-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, M04qhd7IknCQTFCLKZjk7VU7YPHq6Mnki4Y4RdyUYXDxWGyu4S91TTeHXp30BTXX F+bQB8J78OR1m2N4DWhfDg== 0000950144-94-001765.txt : 19941010 0000950144-94-001765.hdr.sgml : 19941010 ACCESSION NUMBER: 0000950144-94-001765 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19941007 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTAVA GROUP INC CENTRAL INDEX KEY: 0000039547 STANDARD INDUSTRIAL CLASSIFICATION: 7384 IRS NUMBER: 580971455 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-05706 FILM NUMBER: 94552130 BUSINESS ADDRESS: STREET 1: 4900 GEORGIA PACIFIC CTR CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4046589000 MAIL ADDRESS: STREET 1: 4900 GEORGIA PACIFIC CTR CITY: ATLANTIA STATE: GA ZIP: 30303 FORMER COMPANY: FORMER CONFORMED NAME: FUQUA INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19920703 10-Q/A 1 ACTAVA GROUP FORM 10-Q/A AMEND. #1 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM 10-Q/A QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1994 COMMISSION FILE NUMBER 1-5706 - -------------------------------------------------------------------------------- THE ACTAVA GROUP INC. (Exact name of registrant as specified in its charter) 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 404/658-9000 NOT APPLICABLE Former name, former address and former fiscal year, if changed since last report INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES 'X' NO INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK AS OF AUGUST 8, 1994 -- 18,335,186 SHARES OF COMMON STOCK. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I -- FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS THE ACTAVA GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1994 1993 ----------- ------------ (UNAUDITED) ASSETS Current assets Cash................................................................ $ 14,015 $ 18,770 Short-term investments.............................................. 31,922 29,635 Receivables (less allowances for doubtful accounts of $8,768 in 1994 and $10,227 in 1993)............................................. 171,972 276,018 Current portion of notes receivable................................. 5,300 -- Inventories......................................................... 67,051 108,439 Prepaid expenses.................................................... 4,710 43,809 Future income tax benefits.......................................... 25,343 32,434 ----------- ------------ Total current assets........................................ 320,313 509,105 Investment in Qualex.................................................. 142,832 -- Property, plant and equipment......................................... 113,455 474,235 Less allowances for depreciation.................................... (44,351) (198,881) ----------- ------------ 69,104 275,354 Notes receivable from Triton Group Ltd................................ 19,226 26,726 Other assets.......................................................... 5,610 50,702 Long-term investments................................................. 15,473 26,611 Intangibles........................................................... 19,048 386,626 ----------- ------------ Total assets................................................ $ 591,606 $1,275,124 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable, accrued expenses and other current liabilities.... $ 120,121 $ 263,883 Notes payable....................................................... 100,447 135,114 Current portion of long-term debt................................... 4,604 6,665 ----------- ------------ Total current liabilities................................... 225,172 405,662 Deferred income taxes................................................. 33,621 56,715 Long-term debt........................................................ 2,107 220,887 Subordinated debt..................................................... 187,787 190,551 Minority interest in photofinishing subsidiary........................ -- 205,395 Redeemable common stock............................................... 12,000 12,000 Stockholders' equity Common stock (22,767,744 shares in 1994 and 1993)................... 22,768 22,768 Additional capital.................................................. 37,153 46,361 Retained earnings................................................... 178,876 236,334 Less treasury stock -- at cost (4,432,558 shares in 1994 and 5,132,558 in 1993)............................................... (107,878) (121,549) ----------- ------------ 130,919 183,914 ----------- ------------ Total liabilities and stockholders' equity.................. $ 591,606 $1,275,124 ========= ==========
See Notes to Consolidated Financial Statements. 1 3 THE ACTAVA GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 1994 1993(A) 1994 1993(A) -------- -------- -------- -------- Net sales..................................... $123,943 $112,753 $279,214 $212,454 Operating costs and expenses Cost of products sold....................... 105,417 91,543 233,488 170,474 Selling, general and administrative expenses................................. 21,493 18,567 48,930 37,594 Provision for doubtful accounts............. 728 1,449 978 1,721 -------- -------- -------- -------- Operating profit (loss).................. (3,695) 1,194 (4,182) 2,665 Interest (expense)............................ (7,463) (6,443) (14,822) (12,568) Other (expense) -- net........................ 797 1,887 741 3,755 -------- -------- -------- -------- Loss before income taxes, discontinued operations and cumulative effect of change in accounting principle......... (10,361) (3,362) (18,263) (6,148) Income taxes (benefit)........................ (188) 306 -- (1,139) -------- -------- -------- -------- Loss from continuing operations.......... (10,173) (3,668) (18,263) (5,009) Discontinued operations Income (loss) from operations............... 1,748 3,711 (2,835) 1,852 (Loss) on disposal of business.............. (37,858) -- (37,858) -- -------- -------- -------- -------- Income (loss) from discontinued operations............................... (36,110) 3,711 (40,693) 1,852 (Loss) before cumulative effect of change in accounting principle................ (46,283) 43 (58,956) (3,157) Cumulative effect of change in accounting principle................................... -- -- -- (4,404) -------- -------- -------- -------- Net income (loss)........................ $(46,283) $ 43 $(58,956) $ (7,561) ======== ======== ======== ======== Earnings (loss) per share of common stock Continuing operations....................... $ (.56) $ (.22) $ (1.02) $ (.30) Discontinued operations..................... (1.98) .22 (2.27) .11 Cumulative effect of change in accounting principle................................ -- -- -- (.26) -------- -------- -------- -------- Primary and fully diluted................ $ (2.54) $ -- $ (3.29) $ (.45) ======== ======== ======== ======== Cash dividends per common share.......... $ -- $ .09 $ -- $ .18 ======== ======== ======== ======== Average common and common equivalent shares................................. 18,197 16,820 17,918 16,683 ======== ======== ======== ========
- --------------- (a) Restated for discontinued operations. See Notes to Consolidated Financial Statements. 2 4 THE ACTAVA GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
