production and shipments to distributors in the third
quarter. Sales for the nine month period ended September 30, 1993 were $177
million, a decrease of 2.2% from the same period last year. Gross profit as a
percentage of sales decreased for both the second quarter of 1993 and the nine
month period ended September 30, 1993 as compared to the same prior year
periods. This decrease was from 32.8% to 10.2% for the third quarter and, for
year-to-date, from 26.7% to 17.5%. Gross profit in dollars decreased for both
the third quarter of 1993 and the nine month period ended September 30, 1993, as
compared to the prior year periods. This decrease was from $12.8 million to $3.5
million for the third quarter and from $48.4 million to $31 million for
year-to-date. These decreases resulted from continuing manufacturing problems
such as unfavorable manufacturing variances and cost over-runs for newly
introduced products. The start-up costs, overall product mix and delays
associated with these new products negatively impacted Snapper's cost of sales.
In addition, because Snapper's new Blackhawk(TM) line of mowers is a lower
price-point and margin product than the Snapper(TM) brand line, per unit gross
margin has been lower when compared to last year's margins in part because
Blackhawk(TM) was 16% of the product mix. As sales were down for the third
quarter of 1993, selling, general and administrative expenses, including sales
volume related expenses such as co-operative advertising, decreased by 12.8% for
the quarter, while year-to-date selling, general and administrative expenses
decreased by 14.6%. Income of $760,000 was provided by reducing a reserve for
plant relocation and consolidation, in recognition of finalizing a plant
closing. The decreased gross profit, partially offset by reduced selling,
general and administrative expenses, resulted in an operating loss of $7.6
million at Snapper in the third quarter of 1993 as compared to a profit of
$45,000 in the third quarter of 1992. The 1993 year-to-date operating results
decreased by $10.8 million when compared to the same 1992 period, from an
operating profit of $8 million to an operating loss of $2.8 million. Snapper
will further reduce production and shipment to distributors in the fourth
quarter of 1993 to match estimated retail sales. This will result in Snapper
recording a net loss for the fourth quarter and the year.
The Company has engaged Merrill Lynch to assist in exploring alternatives
that would enable the Company to realize fair value for its investment in
Snapper. The alternatives may include a sale, joint venture, public offering, or
other action; however, it may be determined that the most appropriate
alternative is to retain Snapper and realize the value from continued
operations. The Company believes that it will be able to realize fair value from
its investment in Snapper if a sale is determined to be the most effective
course of action. On August 9, 1993, the Company announced that a new Chief
Executive Officer had been employed for Snapper.
Sporting Goods: Sales for Actava Sports increased by $40.4 million, or
103.1%, for the third quarter of 1993 and by $50 million, or 50.5%, for
year-to-date when compared to the same 1992 periods. This increase is primarily
due to the acquisition of Diversified Products Corporation (DP) in June, 1993.
In addition to the increase resulting from the acquisition, sales increased for
all Actava Sports companies for both the quarter and year-to-date. Gross profit
as a percent of sales decreased from 19.3% to 11.9% for the third quarter of
1993 but gross profit in dollars increased from $7.6 million to $9.5 million,
25.1%, when compared to the 1992 third quarter. Also, for 1993 year-to-date,
gross profit percentage decreased from 20.1% to 16.1% while gross profit
increased from $19.9 million to $24 million, or 20.4%, when compared to the same
1992 period. Selling, general and administrative expenses increased by $4.4
million for the third quarter of 1993 as compared to the same quarter of 1992,
from $5.3 million to $9.7 million. This was due to $4 million of DP expense for
the quarter. The year-to-date selling, general and administrative expenses
increased from $14.8 million to $21.3 million, or 43.4%, primarily due to
expenses of $4.9 million for DP. Operating profit for the third quarter of 1993
compared to 1992 decreased from a $2.2 million profit to a $222,000 loss, while
the year-to-date decrease
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was $2.3 million, from $5 million to $2.7 million. The decreases in operating
profit are primarily attributable to DP, which recorded a loss for the third
quarter due to the cautious retail environment and production problems caused by
late delivery of electronic components for treadmill equipment. Management
expects DP to incur a loss for the six month period ending December 31, 1993,
which is subsequent to the acquisition of DP by Actava. Actava announced on
October 26, 1993, that a new President and Chief Executive Officer had been
appointed for DP.
