<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) OCTOBER 31, 1994
THE ACTAVA GROUP INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 1-5706 58-0971455
- - ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
(State or other jurisdiction
of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
4900 GEORGIA-PACIFIC CENTER, ATLANTA, GEORGIA 30303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 404/658-9000
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
ITEM 5. OTHER EVENTS
The Actava Group Inc. (the "Company") believes that historical financial
statements which have been restated to report Qualex Inc. as a discontinued
operation would be helpful in allowing investors to evaluate the Company's
current financial statements. Therefore, the Company has restated its historical
consolidated statements of operations and cash flows to reflect Qualex as a
discontinued operation and such restated financial statements are included in
the following:
- Audited Consolidated Balance Sheets of the Company and subsidiaries as of
December 31, 1993 and 1992, and the related Consolidated Statements of
Operations, Stockholders' Equity, and Cash Flows for each of the three
years in the period ended December 31, 1993.
- Unaudited Balance Sheets as of March 31, 1994 and December 31, 1993 of
the Company and subsidiaries and Statements of Operations and Cash Flows
for the three months ended March 31, 1994 and 1993.
<PAGE> 3
ITEM 7. EXHIBITS
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ------------------------------ ------------------------------------------------------------
<S> <C>
99(a).................... Audited Consolidated Financial Statements for The Actava
Group Inc. as of December 31, 1993 and 1992 and for each of
the three years in the period ended December 31, 1993
99(b).................... Unaudited Consolidated Financial Statements for The Actava
Group Inc. for the quarters ended March 31, 1994 and 1993
23....................... Consent of Ernst & Young LLP
</TABLE>
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE ACTAVA GROUP INC.
--------------------------------------
Registrant
/s/ FREDERICK B. BEILSTEIN, III
--------------------------------------
Frederick B. Beilstein, III
Senior Vice President and Chief
Financial Officer
Dated: October 31, 1994
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ------------------------------ ------------------------------------------------------------
<S> <C>
99(a).................... Audited Consolidated Financial Statements for The Actava
Group Inc. as of December 31, 1993 and 1992 and for each of
the three years in the period ended December 31, 1993
99(b).................... Unaudited Consolidated Financial Statements for The Actava
Group Inc. for the quarters ended March 31, 1994 and 1993
</TABLE>
<PAGE> 1
EXHIBIT 99(A)
THE ACTAVA GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
<PAGE> 2
THE ACTAVA GROUP INC. AND SUBSIDIARIES
DECEMBER 31, 1993
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index:
Report of Independent Auditors........................................................ 2
Audited Consolidated Financial Statements:
Consolidated balance sheets........................................................... 3
Consolidated statements of operations................................................. 4
Consolidated statements of cash flows................................................. 5
Consolidated statements of stockholders' equity....................................... 6
Notes to consolidated financial statements............................................ 7
</TABLE>
1
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
To The Stockholders
The Actava Group Inc.
We have audited the accompanying consolidated balance sheets of The Actava
Group Inc. and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Actava Group Inc. and subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in the notes to consolidated financial statements, in 1993
Actava changed its method of accounting for income taxes and postretirement
benefits, and in 1992 Actava changed its method of accounting for the cost of
its proof advertising program.
ERNST & YOUNG LLP
Atlanta, Georgia
March 3, 1994,
except for the
Notes Payable
and Long-Term Debt Note
as to which the date
is March 29, 1994
and except for
the Photofinishing
Transaction and
Discontinued
Operation Note as
to which the date
is August 12, 1994
2
<PAGE> 4
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1992
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash.......................................................................... $ 18,770 $ 20,792
Short-term investments........................................................ 29,635 63,842
Receivables (less allowance for doubtful accounts of $10,227 in 1993 and
$12,805 in 1992)............................................................ 276,018 243,368
Inventories................................................................... 108,439 63,987
Prepaid expenses.............................................................. 43,809 38,365
Income tax benefits........................................................... 32,434 45,790
---------- ----------
Total Current Assets................................................... 509,105 476,144
Property, Plant and Equipment
Land.......................................................................... 8,303 8,700
Buildings and improvements.................................................... 72,289 57,490
Machinery and equipment....................................................... 393,643 343,140
---------- ----------
474,235 409,330
Less allowances for depreciation.............................................. (198,881) (165,720)
---------- ----------
Total Property, Plant and Equipment.................................... 275,354 243,610
Notes Receivable from Triton Group Ltd.......................................... 26,726 31,726
Other Assets (less allowance for doubtful notes and accounts of $3,988 in 1993
and $3,104 in 1992)........................................................... 50,702 45,754
Long-term investments........................................................... 26,611 24,719
Intangibles (less accumulated amortization of $88,281 in 1993 and $65,219 in
1992)......................................................................... 386,626 395,913
---------- ----------
Total Assets........................................................... $1,275,124 $1,217,866
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................................................. $ 86,163 $ 69,665
Accrued expenses and other current liabilities................................ 177,720 160,810
Notes payable................................................................. 135,114 64,795
Current portion of long-term debt............................................. 6,665 10,013
---------- ----------
Total Current Liabilities.............................................. 405,662 305,283
Deferred Income Taxes........................................................... 56,715 53,431
Long-Term Debt.................................................................. 220,887 220,357
Subordinated Debt............................................................... 190,551 193,566
Minority Interest in Photofinishing Subsidiary.................................. 205,395 205,382
Redeemable Common Stock......................................................... 12,000 --
Stockholders' Equity
Common Stock (22,767,744 shares in 1993 and 1992)............................. 22,768 22,768
Additional capital............................................................ 46,362 46,362
Retained earnings............................................................. 236,333 292,266
Less treasury stock -- at cost (6,223,467 shares in 1993 and 1992)............ (121,549) (121,549)
---------- ----------
Total Stockholders' Equity............................................. 183,914 239,847
---------- ----------
Contingent Liabilities and Commitments
Total Liabilities and Stockholders' Equity............................. $1,275,124 $1,217,866
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 5
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
(RESTATED) (RESTATED) (RESTATED)
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
Net sales................................................. $ 465,812 $ 377,890 $274,907
Costs, expenses and other costs of products sold.......... 401,471 283,635 222,553
Selling, general and administrative....................... 85,179 74,946 101,035
Interest expense.......................................... 26,811 20,811 19,663
Provision for doubtful accounts........................... 4,661 2,941 6,258
Other (income) expense-net................................ 1,706 (4,651) (2,935)
Provision for plant closure costs......................... (865) (1,132) 1,932
Provision for employee agreements and related costs....... -- -- 6,839
---------- ---------- ----------
Total costs, expenses and other........................... 518,963 376,550 355,345
Income (Loss) before Income Taxes, Discontinued
Operations and Cumulative Effect of Change in
Accounting Principle................................. (53,151) 1,340 (80,438)
Income tax expense (benefit).............................. (1,435) 1,662 (24,451)
---------- ---------- ----------
Loss from Continuing Operations......................... (51,716) (322) (55,987)
Income from Discontinued Operations....................... 8,526 10,887 5,166
---------- ---------- ----------
Income (Loss) before Cumulative Effect of Change in
Accounting Principle................................. (43,190) 10,565 (50,821)
Cumulative effect of change in accounting principle....... (4,404) 1,034 --
---------- ---------- ----------
Net Income (Loss)....................................... $ (47,594) $ 11,599 $(50,821)
========= ========= ========
Earnings (Loss) Per Share of Common Stock
Primary
Continuing operations..................................... $ (3.01) $ (.02) $ (3.39)
Discontinued operations................................... .49 .66 .31
Cumulative effect of change in accounting principle....... (.25) .06 --
---------- ---------- ----------
Net Income (Loss)......................................... $ (2.77) $ .70 $ (3.08)
========= ========= ========
Pro forma Effect Assuming the Changes in Accounting
Principles are Applied Retroactively:
Net Income (Loss)......................................... $ (43,190) $ 10,565 $(50,667)
========= ========= ========
Net Income (Loss) Per Share............................... $ (2.77) $ .64 $ (3.07)
========= ========= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 6
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
(RESTATED) (RESTATED) (RESTATED)
-------- --------- ---------
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss from continuing operations.......................... $(56,120) $ (322) $ (55,987)
Cumulative effect of change in accounting principle.......... (4,404) -- --
-------- --------- ---------
Loss before cumulative effect of change in accounting
principle.................................................. (51,716) (322) (55,987)
Items providing (using) cash from continuing operating
activities................................................. (16,082) (44,181) 49,247
-------- --------- ---------
Net cash used by continuing operations....................... (67,798) (44,503) (6,740)
-------- --------- ---------
Income from discontinued operations.......................... 8,526 11,921 5,166
Cumulative effect of change in accounting principle.......... -- 1,034 --
-------- --------- ---------
Income before cumulative effect of change in accounting
principle.................................................. 8,526 10,887 5,166
Items providing cash from discontinued operations............ 46,325 57,895 46,718
-------- --------- ---------