INCREASE (DECREASE) IN CASH ------------------------ SIX MONTHS ENDED JUNE 30, ------------------------ 1994 1993(A) --------- -------- Cash flows from operating activities: Income from continuing operations................................... $ (18,263) $ (5,009) Cumulative effect of change in accounting principle............... -- 4,404 --------- -------- Loss before cumulative effect of change in accounting principle... (18,263) (605) Items providing cash from operations.............................. 46,157 3,391 --------- -------- Net cash provided by continuing operations..................... 27,894 2,786 --------- -------- Income (loss) from discontinued operations.......................... (40,693) 1,852 Items providing cash from discontinued operations................. 29,363 41,886 --------- -------- Net cash provided (used) by discontinued operations............ (11,330) 43,738 --------- -------- Net cash provided by operating activities...................... 16,564 46,524 --------- -------- Cash flows from investing activities: Purchases of investments (maturities over 90 days)................ (52,584) (11,633) Sales of investments (maturities over 90 days).................... 51,232 9,543 Net sales of other investments (maturities less than 90 days)..... (935) 19,435 Payments for property, plant & equipment.......................... (19,552) (31,355) Proceeds from disposals of property, plant & equipment............ 4,362 2,041 Collections on notes receivable................................... 483 927 Payments for purchases of businesses.............................. -- (21,243) Payments from Triton Group Ltd.................................... 2,500 -- Payments for other intangibles.................................... -- -- Other investing activities -- net................................. (3,750) (7,217) --------- -------- Net cash (used) by investing activities........................ (18,244) (39,502) Cash flows from financing activities: Net borrowings under short-term bank agreements................... (27,617) 13,895 Borrowings under other long-term debt agreements.................. 228,000 10,611 Payments on long-term debt agreements............................. (194,470) (21,376) Payments of subordinated debt..................................... (3,000) (1,536) Proceeds from issuance of Actava common stock..................... 4,462 -- Cash dividends paid by Qualex to minority interest................ (10,450) (7,714) Cash dividends paid by The Actava Group........................... -- (3,076) --------- -------- Net cash (used) by financing activities........................ (3,075) (9,196) --------- -------- Decrease in cash.......................................... (4,755) (2,174) Cash at beginning of year........................................... 18,770 20,792 --------- -------- Cash at June 30........................................... $ 14,015 $ 18,618 ========= ========
- --------------- (a) Restated for discontinued operations. See Notes to Consolidated Financial Statements. 3 5 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, such financial statements reflect all adjustments necessary for a fair statement of the results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the six months ended June 30, 1994 are not necessarily indicative of the results that may be expected for the year ended December 31, 1994. CHANGES IN ACCOUNTING PRINCIPLES Change in Method of Accounting for Income Taxes Effective January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes". Under Statement 109, the liability method is used in accounting for income taxes: deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement 109, income tax expense was determined using the deferred method: deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. As permitted by Statement 109, the Company has elected not to restate the financial statements of any prior years. The presentation of some items, such as depreciation, has changed; however, the cumulative effect of the change in accounting principle on pre-tax income from continuing operations, net income, and the effective tax rate was not material. Change in Method of Accounting for Postretirement Benefits Effective January 1, 1993, the Company adopted FASB Statement No. 106, "Accounting for Postretirement Benefits Other Than Pensions". The Company and its subsidiaries provide group medical plans and life insurance coverage for certain employees subsequent to retirement. The plans have been funded on a pay-as-you-go (cash) basis. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles, coinsurance and life-time maximums. The plan accounting anticipates future cost-sharing changes that are consistent with the Company's expressed intent to increase the retiree contribution rate annually for the expected medical trend rate for that year. The coordination of benefits with medicare uses a supplemental, or exclusion of benefits, approach. As permitted by Statement 106, the Company elected to immediately recognize the effect in the statement of operations for the first quarter of 1993 as a $4,404,000 charge to net income as the cumulative effect of a change in accounting principle. The annual net periodic postretirement benefit expense for 1993 decreased by $38,000 as a result of adopting the new rules. The annual net periodic postretirement benefit expense for 1994 will be $240,000. The assumed health care cost trend rate used to measure the expected cost of benefits by the plan for 1993 was 14%, with 1% decrements to 6% in 2001 and years thereafter. A 7% discount rate per year, compounded annually, was assumed to measure the accumulated postretirement benefit obligation as of December 31, 1993. A 1% increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1993, by 16% and the net periodic postretirement benefit cost by 18%. 4 6 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Change in Method of Accounting for Postemployment Benefits Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." The Company and its subsidiaries provide benefits to former or inactive employees after employment but before retirement such as severance benefits, disability-related benefits (including workers' compensation), and continuation of health care benefits and life insurance coverage. The cumulative effect as of January 1, 1994, of this change in accounting was not material. Prior to January 1, 1994, the Company recognized the cost of providing some postemployment benefits on a cash basis while substantially all other postemployment benefits were accounted for in the Company's self-insurance program. Under the new method of accounting, the Company will accrue benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. As required by the Statement, prior year financial statements have not been restated to reflect the change in accounting method. Change in Method of Accounting for Certain Investments in Debt and Equity Securities The Company and its subsidiaries invest in various debt and equity securities. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires certain debt securities to be reported at amortized cost, certain debt and equity securities to be reported at market with current recognition of unrealized gains and losses, and certain debt and equity securities to be reported at market with unrealized gains and losses as a separate component of shareholders' equity. The Company adopted the provisions of the new standard for investments held as of or acquired after January 1, 1994. In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of January 1, 1994, of adopting Statement 115 was not material. REDEEMABLE COMMON STOCK Redeemable common stock represents 1,090,909 shares of common stock which were issued in the acquisition of substantially all the assets and liabilities of Diversified Products Corporation. These shares are subject to a right of redemption at the option of the holder with an exercise date of February 17, 1995. SALE OF SPORTS GROUP On July 20, 1994 the Company entered into a definitive agreement with Roadmaster Industries, Inc. (Roadmaster) to combine the Company's four sports companies with Roadmaster in exchange for common stock of Roadmaster which would represent an approximate 39% ownership interest in Roadmaster. QUALEX INC. -- DISCONTINUED OPERATIONS Qualex, Inc. is a photofinishing business formed in March 1988 by the combination of Actava's photofinishing operations with the domestic photofinishing operations of Eastman Kodak Company. Prior to June 