Consolidated Operations: The Company's consolidated sales increased $37
million, or 12%, in the third quarter of 1993 as compared to the third quarter
of 1992 and by $49.5 million, or 5.7%, for the year-to-date periods principally
because of the acquisition of DP. Gross profit as a percentage of sales for the
third quarter of 1993 of 24.9% is a decrease from 33.1% for the comparable 1992
quarter while gross profit dollars decreased by $16.2 million. Gross profit
decreased by $30.3 million, or 11.7%, from $259.6 million to $229.2 million for
1993 year-to-date as compared to 1992. This is primarily due to gross profit
declines suffered by Snapper. Selling, general and administrative expenses also
decreased for both the quarter and year-to-date. The reductions in selling,
general and administrative expenses are primarily attributable to the favorable
reductions achieved by Qualex and Snapper in the third quarter of 1993 as well
as for year-to-date.
Interest expense for the third quarter of 1993 of $10.7 million is
equivalent to the $10.7 million for the third quarter of 1992 and year-to-date
interest expense of $31.9 million is an increase of $7.5 million over the prior
year period. This increase is primarily attributable to higher average
borrowings at both Qualex and Snapper. The increased borrowing resulted from the
Qualex $200 million Senior Note private placement completed in the second
quarter of 1992 and the revolving credit facilities established to provide
working capital for Snapper and the Actava Sports companies. These credit lines
have substantially reduced subsidiary reliance on Actava for working capital
needs.
Other income (net of other deductions) decreased by $3.7 million in the
third quarter and decreased by $679,000 for the nine month period ended
September 30, 1993 when compared to the same period of 1992. This is primarily
the result of changes in investment income and asset sales at Qualex.
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 taxable income. See "Income Taxes" in
Notes to Consolidated Financial Statements.
The minority interest shown on Actava's Consolidated Statements of
Operations represents Kodak's portion of the earnings of Qualex. In accordance
with the Shareholder's Agreement, the Company and Kodak are each entitled to 50%
of Qualex's net income after preferred dividends. See "Photofinishing
Transaction" in Notes to Consolidated Financial Statements.
Effective January 1, 1992, Qualex changed its method of accounting for the
cost of its proof advertising program to recognize advertising expense as it is
incurred rather than at the time of the initial sale to the customer. 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. 109, "Accounting for Income Taxes". The Company was
required to adopt the new method of accounting for income taxes no later than
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 nine months 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. The Company was required to adopt the new method of accounting
for these benefits no later than January 1, 1993. The adoption of Statement No.
106 resulted in an after-tax charge to net income of
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$2.7 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 Postretirement
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. 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 Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", which must be adopted no later than January 1, 1994.
Statement No. 115 requires certain debt and equity securities to be accounted
for at market or other specified values. The adoption of Statement No. 115 will
not have a significant impact on the Company's financial position or results of
operations. SEE "CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES" IN NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
As a result of the items described above, the Company reported a net loss
of $9 million for the third quarter of 1993 and a net loss of $16.6 million for
the nine months ended September 30, 1993. This compares to income of $4.7
million and $6.6 million for the comparable 1992 periods. Management anticipates
that a consolidated loss will also be recorded for the fourth quarter of 1993
and for the full year.
Financial Position: Actava's working capital was $131.6 million at
September 30, 1993 as compared to $176.1 million at December 31, 1992. The
decrease reflects the loss incurred by the Company for the nine months ended
September 30, 1993, repayment by Qualex of long-term debt using cash realized
through collections and sales of accounts receivable, the payment of certain
sinking fund requirements, and the use of approximately $11.6 million of cash in
the DP(R) acquisition. The seasonal increase in accounts receivable at Snapper
and the increase in inventory at Actava Sports were principally financed by
borrowing from working capital lines of credit.
Cash and short-term investments at Actava, excluding Qualex, decreased by
$26.2 million in the nine month period ended September 30, 1993, to $49.7
million. The primary reasons for this decrease were the cash requirements for
the DP acquisition, including a $5 million equity contribution by Actava to DP
which was used to pay operating expenses, and increased inventory at most Actava
companies as the third and fourth quarter selling seasons occur. At September
30, 1993, approximately $7 million of Actava's cash and short-term investments
were pledged to secure a Snapper credit line and approximately $17.3 million of
cash and short-term investments were pledged to support outstanding letters of
credit. This pledge of $17.3 million may increase by approximately $3 million in
December, 1993.