Net cash provided by discontinued operations................. 54,851 68,782 51,884
-------- --------- ---------
Net cash provided (used) by all operations................... (12,947) 24,279 45,144
Cash Flows from Investing Activities:
Purchases of investments (maturities over 90 days)........... (99,510) (99,198) (288,996)
Sales of investments (maturities over 90 days)............... 111,851 107,932 284,980
Net sales of other investments............................... 21,866 6,143 50,739
Purchase of long-term investments............................ -- (24,719) --
Payments for property, plant and equipment................... (55,554) (81,800) (59,499)
Proceeds from disposals of property, plant and equipment..... 16,024 10,230 6,018
Payments for purchases of businesses......................... (9,415) (30,560) (90,019)
Loans to Triton Group Ltd.................................... 5,000 (1,426) (30,300)
Other investing activities -- net............................ (15,221) (3,604) 5,801
-------- --------- ---------
Net Cash Used by Investing Activities........................ (24,959) (117,002) (121,276)
-------- --------- ---------
Cash Flows from Financing Activities:
Net borrowings (payments) under short-term bank agreements... 52,284 51,107 (4,013)
Borrowings under long-term debt agreements................... 21,503 817,000 774,740
Payments on long-term debt agreements........................ (21,192) (771,136) (653,895)
Payments of subordinated debt................................ (1,847) (200) (5,824)
Proceeds from issuance of Actava Common Stock................ -- -- 365
Cash dividends paid by Qualex to minority interest........... (8,614) (3,886) (5,884)
Cash dividends paid by Actava................................ (6,250) (5,956) (5,947)
-------- --------- ---------
Net Cash Provided by Financing Activities.................. 35,884 86,929 99,542
-------- --------- ---------
Increase (Decrease) in Cash............................. (2,022) (5,794) 23,410
Cash at beginning of year.................................... 20,792 26,586 3,176
-------- --------- ---------
Cash at End of Year..................................... $ 18,770 $ 20,792 $ 26,586
======== ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 7
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
---------------- ADDITIONAL RETAINED ------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------ ------- ---------- -------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance -- January 1, 1991........................ 22,768 $22,768 $ 46,276 $344,622 6,254 $(122,136) $291,530
Net (loss) for the year......................... (50,821) (50,821)
Cash dividends on Common Stock, $.36 per
share......................................... (5,947) (5,947)
Common Stock issued under employee stock
options....................................... (220) (30) 585 365
Common Stock purchased and other................ 306 (2) 304
------ ------- ---------- -------- ------ --------- --------
Balance -- December 31, 1991...................... 22,768 22,768 46,362 287,854 6,224 (121,553) 235,431
Net income for the year......................... 11,599 11,599
Cash dividends on Common Stock, $.36 per
share......................................... (5,956) (5,956)
Common Stock issued under employee stock
options....................................... (1) 4 4
Other, principally foreign currency translation
adjustment.................................... (1,231) (1,231)
------ ------- ---------- -------- ------ --------- --------
Balance -- December 31, 1992...................... 22,768 22,768 46,362 292,266 6,223 (121,549) 239,847
Net income for the year......................... (47,594) (47,594)
Cash dividends on Common Stock, $.36 per
share......................................... (6,250) (6,250)
Other, principally foreign currency translation
adjustment.................................... (2,089) (2,089)
------ ------- ---------- -------- ------ --------- --------
Balance -- December 31, 1993...................... 22,768 $22,768 $ 46,362 $236,333 6,223 $(121,549) $183,914
====== ======= ========= ======== ====== ========= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 8
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Actava and
its majority-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
Accounting Changes
Change in Method of Accounting for Certain Advertising Costs of Discontinued
Operation
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, was
included in the cumulative effect of change in accounting principle for 1992 to
apply retroactively the new method. The pro forma amounts presented in the
consolidated statements of operations for 1992 and 1991 reflect the effect of
the retroactive application of applying the new method.
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 bases 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 financial position 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 Company funds the excess of the cost of
benefits under the plans over the participants' contributions as the costs are
incurred. 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. Postretirement
benefit expense for 1992 and 1991, recorded on a cash basis, has not been
restated. The pro forma amounts presented in the consolidated
7
<PAGE> 9
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements of operations reflect no effect of the retroactive application of
applying the new method as it is not material. The assumed health care cost
trend rate 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 7% discount rate per year, compounded annually, was
assumed to measure the accumulated postretirement benefit obligation as of
December 31, 1993, as compared to 9% for January 1, 1993. A 1% increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligations as of December 31, 1993, by 16% and the net
periodic postretirement benefit cost by 18%.
The following table presents the plans' funded status reconciled with
amounts recognized in the Company's consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees....................................................... $(1,094) $ (990)
Fully eligible active plan participants........................ (788) (932)
Other active plan participants................................. (1,149) (2,482)
------- -------
(3,031) (4,404)
Plan assets...................................................... -- --
------- -------
Accumulated postretirement benefit obligation in excess of plan
assets......................................................... (3,031) (4,404)
Unrecognized prior service cost.................................. (1,995) --
Unrecognized net loss............................................ 544 --
Unrecognized transition obligation............................... -- 4,404
------- -------
Accrued postretirement benefit cost.............................. $(4,482) $ --
======= =======
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
Service cost..................................................... $ 96 $ --
Interest cost.................................................... 296 --
Amortization of unrecognized prior service cost.................. (154) --
Cash basis expense............................................... -- 102
------- -------
$ 238 $ 102
======= =======
</TABLE>
Change in Accounting Estimate
During 1993, Snapper revised its estimate of accrued product warranty
expense to reflect an increase in the amount of future warranty expense to be
incurred due to increased warranty claims. This change in accounting estimate
resulted in an additional $4,000,000 charge to net income in 1993.
Short-Term Investments
Short-term investments which are classified as current assets are carried
at the lower of aggregate cost or market value. These investments consist of
interest bearing obligations and other obligations whose return is based upon
market rates of interest. There is no significant concentration of short-term
investments in any single issuer.
Marketable equity securities which are classified as long-term investments
are carried at the lower of aggregate cost or market value. Marketable debt
securities which are classified as long-term investments are
8
<PAGE> 10
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carried at cost which approximates market value. Market values for these
securities are based on quoted market prices. Interest income is accrued as
earned, while dividend income is recorded on the exdividend date. The cost of
marketable securities sold is determined on the specific identification method
and realized gains and losses are reflected in income.
Inventories
Inventories of finished goods, work in process and raw materials are stated
at the lower of cost or market. The Last-In, First-Out (LIFO) method of
determining cost is used for a substantial portion of these inventories.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated over
their expected useful lives. Generally, depreciation is provided on the
straight-line method for financial reporting purposes and on accelerated methods
for tax purposes. Amortization associated with capitalized leases is included in
depreciation expense.
Intangibles
Intangibles consist of the excess of the purchase price over the net assets
of businesses acquired, customer lists and covenants not to compete. Amounts
relating to the excess of the purchase price over the net assets of businesses
acquired are amortized over a 40-year period using the straight-line method.
Amounts relating to customer lists and covenants not to compete are amortized
over two to five years or the life of the agreement, respectively. Management
continuously evaluates intangible assets to determine that no diminishment in
value has occurred. Management evaluates intangible assets on the basis of the
operations of the particular entity to which the intangible relates to determine
whether any changes in the nature and expected benefits to be derived from the
intangible have occurred which would require an adjustment to its recorded
value. In the event management believes that the recorded value of the
intangible is greater than its actual value, the Company will write-down the
value of the intangible. In conjunction with the evaluation of any possible
impairment of its intangibles, the Company also similarly assesses whether a
change in the life of the intangible is required for amortization purposes.
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Excess of purchase price over net assets of businesses
acquired....................................................... $349,546 $344,948
Customer lists................................................... 29,847 40,912
Covenants not to compete......................................... 7,233 10,053
-------- --------
$386,626 $395,913
======== ========
</TABLE>
Income Taxes
Income taxes are provided for all taxable items in the statement of
operations regardless of when these items are reported for federal income tax
purposes. Actava elects to utilize certain provisions of the federal income tax
laws to reduce current taxes payable. Deferred income taxes are provided for
temporary differences in recognition of income and expenses for tax and
financial reporting purposes.
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
9
<PAGE> 11
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and liabilities are determined based on differences between financial reporting
and tax bases 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.
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.
Earnings Per Share of Common Stock
Primary earnings per share are computed by dividing net income (loss) by
the average number of common and common equivalent shares outstanding during the
year. Common equivalent shares include shares issuable upon the assumed exercise
of stock options using the treasury stock method when dilutive. Computations of
common equivalent shares are based upon average prices during each period.