30, 1994, Actava was deemed to control Qualex because it owned 51% of the voting stock of Qualex, was entitled to and elected a majority of the members of the Board of Directors of Qualex, and had the ability through its control of the Board of Directors to declare dividends, remove the executive officers of Qualex and otherwise direct the management and policies of Qualex, except for policies relating to certain designated actions requiring the consent of at least one member of the Board of Directors of Qualex designated by Kodak. As a result of its voting control, the Company in prior periods consolidated the accounts of Qualex and presented Kodak's portion of the ownership and equity in the income of Qualex as a minority interest. During the second quarter of 1994, a change of control of the Company occurred under the terms of the Shareholders Agreement between the Company and Kodak relating to Qualex (the "Qualex Shareholders Agreement"). The change of control was the result of the election of John D. Phillips as President and Chief Executive 5 7 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Officer of Actava. As a result of this change of control and as required by the Qualex Shareholders Agreement, the composition of the Board of Directors of Qualex was changed and certain shares of voting preferred stock of Qualex held by the Company were redeemed by Qualex on June 30, 1994. The effect of this redemption was to reduce the Company's ownership of the voting securities of Qualex from 51% to 50%. Because of these changes, the Company discontinued its practice of consolidating the accounts of Qualex and began accounting for its ownership in Qualex under the equity method of accounting effective as of April 19, 1994. The change in the accounting treatment of the Company's interest in Qualex did not affect the net income or shareholders' equity of the Company, but it reduced the Company's consolidated total assets, liabilities, sales and costs and expenses because these specific accounts of Qualex were no longer included with those of the Company. FINANCIAL POSITION OF QUALEX (000'S)
JUNE 30, DECEMBER 31, 1994 1993 -------- ------------ Cash and short-term investments.............................. $ -- $ 4,060 Net accounts receivable...................................... 82,272 69,015 Inventories.................................................. 28,078 29,381 Other assets................................................. 30,745 38,153 -------- ------------ Total current assets............................... 141,095 140,609 Net property, plant and equipment............................ 198,642 202,150 Other assets................................................. 40,632 30,413 Long-term investments........................................ 26,868 26,611 Intangibles.................................................. 367,188 371,106 -------- ------------ Total assets....................................... $774,425 $770,889 ======== ========== Current liabilities.......................................... $119,928 $130,845 Deferred income taxes........................................ 22,402 22,446 Long-term debt............................................... 260,167 217,987 Stockholders' equity......................................... 371,928 399,611 -------- ------------ Total liabilities and stockholders' equity......... $774,425 $770,889 ======== ==========
In June 1994, the Company decided to sell its interest in Qualex and engaged in negotiations with Kodak regarding the sale of such interest. Accordingly, the results of Qualex for all years presented are reported in the accompanying statements of operations under discontinued operations. In the second quarter of 1994, the Company provided for an anticipated loss of $37,858,000 on the sale of its interest in Qualex and the related covenant not to compete and release. No income tax expenses or benefits were recognized due to the Company's net operating loss carryforwards and recognition of tax benefits in prior periods. On August 12, 1994, Kodak purchased all of the Company's interest in Qualex and obtained a covenant not to compete and related releases from the Company in exchange for $50,000,000 in cash and a promissory note in the principal amount of $100,000,000. The promissory note is payable in installments of $50,000,000 each, without interest, on February 13, 1995 and August 11, 1995. Because the principal amount due under the note does not bear interest, the Company discounted the value of the note to $92,832,000 and will record imputed interest income of $7,168,000 over the term of the note. All amounts received in exchange for the covenant not to compete and release were included in the computation of the anticipated loss on sale of Qualex. 6 8 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective with the second quarter of 1994, the results of operations of Qualex have been reclassified from income from continuing operations to income from discontinued operations and are as follows: RESULTS OF OPERATIONS OF QUALEX (000'S)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Net sales............................... $185,563 $200,508 $333,970 $364,694 Operating expenses...................... 179,742 180,991 342,134 349,151 -------- -------- -------- -------- Operating profit (loss)................. 5,821 19,517 (8,164) 15,543 Interest (expense)...................... (4,633) (4,568) (8,582) (8,572) Other income (expense).................. (38) 36 (439) (99) -------- -------- -------- -------- Income before tax....................... 1,150 14,985 (17,185) 6,872 Income taxes (benefit).................. (2,346) 7,562 (11,514) 3,168 -------- -------- -------- -------- Net income (loss) from discontinued operations before minority interest... 3,496 7,423 (5,671) 3,704 Minority interest....................... (1,748) (3,712) 2,836 (1,852) -------- -------- -------- -------- Net income (loss) from discontinued operations............................ $ 1,748 $ 3,711 $ (2,835) $ 1,852 ======== ======== ======== ========
ACQUISITIONS On June 8, 1993, the Company acquired substantially all the assets of Diversified Products Corporation ("DP") for a net purchase price consisting of $11,629,500, the issuance of 1,090,909 shares of the Company's Common Stock valued at $12,000,000, and the assumption or payment of certain liabilities including trade payables and a revolving credit facility. The Company also entered into an agreement which obligated the Company under certain conditions, all of which have been satisfied, to repurchase the shares of Common Stock issued in the acquisition for $12,000,000 at the option of the holder of such shares. SEE "REDEEMABLE COMMON STOCK" in Notes to Consolidated Financial Statements. The repurchase of such shares will not increase the Company's investment in DP since the cost of DP will be increased by the amount of the cash payment and simultaneously reduced by the same amount due to a corresponding adjustment to the respective redeemable common stock. This transaction was accounted for using the purchase method of accounting; accordingly, the purchased assets and liabilities have been recorded at their estimated fair value at the date of the acquisition. The purchase price resulted in an excess of costs over net assets acquired of approximately $11,417,000. The results of operations of the acquired business have been included in the consolidated financial statements since the date of acquisition. INVENTORIES Inventory balances are summarized as follows (in thousands):
JUNE 30, DECEMBER 31, 1994 1993 -------- ------------ Finished goods and goods purchased for resale.................. $ 64,554 $ 82,559 Raw materials and supplies..................................... 23,141 46,018 -------- ------------ 87,695 128,577 Reserve for LIFO cost valuation................................ (20,644) (20,138) -------- ------------ $ 67,051 $108,439 ======== ==========