For the nine month period ended September 30, 1993, consolidated cash flows
of $19.5 million were provided by operations, investing activities used $43.2
million of cash, and financing activities provided $11.3 million of cash. Cash
flow provided by income from operations included depreciation of $32.7 million
and amortization of $19.6 million. Investing activities used $43.2 million of
cash, including payments for property, plant and equipment (net of disposals) of
$32.1 million, payments for purchases of businesses of $28.3 million, including
the acquisition of DP(R), and net sales of investments of $22.5 million.
Financing activities provided $11.3 million during the year with borrowings
under short-term bank agreements of $34.9 million, net payments of $9.4 million
under long-term debt agreements, payments of subordinated debt of $1.8 million,
and payments of dividends by Qualex and the Company of $7.7 million and $4.7
million, respectively.
Actava's senior long-term debt decreased from $220.4 million at December
31, 1992 to $211.6 million at September 30, 1993. This decrease is primarily
attributable to payments made by Qualex and the termination of capitalized lease
obligations for Snapper.
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Actava's long-term subordinated debt position of $190.4 million at
September 30, 1993 is a decrease of $3.1 million from year-end 1992.
Subordinated debt is 47.5% 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.
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. In addition, the Qualex credit agreement and the Shareholders'
Agreement with Eastman Kodak Company restrict the amount of net assets of Qualex
which may be transferred to the Company or Kodak by dividend or other means.
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, and the
assumption or payment of certain liabilities including trade payables and a
revolving credit facility. The Company also entered into an agreement which may
provide the seller with the right to receive additional payments of cash, or
additional shares of Company Common Stock, depending upon the value of the
issued shares over a period of not longer than one year from the purchase. See
"Acquisitions" in Notes to Consolidated Financial Statements. 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.
This right may be exercised after December 31, 1993, if there is any amount
outstanding under a revolving credit facility with Westinghouse Commercial
Credit Corporation ("Westinghouse Credit"). DP has received a proposal from a
financial institution to replace its revolving credit facility with Westinghouse
Credit prior to December 31, 1993. The amount outstanding under such facility as
of November 11, 1993, was approximately $47.8 million. See "Notes Payable" in
Notes to Consolidated Financial Statements. If the revolving credit facility
with Westinghouse Credit is replaced prior to December 31, 1993, as expected,
then 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 may elect to pay this amount in cash
or in additional shares of Company Common Stock. The Company has filed a
Registration Statement under the Securities Act of 1933, as amended, with
respect to the Acquisition Shares and expects that it will be effective on or
before December 31, 1993. Any additional payment required to be made pursuant to
this agreement will be accounted for as additional purchase price paid for the
assets of DP and will be allocated to the acquired assets in accordance with
their fair market value at the date of the acquisition. In connection with the
replacement of DP's credit facility, the Company will be required to fund the
cash needs of DP in excess of the financing limits under the new credit
facility. The amount of DP's excess cash needs as of September 30, 1993, was
approximately $5.7 million. The Company will be required to provide the
necessary excess funding to DP before DP's new credit facility can be completed
in December, 1993, as planned.
On September 30, 1993, the Company, excluding its subsidiaries and Snapper,
had $25.2 million of unrestricted cash and short-term investments. The Company
uses its existing cash and short-term investments, as well as dividends from its
subsidiaries, to provide for items such as operating expense payments, debt
service, and dividend payments to shareholders. The Company's subsidiaries,
excluding Qualex, had unused borrowing capacity of approximately $49.8 million
at September 30, 1993 under credit agreements secured by assets such as accounts
receivable and 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,
$272.4 million. 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 a similar restriction under
its credit agreements and is also subject to the change of control provisions in
the
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Shareholders' Agreement between the Company and Kodak. These changes of control
provisions could have the effect of eliminating the Company's ability to control
the payment of dividends by Qualex. If existing cash and dividends from
subsidiaries are not sufficient to meet its cash requirements, the Company will
seek to generate additional cash by selling or pledging certain assets,
including the Snapper Division, and will consider options to reduce its cash
expenditures.
SUBSEQUENT EVENTS
As of October 6, 1993, Qualex entered into an Agreement of General
Partnership with JVQ Capital One, Inc. for the purpose of acquiring, owning,
holding, leasing, and selling on-site microlab equipment. In the future, Qualex
intends to sell to this partnership qualifying leases of microlab equipment with
the result that Qualex will record income upon the sale of the lease rather than
over the life of the lease. Qualex will continue to service the equipment under
an agreement with the lessee of the equipment and will pay fees for management
and leasing services to the parent corporation of JVQ Capital One, Inc., a
general partner.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 2 to Form 10-Q for the quarter
ended September 30, 1993, 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 5, 1994
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