Fully diluted earnings per share are computed using such average shares
adjusted for any additional shares which would result from using end-of-year
prices in the above computations, plus the additional shares that would result
from the conversion of the 6 1/2% Convertible Subordinated Debentures. Net
income (loss) is adjusted by interest (net of income taxes) on the 6 1/2%
Convertible Subordinated Debentures. The computation of fully diluted earnings
per share is used only when it results in an earnings per share number which is
lower than primary earnings per share.
Revenue Recognition
Sales from the lawn and garden and sporting goods segments are recognized
when the products are shipped to their customers.
Index Protection Agreements
The Company uses index protection agreements to hedge interest rate risk
associated with its borrowings and to hedge the risk or market price
fluctuations of commodities bought and sold in the normal course of business.
These contracts are accounted for as hedges and any gains or losses are deferred
and included in the basis of the underlying transactions. Cash flows from the
contracts are accounted for in the same categories as the cash flows from the
items being hedged.
10
<PAGE> 12
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1993, Qualex entered into a hedge agreement with a bank which
expires in 1996 related to Qualex's $200,000,000 of Senior Notes. The hedge
agreement includes a Basic Transaction for a notional amount of $100,000,000
under which Qualex pays an interest rate based on the three-month London
Interbank Offered Rate (LIBOR) and receives a fixed interest rate of 4.0587%
quarterly, and an Enhancement Transaction for a notional amount of $163,000,000
under which Qualex pays an interest rate based on the three-month LIBOR and
receives a variable interest rate based on the prime rate less 2.49%. A net
settlement is calculated and paid on a quarterly basis. At December 31, 1993,
termination of this interest rate swap agreement would require a cash payment by
Qualex of $1,158,000 based on market quotes.
Qualex also entered into various commodity swaps to provide protection for
silver recoveries from photofinishing processes. The outstanding contracts at
December 31, 1993 cover the sale of 2,900,000 troy ounces of silver at index
amounts of $3.85 to $4.67 per ounce in 1994 and 1,420,000 troy ounces per year
at index amounts of $4.23 to $5.10 per ounce from 1995 to 2005. In 1997, Qualex
has the sale of 4,300,000 troy ounces covered by swap agreements at an index
amount of $5.15 per ounce. During 1993 and 1992, gain amortization related to
these contracts totaled 2,445,000 and 1,232,000 net of tax, and is included in
income from discontinued operations. At December 31, 1993 and 1992,
respectively, $7,442,000 and $11,476,000 of these gains were recorded as
deferred income. The deferred gains are amortized over the original effective
lives of the agreements and $4,990,000, $1,338,000, $835,000 and $279,000 will
be amortized in 1994, 1995, 1996 and 1997, respectively. At December 31, 1993,
termination of the commodity swap agreements would require cash payments by
Qualex of $18,688,000 based on market quotes.
Self-Insurance
The Company is primarily self-insured for workers' compensation, health,
automobile, product and general liability costs. The self-insurance claim
liability is determined based on claims filed and an estimate of claims incurred
but not yet reported.
Accrued Warranty
The Company provides an accrual for estimated future warranty costs related
to various product coverage programs, based on the historical relationship of
actual costs as a percentage of sales.
Reclassifications
Certain reclassifications were made in prior years' financial statements to
conform to current presentations.
11
<PAGE> 13
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
The following tables provide additional information related to the
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1993 1992 1991
(RESTATED) (RESTATED) (RESTATED)
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Items providing (not providing) cash from continuing
operations:
Depreciation................................................. $ 11,472 $ 8,638 $ 8,096
Amortization................................................. 631 108 192
Provision for doubtful accounts.............................. 4,661 2,941 6,258
Provision for plant closure costs............................ (865) -- 1,932
Changes in operating assets and liabilities, net of effects
from purchases and dispositions:
Accounts receivable.......................................... (34,319) (45,283) 35,428
Inventories.................................................. (17,529) (7,259) 24,378
Prepaid expenses and other assets............................ 1,591 (1,616) (1,227)
Accounts payable, accrued expenses and other current
liabilities............................................... 17,814 (15,482) (1,969)
Current and deferred taxes................................... 88 14,790 (23,942)
Other operating activities -- net............................ 374 (1,018) 101
---------- ---------- ----------
Net items providing (using) cash from continuing operations.... $(16,082) $(44,181) $ 49,247
======== ======== ========
Items providing (not providing) cash from discontinued
operations:
Minority interest............................................ $ 8,526 $ 11,922 $ 5,166
Depreciation................................................. 33,193 26,392 22,800
Amortization................................................. 25,149 23,898 12,926
Provision for doubtful accounts.............................. 2,601 478 (773)
Provision for plant closure costs............................ 4,096 -- 17,037
Changes in operating assets and liabilities, net of effects
from purchases and dispositions of discontinued operations:
Accounts receivable.......................................... 3,654 19,819 5,971
Inventories.................................................. (13,906) 2,496 2,958
Prepaid expenses and other assets............................ (15,503) (22,005) (1,738)
Accounts payable, accrued expenses and other current
liabilities............................................... (17,515) (6,647) (10,634)
Current and deferred taxes................................... 16,030 1,542 (394)
Other operating activities -- net............................ -- -- (6,601)
---------- ---------- ----------
Net items providing cash from discontinued operations.......... $ 46,325 $ 57,895 $ 46,718
======== ======== ========
Net assets of business sold:
Total assets................................................. $ -- $ -- $ 2,696
Total liabilities............................................ -- -- 871
---------- ---------- ----------
Net assets................................................... $ -- $ -- $ 1,825
======== ======== ========
Net assets of businesses purchased:
Total assets................................................. $ 71,693 $ 58,040 $127,825
Total liabilities............................................ 48,063 27,448 37,437
---------- ---------- ----------
Net assets................................................... $ 23,630 $ 30,592 $ 90,388
======== ======== ========
Interest paid................................................ $ 44,570 $ 27,279 $ 23,142
Income taxes paid............................................ $ 11,406 $ 3,334 $ 11,060
</TABLE>
12
<PAGE> 14
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PHOTOFINISHING TRANSACTION AND DISCONTINUED OPERATION
Photofinishing operations are conducted by Qualex Inc., which was formed in
March 1988 by the combination of Actava's photofinishing subsidiary with the
domestic photofinishing operations of Eastman Kodak Company. Actava and Kodak
currently share equally in Qualex's equity, income and dividends. Actava owns
51% of the voting stock of Qualex, is entitled to and has elected a majority of
the members of the Board of Directors of Qualex, and has the ability through its
control of the Board of Directors to declare dividends, remove the executive
officers of Qualex and otherwise direct the management and policies of Qualex,
except for policies relating to certain designated actions requiring the consent
of at least one member of the Board of Directors of Qualex designated by Kodak.
Because of these rights, the Company believes that, it has effective unilateral
control of Qualex which is not temporary. As a result, the Company consolidates
the results of operations of Qualex with the results of operations of the
Company.
Upon the formation of Qualex in 1988, the Company and Kodak entered into a
Shareholders Agreement (the "Qualex Shareholders Agreement") that provided,
among other things, for a reduction in the Company's voting control of Qualex
from 51% to 50% and for changes in the composition of the Board of Directors of
Qualex in the event of a "change in control" of the Company. The Qualex
Shareholders Agreement defined the term "change in control" to include a
"transaction or occurrence the effect of which is to give a person or group of
affiliated persons or entities the power to direct the management and policies"
of the Company.
In 1991, Charles R. Scott was elected President and Chief Executive Officer
of the Company. At the time of his election, Mr. Scott was also serving as
Chairman and Chief Executive Officer of a company that owned approximately 25%
of the Company's voting stock and was the Company's single largest stockholder.
Because Mr. Scott was serving at the same time as the chief executive officer of
both the Company and the Company's single largest stockholder, the Company and
Kodak agreed that a "change in control" of the Company had occurred for purposes
of the Qualex Shareholders Agreement. Despite this "change in control" of the
Company, Kodak agreed that the Company would continue to own 51% of the voting
control of Qualex and to elect a majority of the directors of Qualex. The Qualex
Shareholders Agreement, however, was amended to provide that Kodak had the right
to change the Company's control of Qualex on March 1, 1992 or on any subsequent
March 1. The Company does not believe that Kodak would exercise the right to
change the Company's control of Qualex, and Kodak, in fact, did not exercise
this right on March 1, 1992, 1993 or 1994.