7 9 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Work in process is not considered significant. OTHER INCOME (EXPENSE) Other income (expense) is summarized as follows (in thousands):
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------- ---------------- 1994 1993 1994 1993 ------- ------ ------- ------ Interest and investment income...................... $ 927 $1,440 $ 1,845 $3,762 Miscellaneous income................................ 1,010 1,177 1,764 2,060 Miscellaneous (expense)............................. (1,140) (730) (2,868) (2,067) ------- ------ ------- ------ $ 797 $1,887 $ 741 $3,755 ======= ====== ======= ======
Early payment interest credit expense results from cash payments received by Snapper from distributors prior to receivable due dates which reduce accrued interest and increase miscellaneous (expense). The early payment interest credit expense was $947,000 and $637,000 for the three month periods ended June 30, 1994 and 1993, respectively, and $2,110,000 and $1,778,000 for the six month periods ended June 30, 1994 and 1993, respectively. INCOME TAXES Income tax expense is based upon statutory tax rates and book income or loss adjusted for permanent differences between book and taxable income or loss. The Company's businesses may have an annual effective tax rate which is above or below statutory rates depending upon the amount of earnings from any short-term tax advantaged investments and other items. For the six month period ended June 30, 1994, the Company's consolidated effective tax rate has decreased as compared to the same prior period because the Company is not able to recognize a tax benefit for its losses due to limitations from prior period recognition. During the year, the Company provides for income taxes using anticipated effective annual tax rates for all Company operations. The rates are based on expected operating results for the year, estimated permanent differences between book and tax income, and estimated utilization of any net operating loss carryovers. Effective January 1, 1993, the Company changed its method of accounting for income taxes as required by FASB Statement No. 109, "Accounting for Income Taxes" (See "Changes in Accounting Principles -- Change in Method of Accounting for Income Taxes"). The adoption of Statement No. 109 did not have a material effect on net income and the Company's effective tax rate. LITIGATION In 1991, three lawsuits were filed against the Company, certain of the Company's current and former directors and Intermark, Inc., which owned approximately 26% of the Company's Common Stock. One complaint alleged, among other things, a long-standing pattern and practice by the defendants of misusing and abusing their power as directors and insiders of the Company by manipulating the affairs of the Company to the detriment of the Company's past and present stockholders. The complaint sought monetary damages from the director defendants, injunctive relief against the Company, Intermark and its current directors, and costs of suit and attorneys' fees. The other two complaints alleged, among other things, that members of the Company's Board of Directors contemplate either a sale, a merger, or other business combination involving Intermark and the Company or one or more of its subsidiaries or affiliates. The complaints sought costs of suit and attorneys' fees and preliminary and permanent injunctive relief and other equitable remedies, ordering the director defendants to carry out their fiduciary duties and to take all appropriate steps to enhance the 8 10 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's value as a merger/acquisition candidate. These three suits were consolidated on May 1, 1991. While these actions are in their preliminary stages, management currently believes the actions will not materially affect the results of operations, financial position or liquidity of the Company. On November 30, 1993, a lawsuit was filed by the Department of Justice ("DOJ") against American Seating Company ("American Seating"), a former subsidiary of Actava, in the United States District Court for the Western District of Michigan. The lawsuit is captioned United States v. American Seating Co., Civil Action No. 1:93-CV-956. Pursuant to an asset purchase agreement between Actava and Amseco Acquisition, Inc., dated July 5, 1987, Actava assumed the obligation for certain liabilities incurred by American Seating arising out of litigation or other disputes, involving events occurring on or before June 22, 1987. The DOJ alleges among other things that American Seating failed to disclose certain information relating to its price discount practices that it contends was required in an offer submitted by American Seating to the General Services Administration for possible contracts for sales of systems furniture and related services. The complaint seeks recovery of unspecified single and treble damages, penalties, costs and prejudgment and post-judgment interest. The parties have engaged in settlement discussions but have not agreed on a disposition of the case. A trial, if necessary, has been scheduled for June 1995. The DOJ has asserted damages of approximately $3,500,000. If such damages were awarded and then trebled, the total damages, excluding penalties, costs and interest, could exceed $10,000,000. In addition, penalties, if assessed, could range from several thousand dollars to several million dollars. As a result, the lawsuit could have a material effect on the results of operations and financial condition of the Company. Management, however, believes that American Seating has meritorious defenses to the allegations made by the DOJ and does not expect the Company to incur any material liability as a result of this suit. Actava is a defendant in various other legal proceedings. However, the Company is not aware of any action which, in the opinion of management, would materially affect the financial position, results of operations or liquidity of the Company. CONTINGENT LIABILITIES AND COMMITMENTS Actava, on behalf of its Snapper division, has an agreement with a financial institution which makes available to dealers floor plan financing for Snapper products. This agreement provides financing for dealer inventories and accelerates cash flow to Snapper's distributors and to Snapper. Under the terms of the agreement, a default in payment by one of the dealers on the program is non-recourse to both the distributor and to Snapper. However, the distributor is obligated to repurchase any equipment recovered from the dealer and Snapper is obligated to repurchase the recovered equipment if the distributor defaults. At December 31, 1993 and 1992, there was approximately $23,000,000 and $20,000,000, respectively, outstanding under these floor plan financing arrangements. At June 30, 1994 and 1993, there was approximately $31,000,000 and $25,000,000, respectively, outstanding under these floor plan financing arrangements. Actava is contingently liable under various guarantees of debt totaling approximately $5,600,000. The debt is primarily Industrial Revenue Bonds which were issued by former subsidiaries to finance their manufacturing facilities and equipment, and is secured by the facilities and equipment. In addition, upon the sale of the subsidiaries, Actava received lending institution guarantees of bank letters of credit to support Actava's contingent obligations. There are no material defaults on the debt agreements. Actava is contingently liable under various real estate leases of former subsidiaries. The total future payments under these leases, including real estate taxes, is estimated to be approximately $8,600,000. The leased properties generally have financially sound subleases. At June 30, 1994, approximately $5,000,000 of Actava's cash and short-term investments were pledged to secure a Snapper credit line. At August 12, an additional $12,000,000 was pledged to secure a letter of credit issued with regard to the Company's redeemable stock. 