Actava 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 Actava and Eastman Kodak Company
stipulates that upon a change of control at Actava certain Qualex preferred
stock, including the voting preferred owned by Actava, will be redeemed. On
March 28, 1991, the Qualex Shareholders' Agreement between Actava and Kodak was
amended. The amendment stipulates that a change of control of Actava, 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. As of March 1,
1992, and each subsequent March 1, Kodak may withdraw its waiver, and enforce
its rights under the Agreement by providing Actava with 30 days written notice.
At March 3, 1994, Kodak had not provided notice to Actava of an election to
withdraw its waiver. The Board of Directors of Qualex was increased from seven
to nine members, comprised of five representatives of Actava, three
representatives of Kodak and the chief executive officer of Qualex, pursuant to
the amendment.
Should Kodak withdraw its waiver or if an additional change in control of
Actava were to occur and if the Qualex preferred stock were redeemed, Actava
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
13
<PAGE> 15
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, Actava may possibly be deemed to no longer control
Qualex and Actava would no longer be in a position unilaterally to control,
among other things, the declaration of dividends to Actava and Kodak by Qualex.
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 restated 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 promisory 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.
The following assets and liabilities of Qualex are included in the
Company's balance sheet at December 31, 1993 and 1992.
FINANCIAL POSITION OF QUALEX
(000'S)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
<S> <C> <C>
Cash and short-term investments................................. $ 4,060 $ 8,721
Net accounts receivable......................................... 69,015 75,053
Inventories..................................................... 29,381 15,475
Other assets.................................................... 38,153 34,173
------------ ------------
Total current assets.................................. 140,609 133,422
Net property, plant and equipment............................... 202,150 202,580
Other assets.................................................... 30,413 19,504
Long-term investments........................................... 26,611 24,719
Intangibles..................................................... 371,106 391,618
------------ ------------
Total assets.......................................... $770,889 $771,843
============ ============
Current liabilities............................................. $130,845 $140,083
Deferred income taxes........................................... 22,446 19,598
Long-term debt.................................................. 217,987 212,576
Stockholders' equity............................................ 399,611 399,586
------------ ------------
Total liabilities and stockholders' equity............ $770,889 $771,843
============ ============
</TABLE>
14
<PAGE> 16
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's statements of operations for the three years in the period
ended December 31, 1993, have been restated to reflect Qualex as a discontinued
operation. The results of Qualex for these periods are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Net sales...................................................... $775,299 $770,853 $649,728
Operating expenses............................................. 723,952 716,217 621,709
-------- -------- --------
Operating profit............................................... 51,347 54,636 28,019
-------- -------- --------
Interest expense............................................... (16,488) (12,643) (3,871)
Other income (expense)......................................... (1,209) 1,448 602
-------- -------- --------
Income before taxes............................................ 33,650 43,441 24,750
Income taxes (benefit)......................................... 16,598 21,666 14,418
-------- -------- --------
Net income from discontinued operations before minority
interest..................................................... 17,052 21,775 10,332
Minority interest.............................................. (8,526) (10,888) (5,166)
-------- -------- --------
Net income from discontinued operations........................ $ 8,526 $ 10,887 $ 5,166
======== ======== ========
</TABLE>
ACQUISITIONS
On June 8, 1993, the Company acquired substantially all the assets of
Diversified Products Corporation ("DP") for a net purchase price consisting of
$11,629,500, the issuance of 1,090,909 shares of the Company's Common Stock
valued at $12,000,000, and the assumption or payment of certain liabilities
including trade payables and a revolving credit facility. The Company also
entered into an agreement which may provide the seller the right to additional
payments depending upon the value of the issued shares over a period of not
longer than one year from the purchase date. The issuance of additional payments
of cash 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.
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:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
---------------------
1993 1992
-------- --------
<S> <C> <C>
(IN THOUSANDS EXCEPT
PER
SHARE AMOUNTS)
UNAUDITED
Sales.......................................................... $519,477 $534,140
Net income (loss).............................................. (56,988) 1,352
Income (loss) per share -- primary............................. (3.23) .08
</TABLE>
During 1992, Qualex acquired Samiljan Foto, L.P. and certain other
photofinishing operations for $21,228,000 and $22,997,000 respectively,
including expenses. For one of the businesses in which Qualex purchased a
majority interest in 1992, the sellers have the right to require Qualex to
purchase the remaining interest, beginning in 1997, at an amount not to exceed
$18,000,000. During 1991, Qualex acquired Guardian
15
<PAGE> 17
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Photo Inc. and Phototron Corporation for $73,785,000 and $16,137,000,
respectively, including expenses. In a concurrent transaction with the
acquisition of Phototron Corporation, Actava, Kodak and Qualex settled the
litigation brought against them by Phototron Corporation.
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 purchase price resulted in an excess of costs over net assets acquired of
approximately $23,321,000 and $53,848,000 during 1992 and 1991, respectively, in
addition to $19,215,000 and $30,300,000 attributed to customer lists,
respectively. The results of operations of the businesses acquired have been
included in the consolidated financial statements since the dates of
acquisition.
The following data represents the combined unaudited operating results of
Actava on a pro forma basis as if the 1991 transactions had taken place at the
beginning of 1991. Pro forma information for 1992 acquisitions would not be
significantly different from the results reported. 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.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1991
----------------
<S> <C>
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
UNAUDITED
Sales......................................................................... $274,907
Net (loss).................................................................... (53,538)
----------------
(Loss) per share -- primary................................................... (3.24)
</TABLE>
ACCOUNTS AND NOTES RECEIVABLE
Receivables from sales of Actava's lawn and garden products amounted to
$146,994,000 and $157,605,000 at December 31, 1993 and 1992, respectively. The
receivables are primarily due from independent distributors located throughout
the United States. Amounts due from distributors are supported by a security
interest in the inventory or accounts receivable of the distributors. The
receivables generally have extended due dates which correspond to the seasonal
nature of the products' retail selling season. Concentrations of credit risk due
to the common business of the customers are limited due to the number of
customers comprising the customer base and their geographic location. Ongoing
credit evaluations of customer's financial condition are performed and reserves
for potential credit losses are maintained. Such losses, in the aggregate, have
not exceeded management's expectations.
Photofinishing sales are made to national, regional and local retailers
located throughout the United States, including mass merchants, grocery store
chains and drug store chains. Photofinishing receivables, which were $70,744,000
and $76,202,000 at December 31, 1993 and 1992, respectively, are unsecured and
generally due within 20 days following the end of each month. Included in
accounts receivable at December 31, 1993 and 1992 are $54,711,000 and
$47,564,000, respectively, due from national retail chains. Of these amounts,
$9,812,000 and $9,465,000 at December 31, 1993 and 1992, respectively, were
receivable from one such customer on net sales of $84,297,000 and $86,611,000,
respectively. The Company provides an allowance for doubtful accounts equal to
the estimated losses expected to be incurred in the collection of accounts
receivable. Such losses have consistently been within management's expectations.
Receivables from the sale of sporting goods are primarily from mass
merchants and sporting goods retailers located throughout the United States. The
receivables, which are unsecured, were $71,836,000 and
16
<PAGE> 18
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$19,781,000 at December 31, 1993 and 1992, respectively, and are generally due
within 30 to 60 days. Of these amounts, $23,362,000, and $4,686,000 are from the
same four highest balance customers for December 31, 1993 and 1992,
respectively. The companies which comprise the sporting goods group maintain
allowances for potential credit losses and such losses, in the aggregate, have
not exceeded management's expectations.
TRITON GROUP LTD. LOAN
At December 31, 1993, the Company had a $26,726,000 million note receivable
from Triton Group Ltd. secured by 4,413,598 shares of Actava Common Stock. At
December 31, 1992, $31,726,000 was outstanding under the agreement and was
secured by 4,338,598 shares of Actava 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, which became effective June 25, 1993,
included: 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, to prime plus 2% for the next six months, and to prime plus 2 1/2% for the
remainder of the term of the note; revising 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 off. The Stockholder Agreement was amended to
permit Triton to designate two directors (who are not officers or employees of
Triton) on an expanded nine-member Board of Directors so long as Triton
continues to own 20% or more of Actava's 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 have amended or eliminated the collateral maintenance (margin call)
provisions that are an integral part of the Amended and Restated Loan Agreement.
On 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 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. On December 7,
1993, the Amended and Restated Loan Agreement was amended, in connection with a
$5,000,000 prepayment of principal received on December 7, 1993, to provide for
quarterly principal payment installments of $1,250,000 due on the last day of
each quarter of each year beginning March 31, 1994, with any unpaid principal
and accrued interest due on April 1, 1997. The Agreement was also amended to
require 75,000 additional shares of Actava Common Stock to be pledged as
collateral and to modify the margin call provisions of the Agreement to provide
a $7.50 minimum per share value of Actava Common Stock for purposes of
determining the amount of any margin call mandatory payments. These
modifications limit the circumstances under which Triton must pledge additional
collateral for the loan; however, the 4,413,598 shares of Actava Common Stock
owned by Triton will continue to be pledged to secure the loan until the loan is
paid in full. At March 3, 1994, the pledged shares had a market value of
$30,895,000 as compared to the loan balance of $26,726,000. In the opinion of
management, the shares held as collateral are, and will continue to be,
sufficient to provide for realization of the loan.