9 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Actava currently provides high-quality, brand-name consumer products through distribution channels to retail markets across the United States. As a result of the sale of its interest in Qualex, Actava presently operates in two distinct businesses; lawn and garden equipment and sporting goods. Actava has announced plans to combine its four sporting goods companies with Roadmaster. During the second quarter of 1994, certain events occurred which resulted in a change in the voting control of Qualex and a corresponding change in the method of accounting for Actava's investment in Qualex from consolidation to the equity method and the presentation of Qualex as a discontinued operation as of June 1994. Also during the second quarter of 1994, the Company made a decision to dispose of its interest in Qualex. On August 12, 1994, Actava sold its investment in Qualex to Kodak. Accordingly, the results of Qualex for all periods presented are reported in the accompanying consolidated statements of operations as discontinued operations. See "Qualex Inc. -- Discontinued Operations" in Notes to Consolidated Financial Statements. Actava's Snapper Division manufactures Snapper(R) brand power lawnmowers, lawn tractors, garden tillers, snow throwers, and related products, parts and accessories and distributes blowers, string trimmers and edgers. The lawnmowers include rear engine riding mowers, front engine riding mowers or lawn tractors, and walk-behind mowers. Snapper also manufactures a line of commercial lawn and turf equipment and markets a fertilizer line under the Snapper(R) brand. Actava Sports companies manufacture, import and distribute products for a broad cross-section of the sporting goods, fitness and leisure markets. Products are sold under a variety of Actava companies' own brand names, as well as under licenses from the National Football League, National Basketball Association, Major League Baseball, The Walt Disney Company, Inc., Remington Arms Company, Inc., The Keds Corporation (Keds(R) and Pro-Keds(R)), Body by Jake Licensing Corporation (Body by Jake(R)), and numerous colleges and universities. On July 20, 1994, Actava and Roadmaster entered into a definitive agreement under which the four Actava Sports companies will be combined with Roadmaster. Under the terms of the agreement, and upon consummation of the transaction, Actava would transfer its sporting goods companies to Roadmaster in exchange for approximately 19.2 million shares of Roadmasters' common stock, which will represent approximately 39% of Roadmaster's outstanding stock. The value of Actava's investment in Roadmaster would be approximately $70.7 million based on the $3.6875 closing price for Roadmaster common stock on June 30, 1994 and approximately $75.5 million based on the $3.9375 closing price for Roadmaster common stock on August 11, 1994. Completion of the transaction is subject to a number of conditions, including approval by the shareholders of both Roadmaster and Actava. The accounting treatment of the transaction for Actava will depend upon the value of Roadmaster Common Stock (the "Stock Value") as of the consummation of the transaction ("Closing Date") and Actava's book value in the Sports Companies as of the Closing Date (the "Book Value"). If the Stock Value exceeds the Book Value as of the Closing Date, no gain will be realized by Actava for accounting purposes, and Actava will record the Exchange Shares on its books at an amount equal to the Book Value. On the other hand, if the Book Value exceeds the Stock Value as of the Closing Date, then Actava will record a loss upon consummation of the Exchange Transaction in an amount equal to the difference between the Book Value and the Stock Value. The value of the Roadmaster common stock received in the combination will be determined by its market price on the closing date of the transaction. The book value of the Actava sporting goods companies, as adjusted by certain debt which will be repaid to Actava as a result of the transaction, as of June 30, 1994 was $70.7 million. Actava will not classify the sporting goods companies as a discontinued operation due to the interest retained by Actava as represented by its approximately 39% equity investment in Roadmaster. The following is a discussion of the operating results of each of the continuing operations of the Company and the operating results and financial position of the Company on a consolidated basis. Financial information summarizing the operating performance of Qualex Inc., which is classified as a discontinued operation, is presented in "Qualex Inc. -- Discontinued Operations" in Notes to Consolidated Financial Statements. Lawn and Garden: Snapper's second quarter sales to distributors decreased $18.8 million, or 25.3%, to $55.5 million in 1994 from $74.3 million in 1993. Snapper's gross profit decreased $3.6 million, or 26.6% for 10 12 the second quarter, to $9.8 million in the 1994 period from $13.4 million in 1993. Sales for the six month period ended June 30, 1994 decreased to $130.2 million from $142.9 million, an 8.9% decrease from the same 1993 period. Gross profit for the six month period ended June 30, 1994 decreased by $986,000 or 3.6% to $26.5 million from $27.5 million for the same period in the prior year. The sales decrease in the second quarter and six month periods reflects the trend by Snapper distributors and dealers to order products only as needed by them to replenish retail inventories as required by actual consumer demand. The 25% decrease in sales in the second quarter, compared to the second quarter of 1993, also reflects the fact that in June 1993 Snapper began production and shipment of products for the 1994 selling season, whereas in 1994 production for the 1995 selling season will not begin until the third fiscal quarter. The decrease in gross profit during the second quarter of 1994 is due to the lower than prior year sales level of core products as well as higher margin accessories. Also contributing to the decline in gross profit for the second quarter and the slight decrease in the gross profit for the 1994 year-to-date period when compared to the same 1993 periods was the impact in the 1994 periods of the 1993 transfer or sale of inventory at four company owned domestic distributors to independent distributors. During 1993 the Company closed three Company-owned domestic distributors and sold one such distributor. Selling, general and administrative expenses decreased by $1.7 million, or 14.7%, to $10.2 million for the second quarter of 1994 from $11.9 million for the comparable 1993 quarter, primarily due to the effect of lower second quarter 1994 sales on sales volume related expenses such as advertising. Selling, general and administrative expenses increased by $699,000, or 3%, to $24.2 million from $23.5 million for the six month period ended June 30, 1994 compared to the prior year period primarily due to special promotions for the period, which were implemented to encourage distributors to sell aged inventory items to dealers. A slight operating loss of $328,000 was experienced for the second quarter of 1994, compared to an operating profit of a $2.6 million for the second quarter of 1993. The operating profit for the six month period ended June 30, 1994 of $2.4 million represents a $2.4 million decrease from the $4.8 million operating profit for the same 1993 period. Sporting Goods: Sales for Actava Sports increased by $30.0 million, or 78%, to $68.5 million for the second quarter of 1994 from $38.5 million for the second quarter of 1993 and to $149.0 million from $69.5 million, a $79.5 million or 114.4%, increase for the 1994 year-to-date period as compared to the same period in 1993. This increase was primarily due to sales recorded by DP, which was acquired by the Company in June 1993. Actava