17
<PAGE> 19
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventory balances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Finished goods and goods purchased for resale.................. $ 82,559 $ 49,279
Raw materials and supplies..................................... 46,018 33,537
-------- --------
128,577 82,816
Reserve for LIFO cost valuation................................ (20,138) (18,829)
-------- --------
$108,439 $ 63,987
======== ========
</TABLE>
Work in process is not considered significant.
During 1991, certain inventory quantities were reduced resulting in a
liquidation of LIFO inventory quantities which were carried at lower costs
prevailing in prior years as compared with the cost of current year purchases.
The utilization of this lower cost inventory decreased net loss by approximately
$1,487,000 and decreased loss per share of common stock by $.09.
LONG-TERM INVESTMENTS
Marketable securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
------- -------
<S> <C> <C>
(IN THOUSANDS)
Marketable equity securities, at lower cost or market............ $15,850 $15,031
Bonds and commercial paper....................................... 3,003 7,430
U.S. Treasury bills.............................................. 7,758 2,258
------- -------
Total.................................................. $26,611 $24,719
======= =======
</TABLE>
Net realized gains (losses) on the sale of these securities totaled
$(185,000) and $134,000 in 1993 and 1992, respectively, and have been included
in the determination of income from discontinued operations. At December 31,
1993, the value of marketable equity securities exceeded their cost by $265,000,
while at December 31, 1992, unrealized losses on these securities of $201,000
were recorded to a valuation allowance and included in shareholders' equity. The
market value of debt securities approximates cost.
18
<PAGE> 20
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities, including
$31,392,000 in 1993 and $44,274,000 in 1992 due to Eastman Kodak Company, are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued salaries and wages....................................... $ 8,363 $ 10,211
Accrued interest................................................. 14,471 15,741
Accrued advertising and promotion................................ 25,238 15,039
Deferred income.................................................. 13,791 17,251
Self-insurance claims payable.................................... 35,070 35,683
Reserve for plant closure costs.................................. 6,754 15,286
Other............................................................ 74,033 51,599
-------- --------
$177,720 $160,810
======== ========
</TABLE>
NOTES PAYABLE AND LONG-TERM DEBT
Qualex has three separate line of credit agreements for working capital
needs. These agreements are $5,000,000 each, for a total of $15,000,000. The
Company pays a facility fee of 1/4% per annum on the committed line of credit
agreements. At December 31, 1993, $3,200,000 was outstanding under these
agreements while no amounts were outstanding at December 31, 1992.
Included in Notes Payable at December 31, 1993 and 1992 is $87,359,000 and
$58,243,000, respectively, which was outstanding under a three year Finance and
Security Agreement which provides working capital to the Snapper division. The
Agreement, dated October 23, 1992, is for $75,000,000 (and may be increased
under certain circumstances up to $100,000,000 for a specified period of time).
Interest is payable at the prime rate plus 3/4% to 1 1/4%, depending upon the
prime rate in effect. The Agreement provides for the payment of an annual line
fee of $487,500 which is subject to increases in certain circumstances. The loan
is principally secured by Snapper assets and certain inventory of Snapper and
requires Actava to comply with various restrictive financial covenants. The
assets which serve as collateral are determined by reference to the outstanding
balance under the credit agreement and the qualification of the assets as
collateral is defined in the credit agreement; however, the assets potentially
available as collateral are, in the aggregate, $173,068,000. As of March 29,
1994, effective as of December 31, 1993, various provisions of the Agreement,
including the financial covenants, were amended.
During 1992, in order to provide additional working capital and for general
corporate purposes, an Actava Sports subsidiary entered into a three year Loan
and Security Agreement with a financial institution to provide up to $35,000,000
of working capital. Interest is payable at the prime rate plus 1 1/4%. The
Agreement provides for a facility fee of $350,000. The loan is principally
secured by certain receivables and inventory of the subsidiary and requires the
subsidiary to comply with various restrictive financial covenants. The assets
which serve as collateral are determined by reference to the outstanding balance
under the credit agreement and the qualification of the assets as collateral is
defined in the credit agreement; however, the assets potentially available as
collateral are, in the aggregate, $23,681,000. At December 31, 1993, $1,846,000
was outstanding under the agreement while no amounts were outstanding at
December 31, 1992.
During 1992, in order to provide additional working capital and for general
corporate purposes, an Actava Sports subsidiary entered into a one-year
Revolving Loan Agreement with a financial institution to provide up to
$6,500,000 for working capital. Interest is payable at the prime rate of the
financial institution. The loan is unsecured and requires the subsidiary to
comply with various restrictive financial covenants. In August, 1993, the
agreement was amended to increase the facility limit to $8,000,000 for a
six-month period beginning
19
<PAGE> 21
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 1, 1993, and to extend the term of the agreement until August 31,
1994. At December 31, 1993, $2,700,000 was outstanding under the Agreement while
no amounts were outstanding at December 31, 1992.
In April 1993, a Revolving Loan and Security Agreement with respect to a
revolving credit facility of up to $10,000,000 was entered into by an Actava
Sports subsidiary. Interest is payable at the 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. The assets which serve
as collateral are determined by reference to the outstanding balance under the
credit agreement and the qualification of the assets as collateral is defined in
the credit agreement; however, the assets potentially available as collateral
are, in the aggregate, $12,881,000. At December 31, 1993 and 1992, no amounts
were outstanding under the agreement.
In December 1993, an Actava Sports subsidiary, DP, entered into a Finance
and Security Agreement with two financial institutions in order to provide up to
$50,000,000 of working capital under a revolving credit facility. The agreement
is secured by certain receivables, inventories, property, plant and equipment,
and intangibles, as well as DP's issued and outstanding common stock and
requires compliance with various restrictive financial covenants. The assets
which serve as collateral are determined by reference to the outstanding balance
under the credit agreement and the qualification of the assets as collateral is
defined in the credit agreement; however, the assets potentially available as
collateral are, in the aggregate, $109,000,000. As of March 29, 1994, effective
December 31, 1993, various provisions of the Agreement, including the financial
covenants, were amended. Interest is payable at the prime rate plus 1 1/2%. The
Agreement provides for an annual facility fee of $375,000. At December 31, 1993,
$36,178,000 was outstanding under the agreement.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior notes -- Qualex........................................... $200,000 $200,000
Revolving credit agreement -- Qualex............................. 10,000 --
Capitalized lease obligations.................................... 545 5,053
Other long-term debt:
Secured (4-9% notes due at various dates to 2002)................ 1,900 2,630
Unsecured (4-8% notes due at various dates to 2001).............. 8,442 12,674
-------- --------
$220,887 $220,357
======== ========
</TABLE>
Qualex issued through a private placement $200,000,000 of Senior Notes in
1992 with September 1 maturities in 1997, 1999 and 2002 of $60,000,000,
$70,000,000 and $70,000,000, respectively, with interest rates of 7.99%, 8.45%
and 8.84%, respectively.
During 1992, Qualex entered into an unsecured $115,000,000 Revolving Credit
Agreement with eight financial institutions which will expire in May 1995.
Interest is payable under three rate options which are determined by reference
to the prime rate, the London interbank offered rate plus 1/2% to 3/4%, and
competitive bids. The Agreement provides for a participation fee of 1/8% and an
annual facility fee of 1/4%. At December 31, 1993, $10,000,000 was outstanding
under the agreement while no amounts were outstanding at December 31, 1992.
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 Actava by dividend or other means. At December 31, 1993,
approximately $166,000,000 of the $194,000,000 representing Actava's share of
the net assets of Qualex was restricted under the terms of these agreements.
20
<PAGE> 22
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Collateral for certain of the long-term debt includes real property. Assets
pledged as collateral under the borrowings are not material. Maturities of
long-term and subordinated debt are $15,142,000 in 1995, $35,172,000 in 1996,
$75,783,000 in 1997 and $59,121,000 in 1998.
The fair value of Actava's long-term and subordinated debt, including the
current portion, at December 31, 1993 is estimated to be approximately
$445,000,000 and was estimated at $425,000,000 at December 31, 1992. This
estimate is based on a discounted cash flow analysis using Actava's current
incremental borrowing rates for similar types of agreements and on quoted market
prices for issues which are traded. Actava does not anticipate settlement of
long-term debt at fair value and currently does not intend to pay the debt prior
to maturity.