Sports, excluding DP, experienced an increase in second quarter sales of $4.5 million, a 13.4% increase, from $33.7 million for 1993 to $38.2 million for 1994. Actava Sports, excluding DP, experienced an increase in year-to-date sales of $5.8 million, or 8.9%, from $64.8 million for 1993 to $70.6 million for 1994. Gross profit increased $890,000, or 11.4%, from $7.8 million for the 1993 second quarter to $8.7 million for the second quarter of 1994. The gross profit of Actava Sports, excluding DP, increased by $844,000 from the second quarter of 1993 to the comparable 1994 quarter. The gross profit for the 1994 year-to-date period, when compared to the same 1993 period, increased from $14.5 million to $19.2 million primarily due to a gross profit increase of $4.1 million attributable to the inclusion of DP for the full six month period for 1994 as compared to three weeks in 1993. Selling, general and administrative expenses increased from $11.5 million to $18.9 million for the first six months of 1993 and 1994, respectively. This $7.4 million increase is primarily due to a $6.6 million increase in selling, general and administrative expenses resulting from the inclusion of DP's expenses for the full six month 1994 period compared to only three weeks for 1993. Selling, general and administrative expenses for the second quarter of 1994 increased by $3.0 million to $9.2 million from $6.2 million for the 1993 period. This 47.6% increase is primarily due to a $2.7 million increase attributable to the inclusion of DP for the entire 1994 quarter compared to only three weeks in the 1993 quarter. Actava Sports experienced a $558,000 operating loss for the second quarter of 1994, a $2.0 million decrease from the $1.5 million operating profit for the 1993 second quarter. The Actava Sports operating profit for the 1994 year-to-date period of $305,000 represents a $2.6 million, or 89.6%, decrease from the $2.9 million operating profit reported for the same 1993 period. Both the second quarter and year-to-date 11 13 decreases are due to the inclusion of DP's operations for the entire 1994 period as compared to three weeks for the 1993 period. Consolidated Continuing Operations: Actava's consolidated sales increased $11.2 million, or 9.9%, for the second quarter of 1994 as compared to the second quarter of 1993, principally because of the inclusion of $25.5 million in sales from DP, which was acquired in June 1993, as partially offset by the $18.8 million Snapper sales decrease. Actava's year-to-date consolidated sales increase of $66.8 million, or 31.4%, from $212.5 million for 1993 to $279.2 million for 1994 is primarily due to a $73.7 million increase attributable to DP, and a $5.8 million increase from all other Actava Sports companies, partially offset by a $12.8 million decrease from Snapper. The 1994 second quarter consolidated gross profit percentage of 14.9% represents gross profit dollars of $18.5 million, a $2.7 million decrease in gross profit dollars as compared to the same 1993 quarter. The increase of $3.7 million to $45.7 million for 1994 year-to-date gross profit from $42.0 million for 1993 represents a $3.7 million increase in gross profit dollars. The 1994 year-to-date gross profit percentage decreased to 16.4% from 19.8% for 1993. The 1994 second quarter $1.4 million increase in consolidated selling, general and administrative expenses to $22.2 million from $20.8 million for 1993 and the 1994 year-to-date increase of $8.6 million to $48.6 million from $40.0 million for 1993 are primarily due to the inclusion of DP, which was acquired in June 1993, and a 1994 first quarter provision of $1.3 million for the settlement of employment agreements. Actava's consolidated operating loss from continuing operations for the 1994 second quarter of $3.7 million represents a $4.9 million decrease from the $1.2 million 1993 second quarter operating profit. The 1994 year-to-date consolidated operating loss of $4.2 million represents a decrease of $6.8 million from the $2.7 million 1993 year-to-date operating profit. Interest expense for the second quarter of 1994 of $7.5 million is an increase of $1.0 million from the second quarter of 1993. Interest expense for the six months ended June 30, 1994 of $14.8 million is an increase of $2.3 million from the $12.5 million of interest expense for the same 1993 period. These increases are primarily due to increases in interest expense for Snapper of $.7 million and an increase of $1.7 million for DP, which was acquired in June 1993 and thus included for only a part of the 1993 year to date period. The higher average borrowings at Snapper under the revolving credit facilities established to provide working capital and higher interest rates for the 1994 period were the reason for the Snapper increase in interest expense to $3.6 million for the period ended June 30, 1994 from $2.9 million for the same 1993 period. The inclusion of $1.8 million of DP interest expense for the entire six month period ended June 30, 1994 as compared to $.1 million for only the post-acquisition period in the same 1993 period is the principal reason for the consolidated increase in interest expense. During the second quarter of 1994, Snapper and all of the Actava Sports companies had separate credit lines in place, which has substantially reduced their reliance on Actava for working capital needs. Other income (net of other deductions) decreased by $1.1 million in the second quarter of 1994 and by $3.0 for the 1994 year-to-date period when compared to 1993. This decrease is primarily the result of a decrease in investment income from lower investment levels due to liquidations of short-term investments to fund corporate purposes such as the purchase of DP and DP's initial working capital needs. During the year Actava provides for income taxes using anticipated effective annual tax rates. The rates are based on expected operating results for the year and estimated permanent differences between book and taxable income. As a result of the sale of Qualex, the Company will no longer include any income tax expense related to Qualex in continuing operations because Qualex is now reported as a discontinued operation rather than as a consolidated subsidiary for financial reporting purposes and is still not included in the Company's consolidated federal income tax return. See "Income Taxes" in Notes to Consolidated Financial Statements. Discontinued Operations: In 1988 the Company combined its photofinishing operations with the domestic photofinishing operations of Kodak in a transaction accounted for as a purchase, forming a jointly-owned company, Qualex. During the second quarter of 1994, a change of control of the Company occurred under the Shareholders Agreement between the Company and Kodak relating to Qualex. The change of control 12 14 occurred when the Board of Directors of Actava elected a new president and chief executive officer. Prior to the change of control, the Company had owned 51% of the voting stock of Qualex and had designated a majority of the members of the Board of Directors of Qualex. As a result of the change of control, the Company's ownership of the voting stock of Qualex was reduced to 50% and the Company and Kodak each became entitled to elect an equal number of members of the Board of Directors of Qualex. Because of these changes affecting the Company's control of Qualex, the Company discontinued its practice of consolidating the accounts of Qualex and began accounting for its ownership in Qualex under the equity method. In addition, the Company made a decision during the second quarter to dispose of its interest in Qualex. On August 12, 1994, Actava sold its investment in Qualex to Kodak. Accordingly, the Qualex results for all periods presented are reported in the accompanying consolidated statements of operations as discontinued operations. A loss of $37.9 million for loss on the disposal of discontinued operations and