SUBORDINATED DEBT
Subordinated debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
6% Senior Swiss Franc Bonds due 1996........................... $ 30,152 $ 30,152
6 1/2% Convertible Debentures due 2002......................... 75,000 75,000
9 1/2% Debentures due 1998, net of unamortized discount of
$1,308 in 1993 and $1,593 in 1992............................ 58,176 57,891
9 7/8% Senior Debentures due 1997, net of unamortized discount
of $468 in 1993 and $661 in 1992............................. 20,532 23,339
10% Debentures due 1999........................................ 6,691 7,184
-------- --------
$190,551 $193,566
======== ========
</TABLE>
In 1986 Actava issued 6% Senior Subordinated Swiss Franc Bonds due 1996 for
100,000,000 Swiss francs. Simultaneously, in order to eliminate exposure to
fluctuations in the currency exchange rate over the life of the bonds, Actava
entered into a currency swap agreement with a financial institution whereby
Actava received approximately $48,000,000 in exchange for the Swiss Franc Bond
proceeds. As a result of the swap agreement, Actava will, in effect, make its
interest and principal bond repayments in U.S. dollars without regard for
changes in the currency exchange rate. A default by the counterparty to the swap
agreement would expose Actava to potential currency exchange risk on the
remaining bond interest and principal payments in that Actava would be required
to purchase Swiss francs at current exchange rates rather than at the swap
agreement exchange rate. The amount of this potential risk cannot be currently
calculated as the principal and interest payments will be made in future years
and alternative swap agreements could be entered into by Actava. At December 31,
1993, the swap agreement has an effective exchange rate over its remaining term
of .5459 Swiss francs per U.S. dollar while the U.S. dollar equivalent market
exchange rate was .6734. After considering the stated interest rate, the cost of
the currency swap agreement, taxes and underwriting commissions, the effective
cost of the bonds is approximately 11.3%. The fair value of the currency swap as
of December 31, 1993 and 1992, was $10,795,000 and $7,242,000, respectively;
however, this is subject to change as domestic interest rates and foreign
currency markets are determining factors.
Actava, at its option, may redeem the Senior Subordinated Swiss Franc Bonds
at 101.0% plus accrued interest for one year subsequent to March 6, 1994 and at
decreasing amounts thereafter. The Bonds include a covenant which restricts the
amount of stockholders' equity available for cash dividends and the cash
redemption of capital stock. At December 31, 1993, $3,412,000 was available for
these purposes pursuant to this covenant.
In 1987 Actava issued $75,000,000 of 6 1/2% Convertible Subordinated
Debentures due in 2002 in the Euro-dollar market. The Debentures are convertible
into Actava's Common Stock at a conversion price of
21
<PAGE> 23
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
41 5/8 per share. At Actava's option the Debentures may be redeemed at 101% plus
accrued interest prior to August 4, 1994 and at 100% thereafter.
The 9 7/8% Senior Subordinated Debentures are redeemable at the option of
Actava at 101.555% of the principal amount plus accrued interest if redeemed
prior to March 15, 1994, and at decreasing prices thereafter. Mandatory sinking
fund payments of $3,000,000 (which Actava may increase to $6,000,000 annually)
began in 1982 and are intended to retire, at par plus accrued interest, 75% of
the issue prior to maturity.
At the option of Actava, the 10% Subordinated Debentures are redeemable, in
whole or in part, at the principal amount plus accrued interest. Sinking fund
payments of 10% of the outstanding principal amount commenced in 1989; however,
Actava receives credit for Debentures redeemed or otherwise acquired in excess
of sinking fund payments.
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.
CAPITAL STOCK
Preferred and Preference Stock
There are 5,000,000 authorized shares of Preferred Stock and 1,000,000
authorized shares of Preference Stock, none of which were outstanding or
designated as to a particular series at December 31, 1993.
Common Stock
There are 100,000,000 authorized shares of Common Stock, $1 par value. At
December 31, 1993, 1992 and 1991 there were 17,635,186, 16,544,277 and
16,544,027 shares issued and outstanding, respectively, after deducting
6,223,467, 6,223,467 and 6,223,717 treasury shares, respectively, and after the
issuance of 1,090,909 shares of redeemable common stock during the year ended
December 31, 1993.
Actava has reserved the shares of Common Stock listed below for possible
future issuance:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1992
--------- ---------
<S> <C> <C>
Stock options................................................. 761,000 871,375
6 1/2% Convertible Subordinated Debentures.................... 1,801,802 1,801,802
Restricted stock plan......................................... 102,800 102,800
--------- ---------
2,665,602 2,775,977
======== ========
</TABLE>
22
<PAGE> 24
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options
Actava's stock option plans provide for the issuance of qualified incentive
stock options and nonqualified stock options. Incentive stock options may be
issued at a per share price not less than the market value of Actava's Common
Stock at the date of grant. Nonqualified options may be issued generally at
prices and on terms determined by the stock option committee. The following
table reflects changes in the incentive stock options issued under these plans:
<TABLE>
<CAPTION>
APPROXIMATE
PRICE RANGE
SHARES PER SHARE
-------- -----------
<S> <C> <C>
Options outstanding at January 1, 1991......................... 138,525 $ 20-28
Granted...................................................... 64,500 12
Exercised.................................................... (30,000) 12
Canceled..................................................... (13,000) 28
Expired...................................................... (104,775) 20
-------- -----------
Options outstanding at December 31, 1991....................... 55,250 12-28
Granted...................................................... 60,000 12-15
Exercised.................................................... (250) 12
Canceled..................................................... (17,125) 12-28
-------- -----------
Options outstanding at December 31, 1992....................... 97,875 12-28
Granted...................................................... 50,000 9-12
Canceled..................................................... (21,125) 12-28
-------- -----------
Options outstanding at December 31, 1993....................... 126,750 $ 9-28
======== =========
</TABLE>
During 1993 nonqualified options for 75,500 shares at $13.75 per share were
granted.
At December 31, 1993, incentive stock options totaling 64,000 shares were
exercisable at prices ranging from $11.875 to $27.875 and nonqualified options
totaling 53,875 shares were exercisable at prices ranging from $13.75 to $14.50.
There were 591,550 and 696,300 shares under Actava's stock option plans at
December 31, 1993 and 1992, respectively, which were available for the granting
of additional stock options.
PROVISIONS FOR PLANT CLOSURE COSTS
The 1993 and 1991 income from discontinued operations includes $1,038,000
and $5,196,000 ($4,096,000 and $17,037,000, respectively, before income taxes
and minority interest for discontinued operations) or $.06 and $.31 per share
for the costs of closing 3 and 12, respectively of Qualex's photofinishing
plants. The provision for plant closure for Qualex included in income from
discontinued operations includes lease termination costs and fixed asset and
facility closure costs which may be incurred over several years based on the
remaining terms of the leases and employee severance and termination costs.
The reserve for closing certain lawn and garden facilities was established
in 1990 by a provision for plant closure of approximately $13,700,000. Lawn and
garden production at these facilities ceased in early 1991, however, inventory
previously produced at these sites continued to be distributed from these sites
until 1992. Costs associated with this warehouse and distribution function were
included in costs of sales in 1992 and 1991 and were immaterial. Due to market
conditions and the size of these lawn and garden facilities, the Company
estimated in 1990 that it would require approximately three years to dispose of
these facilities and in 1993 this was accomplished. During 1993, 1992 and 1991,
costs of approximately $3,400,000, $2,100,000 and $4,280,000 respectively were
incurred related to employee severance, plant maintenance, interest on
capitalized lease obligations and the loss on disposal of equipment and
buildings. In 1993, the provision for plant
23
<PAGE> 25
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
closure costs includes reductions of $849,000, before and after tax, of $.05 per
share, to the reserve for closing the lawn and garden facilities as this
disposal was completed.
The 1991 provision for plant closure costs also includes $500,000 before
tax ($315,000 net of tax or $.02 per share) for closing facilities at a sporting
goods subsidiary and $1,432,000 before tax ($945,000 net of tax or $.06 per
share) for reducing the Actava corporate office facilities. The costs related to
the planned reduction of corporate office facilities were estimated in 1991 when
management made the decision to move out of its corporate office. The Company
subleased a portion of its space in 1991 and utilized $300,000 of the original
reserve. However, in 1992, it became apparent that the remaining space could not
be subleased as anticipated in 1991 and the Company decided to reverse its
remaining reserve of approximately $1,100,000 through the provision for plant
closure costs and utilize its remaining space until the lease expires in 1995.