a loss of $2.8 million from operations of discontinued operations is reflected in Actava's year-to-date net loss as a result. See "Qualex Inc. -- Discontinued Operations" in Notes to Consolidated Financial Statements. Net Income (Loss): Actava reported a loss from continuing operations of $10.2 million for the second quarter of 1994, compared to a loss from continuing operations of $3.7 million for the second quarter of 1993. Actava's net loss of $46.3 million for the second quarter of 1994 included a loss from discontinued operations of $36.1 million. The Company's $43,000 of income for the second quarter of 1993 included income of $3.7 million from discontinued operations. For the first six months of 1994, Actava had a loss from continuing operations of $18.3 million, compared to a loss from continuing operations of $5.0 million for the comparable 1993 period. Actava also experienced a $40.7 million loss from discontinued operations for the first six months of 1994, resulting in a net loss for the period of $59 million. Actava's $7.6 million net loss for the first six months of 1993 included income from discontinued operations of $1.8 million, and a loss from the cumulative effect of a change in accounting principle of $4.4 million. Changes in Accounting Principles: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Actava adopted the new method of accounting for income taxes on January 1, 1993. Statement No. 109 affects the manner and rates at which deferred income taxes are reflected on the balance sheet and, therefore, possibly the amount of taxes reflected in the statement of operations. The adoption of Statement No. 109 did not result in a material effect on net income for the first quarter of 1993. See "Summary of Significant Accounting Policies -- Changes in Accounting Principles" in Notes to Consolidated Financial Statements. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". Statement No. 106 requires the cost of postretirement benefits to be recognized in the financial statements over an employee's active working career. Actava adopted the new method of accounting for these benefits as of January 1, 1993. The adoption of Statement No. 106 resulted in a charge to net income of $4.4 million and was reported as the cumulative effect of a change in accounting principle in the first quarter of 1993. See "Summary of Significant Accounting Policies -- Changes in Accounting Principles" in Notes to Consolidated Financial Statements. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". Statement No. 112 requires the recognition of the cost of benefits to be provided after employment, but before retirement, in the financial statements over an employee's active working career. Actava adopted the new method of accounting for these benefits as of January 1, 1994. The adoption of Statement No. 112 will not result in a material impact on the Company's financial statements when reported. See "Postemployment Benefits" in Notes to Consolidated Financial Statements. The Company and its subsidiaries invest in various debt and equity securities. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires certain debt securities to be reported at amortized cost, certain debt and equity securities to be reported at market with current recognition of unrealized gains 13 15 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, See "Summary of Significant Accounting Policies -- Changes in Accounting Principles" in Notes to Consolidated Financial Statements. Financial Position: Actava's working capital, excluding Qualex, was $99.1 million at June 30, 1994 as compared to $93.7 million at December 31, 1993. The increase is primarily due to changes in the Triton loan agreement which resulted in classifying $5.0 million as a current note receivable. Cash and short-term investments at Actava, excluding Qualex, increased by $1.6 million in the first six months of 1994 to $45.9 million. At June 30, 1994, approximately $5.0 million of the Company's cash and short-term investments were pledged to secure a Snapper credit line. In addition, subsequent to June 30, 1994, $12.0 million was pledged to secure a letter of credit issued on August 12, 1994, with regard to the Company's redeemable common stock. Approximately $16.2 million of cash and short-term investments which were pledged to support outstanding letters of credit at March 31, 1994 were released to Actava during the 1994 second quarter. These letters of credit are now issued on an unsecured basis. On August 12, 1994 the Company sold its interest in Qualex to Kodak. As a result of this sale, the Company received, on August 12, 1994, cash of $50 million and will receive two additional payments of $50 million each in six months and twelve months. The Company has entered into a contract to sell a real estate investment near Houston, Texas, which is known as Sienna Plantation. An investment group has agreed to purchase the property from a partnership in which Actava has an interest. Actava is expected to receive approximately $9.0 million in cash upon consummation of the transaction. The purchase price is approximately equal to Actava's book value and is expected to close in or before December 1994. For the six month period ended June 30, 1994, cash flows of $16.6 million were provided by operating activities while investing and financing activities used $18.2 million and $3.1 million of cash, respectively. Cash flows of $27.9 million were provided by continuing operations while discontinued operations used $11.3 million. For operations, accounts receivable decreased by $31.4 million, inventories decreased by $12.0 million, prepaid expenses decreased by $10.9 million, and accounts payable and other similar items decreased by $14.2 million. Depreciation of $7.3 million and amortization of $213,000 are included in determining cash flow provided by continuing operations. Investing activities for the six months ended June 30, 1994 used $18.2 million of cash, including payments for property, plant and equipment (net of disposals) of $15.2 million. Financing activities for the six months ended June 30, 1994 used $3.1 million during the quarter with repayments under short-term bank agreements of $27.6 million, net borrowings of $33.5 million under long-term debt agreements, payments of $3.0 million for subordinated debt and payments of dividends by Qualex prior to being discontinued to minority interest of $10.5 million. Long-term debt, including the current portion, for Actava, excluding Qualex, decreased from $3.3 million at December 31, 1993 to $3.0 million at June 30, 1994 due to payments thereon. Actava's subordinated debt position, including the current portion, of $191.5 million at June 30, 1994 reflects a decrease of $2.8 million from year-end 1993. Subordinated debt is 98.4% of Actava's total long-term debt, including the current portion, with the first significant maturity due in 1996. The Company has a currency swap agreement with a financial institution in order to eliminate exposure to foreign currency exchange rates for its 6% Senior Subordinated Swiss Franc Bonds. A default by the financial institution that is a party to the swap agreement would expose the Company to potential currency exchange risk on the remaining bond interest and principal payments. The approximate fair market value of the currency swap as of June 30, 1994, was $15.0 million. The Company would receive the proceeds payable upon the termination of the currency swap. 14 16 The Company is subject to various contingent liabilities and commitments. These include a floor plan agreement entered into by Snapper under which approximately $31.0 million and $25.0 million was outstanding at June 30, 1994 and 1993, respectively, various guaranties of debt totaling approximately $5.6 million, various real estate leases with estimated future payments of approximately $8.6 million, various potential liabilities relating to environmental matters, various