Changes in the reserve for plant closure costs were as follows:
<TABLE>
<CAPTION>
CHARGED RECORDED
CHARGED TO INCOME THROUGH PURCHASE
TO PROVISION FOR FROM DISCONTINUED ACCOUNTING IN THE
PLANT CLOSURE COSTS OPERATIONS YEAR OF ACQUISITION TOTAL
------------------- ----------------- ------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1991....... $ 13,700 $ 15,834 $ 4,190 $ 33,724
Additions for:
Lease termination
costs(a).................. 1,432 3,595 1,292 6,319
Employee severance &
termination
benefits(a)............... 200 5,726 6,334 12,260
Fixed asset and facility
closure costs............. 300 7,716 7,734 15,750
------------------- ----------------- ------------------- --------
Total additions........ 1,932 17,037 15,360 34,329
Costs incurred(b)........... (7,686) (389) (4,132) (12,207)
Balance at December 31, 1991..... 7,946 32,482 15,418 55,846
Additions for:
Fixed asset and facility
closure costs............. -- -- 1,244 1,244
Reductions in reserves...... (1,132) (374) -- (1,506)
------------------- ----------------- ------------------- --------
Total additions
(reductions)......... (1,132) (374) 1,244 (262)
Costs incurred(b)........... (2,360) (23,713) (11,755) (37,828)
Balance at December 31, 1992..... 4,454 8,395 4,907 17,756
Additions for:
Lease termination
costs(a).................. -- 1,475 -- 1,475
Employee severance &
termination benefits(a)... -- 1,294 -- 1,294
Fixed asset and facility
closure costs............. -- 1,327 906 2,233
Reduction in reserves....... (865) -- (865)
------------------- ----------------- ------------------- --------
Total additions
(reductions), net.... (865) 4,096 906 4,137
Costs incurred(b).............. (3,589) (7,437) (4,432) (15,458)
Balance at December 31, 1993..... $ -- $ 5,054 $ 1,381 $ 6,435
============= ============= ============== ========
</TABLE>
- - ---------------
(a) Substantially all amounts accrued require future cash expenditures.
(b) Costs were generally incurred in accordance with line item categories as
presented above.
24
<PAGE> 26
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INCOME -- NET
Other income net of other (expenses) from continuing operations is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Interest and investment income.......................... $ 6,167 $ 5,831 $ 7,459
Miscellaneous income (expense).......................... (7,873) (1,180) (4,524)
------- ------- -------
$(1,706) $ 4,651 $ 2,935
======= ======= =======
</TABLE>
Early payment interest credit expense which is the result of cash payments
received by Snapper from distributors prior to receivable due dates is included
in net miscellaneous income (expense). The early payment interest credit expense
was $4,322,000 for 1993, $2,522,000 for 1992, and $4,348,000 for 1991.
Miscellaneous income (expense) for 1993 includes a charge to operations of
$3,000,000 for an increase in a valuation allowance for a real estate
investment.
INCOME TAXES
Income tax expense (benefit) is composed of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
LIABILITY DEFERRED
METHOD METHOD
--------- --------------------
1993 1992 1991
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations:
Current federal..................................... $ (1,674) $ (1,316) $ (6,203)
Current state....................................... 239 156 595
Deferred federal and state.......................... -- 2,822 (18,843)
--------- -------- --------
$ (1,435) $ 1,662 $(24,451)
======= ======== ========
Discontinued operations:
From operations..................................... $ 16,598 $ 21,666 $ 14,418
======= ======== ========
</TABLE>
25
<PAGE> 27
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) computed by applying federal statutory rates
to income (loss) before income taxes is reconciled as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
LIABILITY DEFERRED
METHOD METHOD
--------- -------------------
1993 1992 1991
--------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations:
Computed tax at statutory rates..................... $ (18,603) $ 457 $(27,349)
State tax, net of federal benefit................... 155 103 393
Effect of tax rate changes on realization of timing
differences...................................... 414 153 301
Amortization of goodwill............................ 52 51 50
Tax-exempt interest................................. -- -- (36)
Undistributed earnings of majority-owned
subsidiary....................................... 603 812 351
Over provision of current tax....................... -- -- 1,000
Deferred tax valuation allowance.................... 16,227 -- --
Other............................................... (283) 86 839
--------- ------- --------
$ (1,435) $ 1,662 $(24,451)
======== ======= ========
Discontinued operations:
Computed tax at statutory rates..................... $ 11,778 $14,769 $ 8,415
State tax, net of federal benefit................... 2,088 3,000 1,756
Amortization of goodwill............................ 3,071 3,184 2,703
Effect of non-tax basis adjustments in connection
with acquisitions................................ -- 914 1,037
Tax-exempt interest................................. (26) (80) (34)
Dividends received deduction........................ (290) -- --
Over provision of current tax....................... -- -- 675
Other............................................... (23) (121) (134)
--------- ------- --------
$ 16,598 $21,666 $ 14,418
======== ======= ========
</TABLE>
26
<PAGE> 28
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of deferred tax assets and liabilities at December
31, 1993, are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward........................ $ 30,383
Reserves for losses and write-down of certain assets... 14,885
Reserves for self-insurance............................ 11,781
Alternative minimum tax credit......................... 8,805
Provision for loss on loans and receivables............ 3,509
Tax amortizable intangible............................. 3,145
State tax accruals..................................... 2,676
Gain on hedge transaction.............................. 2,609
Obligation for postretirement benefits................. 1,966
Plant closure costs.................................... 1,541
Charitable contribution carryforward................... 1,053
Other.................................................. 1,913 $ 1,793
Investment in less than 80% owned subsidiary........... -- 37,627
Basis differences in fixed assets...................... -- 29,387
Purchase of safe harbor lease investment............... -- 9,783
Undistributed earnings of majority-owned subsidiary.... -- 1,282
------------ ------------
Subtotal............................................... 84,266 79,872
Valuation allowance.................................... 28,675 --
------------ ------------
Total deferred taxes................................... $ 55,591 $ 79,872
========= =========
Net deferred taxes..................................... $ 24,281
=========
</TABLE>
The valuation allowance recorded upon adoption of FASB Statement No. 109,
"Accounting for Income Taxes," at January 1, 1993 was approximately $12,500,000.
The components of deferred income tax expense (benefit) for the years ended
December 31, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1992 1991
------ --------
(IN THOUSANDS)
<S> <C> <C>
Accelerated depreciation................................... $ 643 $ 567
Provision for loss on loans and receivables................ (281) (1,886)
Reserves for losses and write-down of certain assets....... 1,030 (825)
Plant closure costs........................................ 1,077 3,983
Undistributed earnings of majority-owned subsidiary........ 547 (110)
Recognition of income tax net operating loss benefit....... -- (19,986)
Other...................................................... (194) (586)
------ --------
$2,822 $(18,843)
====== ========
</TABLE>
Actava has a net operating loss carryforward for federal income tax
purposes of approximately $86,800,000 at December 31, 1993, which will expire in
years 2006 through 2008. Actava has an alternative minimum tax credit
carryforward of approximately $8,800,000, which may be carried forward
indefinitely, available to offset regular tax in certain circumstances.
27
<PAGE> 29
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION PLANS
Actava and its subsidiaries have several noncontributory defined benefit
and other pension plans which are "qualified" under federal tax law and cover
substantially all employees. In addition Actava has a "nonqualified"
supplemental retirement plan which provides for the payment of benefits to
certain employees in excess of those payable by the qualified plans. Benefits
under the qualified and nonqualified plans are based upon the employee's years
of service and level of compensation. Actava's funding policy for the qualified
plans is to contribute annually such amounts as are necessary to provide assets
sufficient to meet the benefits to be paid to the plans' members and to keep the
plans actuarially sound. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be earned
in the future.
The components of net periodic pension costs are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1992 1991
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 374 $ 705 $ 610
Interest cost on projected benefit obligation............... 961 1,015 890
Actual return on plan assets................................ (996) (992) (1,628)
Net amortization and deferral............................... 76 (31) 704
----- ------- -------
$ 415 $ 697 $ 576
===== ======= =======
</TABLE>
Assumptions used in the accounting for the defined benefit plans are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rates............................... 7.2 % 8.4 % 8.3 %
Rates of increase in compensation levels...................... 4.7 % 6.1 % 6.2 %
Expected long-term rate of return on assets................... 7.6 % 8.3 % 8.3 %
</TABLE>
These actuarial assumptions were changed during 1993 for accounting for the
defined benefit plans as of December 31, 1993. The change in discount rates from
8.4% for 1992 to 7.2% for 1993 increased projected benefit obligations by
approximately 12%.