other litigation matters and various pledges of cash and short-term investments. See "Contingent Liabilities and Commitments" in Notes to Consolidated Financial Statements. On June 8, 1993, the Company acquired substantially all the assets of DP for a net purchase price consisting of $11.6 million in cash, the issuance of 1,090,909 shares of the Company's Common Stock (the "Acquisition Shares") valued at $12 million, and the assumption or payment of certain liabilities including trade payables and a revolving credit facility. The Company recorded redeemable Common Stock of $12 million upon the issuance of the Acquisition Shares. See "Acquisitions" in Notes to Consolidated Financial Statements. The Company also entered into an agreement providing the holder of the Acquisition Shares (the "Holder") with the right to receive additional payments depending upon the value of the Acquisition Shares over a period of not longer than one year from the purchase date. The agreement gives the Holder the right under certain circumstances, which have already occurred, to require the Company to purchase the Acquisition Shares at a price equal to $11.00 per share. The repurchase of the Acquisition Shares will not increase the cost recorded by Actava for DP since the cost of DP will be increased by the amount of the cash payment and simultaneously reduced by the same amount due to a corresponding adjustment to the respective redeemable common stock. The right of the Holder to receive additional payments of cash became exercisable after June 8, 1994 and would have expired if not exercised on or before August 7, 1994. On August 3, 1994, the Holder agreed to extend the exercise date to February 17, 1995 in exchange for a $435,000 fee and an irrevocable letter of credit in the amount of $12.0 million which is available and payable to the Holder on and after February 17, 1995 upon demand and tender of the Acquisition Shares. The $435,000 fee will be amortized over the term of the extension. Actava's debt agreements contain covenants which, among other things, place restrictions upon the amount of stock the Company may repurchase and dividends it may pay. The repurchase of the Acquisition Shares may violate some of these covenants. In November 1991, the Company entered into a Loan Agreement with its then 25.0% stockholder, Triton Group Ltd. ("Triton"), whereby Triton could borrow up to $32.0 million from the Company secured by the stock in the Company owned by Triton (the "Triton Loan"). The Triton Loan Agreement was modified in June 1993, pursuant to the Plan of Reorganization filed by Triton in its Chapter 11 bankruptcy proceeding. The modification reduced the interest rate on the Triton Loan, extended the maturity date from November 1994 to April 1997 and modified the mandatory payment (margin call) provisions and the Stockholder Agreement between Actava and Triton, as described in the Notes to the Consolidated Financial Statements. As modified, the Triton Loan provided for quarterly payments of interest only with no scheduled principal payments due until final maturity in April 1997. In December 1993, Triton and Actava entered into a further amendment to the Loan Agreement pursuant to which Triton made a principal payment of $5.0 million plus accrued interest on the Triton Loan, reducing the loan balance to approximately $26.7 million. In addition, the December 1993 amendment provided for quarterly principal payments of $1.25 million commencing March 31, 1994 and modified the mandatory payment (margin call) provisions of the loan. Triton has announced that on March 2, 1994, Triton obtained a commitment from a bank which would enable Triton to prepay the entire balance under the Loan Agreement, subject to the preparation of definitive documents. Triton also announced that while the terms and cost of this new financing would be less favorable than those of the existing arrangement, Triton is willing to consider a refinancing as part of a broader strategy to enhance the value of Actava. Triton has announced that the bank commitment, which was originally scheduled to expire on June 30, 1994, has been extended until September 30, 1994. As of June 30, 1994 the outstanding balance under the Triton Loan was $24.2 million. During the first and second quarters of 1994 the Company received cash dividends from its subsidiaries of $12.0 million and $811,000, respectively. The Company, excluding its operating subsidiaries and Snapper, had $63.4 million of unpledged cash and short-term investments as of August 12, 1994. Such subsidiaries, however, are restricted by financial covenants in their credit agreements from paying the Company more than 15 17 70% of their net income as dividends. The Company uses its existing cash and short-term investments, as well as dividends from is subsidiaries and payments on the Triton Loan, to provide for items such as operating expense payments and debt service. The Company, excluding its subsidiaries and Snapper, has debt service payments scheduled for the remainder of 1994 of approximately $10.4 million. The credit agreements with Snapper and one of the Company's sporting goods subsidiaries contain financial covenants (involving tangible net worth, book net worth and other matters) which the Company must comply with to prevent a default. A default under these credit agreements would have serious adverse consequences, including the elimination of funding for the operations of Snapper and the sporting goods company, as well as the prohibition on payment of any dividends to the Company by these businesses. As a result of the loss incurred by the Company in connection with the sale of Qualex, the Company obtained financial covenant amendments from its lenders so that the Company would remain in compliance with these covenants through August 31, 1994. It will be necessary for the Company to negotiate additional amendments to these financial covenants in order for the Company to be in compliance with these covenants after August 31, 1994. Management believes that it will be successful in negotiating these additional amendments. The Company's subsidiaries and division, excluding Qualex, had unused borrowing capacity of approximately $47.7 million at June 30, 1994, under credit agreements which are secured by assets such as accounts receivable or inventory. The assets which serve as collateral are determined by reference to the outstanding balance under the credit agreements and the qualification of the assets as collateral as defined in the credit agreements; however, the assets potentially available as collateral are, in the aggregate, $335.1 million. On April 19, 1994, John D. Phillips was elected president and chief executive officer of the Company. He was also elected to the Board of Directors of the Company. Mr. Phillips succeeds Charles R. Scott, who had served as the Company's president and chief executive officer since 1991. In connection with the election of Mr. Phillips, Renaissance Partners, an investment partnership in which Mr. Phillips serves as a general partner, purchased from the Company 700,000 shares of the Company's Common Stock for $4,462,500, representing a price of $6.375 per share. Mr. Phillips also received an immediately vested option to purchase 300,000 shares of the Company's Common Stock at a price of $6.375 per share. This price represents the last sale price of the Company's Common Stock on the New York Stock Exchange on April 11, 1994, the day before the Company announced that it had received the investment and employment proposals from Mr. Phillips. The Company has entered into a Registration Rights Agreement with Renaissance Partners pursuant to which the Company has agreed to register with Securities and Exchange Commission the 700,000 shares of Common Stock purchased by Renaissance Partners. 16 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: October 7, 1994 17 -----END PRIVACY-ENHANCED MESSAGE-----