28
<PAGE> 30
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth the funded status and amount recognized in
the Consolidated Balance Sheets for Actava's defined benefit pension plans:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
<S> <C> <C>
(IN THOUSANDS)
PLANS WHOSE ASSETS EXCEED ACCUMULATED BENEFITS
Actuarial present value of benefit obligations:
Vested benefit obligations................................... $ (4,652) $(11,717)
======== ========
Accumulated benefit obligation............................... $ (5,232) $(13,100)
======== ========
Projected benefit obligations................................ $ (5,232) $(15,035)
Plan assets at fair value.................................... 6,296 15,197
-------- --------
Funded status -- plan assets in excess of projected benefit
obligation................................................ $ 1,064 $ 162
======== ========
Comprised of:
Accrued pension cost......................................... $ -- $ (2,265)
Prepaid pension cost......................................... 415 332
Unrecognized net gain (loss)................................. (523) 702
Unrecognized prior service cost.............................. 187 325
Unrecognized net assets at January 1, 1987, net of
amortization.............................................. 985 1,068
-------- --------
$ 1,064 $ 162
======== ========
PLANS WHOSE ACCUMULATED BENEFITS EXCEED ASSETS
Actuarial present value of benefit obligations:
Vested benefit obligation.................................... $(21,174) $ (8,198)
======== ========
Accumulated benefit obligation............................... $(22,224) $ (8,340)
======== ========
Projected benefit obligation................................. $(25,320) $ (9,035)
Plan assets at fair value.................................... 18,615 5,594
-------- --------
Funded status -- projected benefit obligation in excess of
plan assets............................................... $ (6,705) $ (3,441)
======== ========
Comprised of:
Accrued pension cost......................................... $ (4,637) $ (3,246)
Prepaid pension cost......................................... -- 596
Unrecognized net gain (loss)................................. (2,157) (1,098)
Unrecognized prior service cost.............................. (215) (215)
Unrecognized net obligation at January 1, 1987, net of
amortization.............................................. 304 522
-------- --------
$ (6,705) $ (3,441)
======== ========
</TABLE>
Substantially all of the plan assets at December 31, 1993 and 1992 are
invested in governmental bonds, mutual funds and temporary investments.
Some of the Company's subsidiaries also have defined contribution plans
which provide for discretionary annual contributions covering substantially all
of their employees. Contributions from continuing operations of approximately
$400,000 in 1993, $800,000 in 1992, and $200,000 in 1991 were made to these
plans.
LEASES
Actava and its subsidiaries are lessees of warehouses, manufacturing
facilities and other properties under numerous noncancelable leases.
29
<PAGE> 31
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized leased property, which is not significant, is included in
property, plant and equipment and other assets.
Future minimum payments for the capital leases and noncancelable operating
leases with initial or remaining terms of one year or more are summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------------------------------------------------------- --------- -------
<S> <C> <C>
(IN THOUSANDS)
1994......................................................... $12,976 $ 462
1995......................................................... 10,321 287
1996......................................................... 8,813 157
1997......................................................... 7,717 138
1998......................................................... 5,377 0
Thereafter................................................... 12,847 0
--------- -------
Total minimum lease payments................................. $58,051 1,044
=======
Less amounts representing interest........................... (128)
-------
Present value of net minimum lease payments.................. $ 916
======
</TABLE>
Rental expense charged to continuing operations for all operating leases
was $4,641,000, $3,454,000 and $3,844,000 for the years ended December 31, 1993,
1992 and 1991, respectively.
Certain noncancelable leases have renewal options for up to 10 years, and
generally, related real estate taxes, insurance and maintenance expenses are
obligations of Actava. Certain leases have escalation clauses which provide for
increases in annual rentals in certain circumstances.
LITIGATION
On February 18, 1994, Photographic Concepts Inc. ("PCI"), a Florida
corporation, sued Qualex in the United States District Court for the Middle
District of North Carolina, in a lawsuit captioned Photographic Concepts, Inc.
v. Qualex, Inc., Civil Action No. 1:94-CV-00081. PCI's claims arise out of
allegations that Qualex entered into and then breached an agreement with PCI
relating to the marketing of on-site "microlab" photofinishing services. During
1993, Qualex's microlab business resulted in $33,300,000 in revenues and
$7,300,000 in gross profits, and Qualex expects such business to increase in the
future. PCI alleges, among other things, that Qualex breached agreement with
PCI, and misappropriated trade property and other information from PCI. PCI is
seeking an injunction against Qualex's alleged use and misappropriation of PCI's
allegedly confidential and proprietary trade methods and techniques, an
accounting for and payment over to PCI of Qualex's profits from such alleged use
and misappropriation, unspecified consequential and punitive damages and
attorneys' fees and other costs of litigation. Qualex is currently gathering the
information and documents necessary to file its response to PCI's Complaint.
That response must be filed by April 25, 1994. Qualex intends to defend the case
vigorously, but the Company is unable to determine the probable impact of the
suit at this early stage in the proceeding.
In 1991, three lawsuits were filed against Actava, certain of Actava's
current and former directors and Intermark, Inc., which owned approximately 26%
of Actava'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 Actava by manipulating the affairs of
Actava to the detriment of Actava's past and present stockholders. The complaint
sought monetary damages from the director defendants, injunctive relief against
Actava, Intermark and its current directors, and costs of suit and attorney's
fees. The other two complaints alleged, among other things that members of the
Actava Board of Directors contemplate either a sale, a merger, or other business
combination involving Intermark, Inc. and Actava or one or more of its
30
<PAGE> 32
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries or affiliates. The complaints sought costs of suit and attorney's
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. While these actions are in their preliminary stages, management currently
believes the actions will not materially affect the operations or financial
position of Actava.
On November 30, 1993, a lawsuit was filed by the Department of Justice
("DOJ") against American Seating Company ("American Seating"), a former
subsidiary of Actava, in the United States District Court for the Western
District of Michigan. The lawsuit is captioned United States v. American Seating
Co., Civil Action No. 1:93-CV-956. Pursuant to an asset purchase agreement
between Actava and Amseco Acquisition, Inc., dated July 15, 1987, Actava assumed
the obligation for certain liabilities incurred by American Seating arising out
of litigation or other disputes, involving events occurring on or before June
22, 1987. The DOJ alleges among other things that American Seating failed to
disclose certain information relating to its price discount practices that it
contends was required in an offer submitted by American Seating to the General
Services Administration for possible contracts for sales of systems furniture
and related services. The complaint seeks recovery of unspecified single and
treble damages, penalties, costs and prejudgment and post-judgment interest. The
parties have engaged in settlement discussions but not have agreed on a
disposition of the case. A trial, if necessary, has been scheduled for June
1995. The DOJ has asserted damages of approximately $3.5 million. If such
damages were awarded and then trebled, the total damages, excluding penalties,
costs and interest, could exceed $10 million. 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, Actava
is not aware of any action which, in the opinion of management, would materially
affect the financial position or results of operations of Actava.
CONTINGENT LIABILITIES AND COMMITMENTS
Actava, on behalf of its Snapper division, has an agreement with a
financial institution which makes available to dealers floor plan financing for
Snapper products. This agreement provides financing for dealer inventories and
accelerates cash flow to Snapper's distributors and to Snapper. Under the terms
of the agreement, a default in payment by one of the dealers on the program is
non-recourse to both the distributor and to Snapper. However, the distributor is
obligated to repurchase any equipment recovered from the dealer and Snapper is
obligated to repurchase the recovered equipment if the distributor defaults. At
December 31, 1993 and 1992, there was approximately $23,000,000 and $20,000,000,
respectively, outstanding under these floor plan financing arrangements.
Actava is contingently liable under various guarantees of debt totaling
approximately $8,600,000. The debt is primarily Industrial Revenue Bonds which
were issued by former subsidiaries to finance their manufacturing facilities and
equipment, and is secured by the facilities and equipment. In addition, upon the
sale of the subsidiaries, Actava received lending institution guarantees or bank
letters of credit to support Actava's contingent obligations. There are no
material defaults on the debt agreements.
Actava is contingently liable under various real estate leases of former
subsidiaries. The total future payments under these leases, including real
estate taxes, is estimated to be approximately $9,100,000. The leased properties
generally have financially sound subleases.
31
<PAGE> 33
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1992, Qualex entered into an agreement with a bank whereby it
sells an undivided interest in a designated pool of trade accounts receivable on
an ongoing basis. The receivables are discounted at the commercial paper rate.
At December 31, 1993 this rate was 3.42%. In addition, the bank charges Qualex a
program fee of .425% of the balance outstanding at the end of each month.
The maximum allowable amount of receivables to be sold, initially set at
$50,000,000, was increased to $75,000,000 in August 1992. Qualex continued to
service the receivables at no charge to the purchaser since any servicing cost
would be negligible due to the nature of the receivables, e.g., short-term
(generally collected in 45 days based on invoice terms). As collections reduce
the pool of sold accounts receivable, Qualex sells participating interest in new
receivables to bring the amount sold up to the desired level. At December 31,
1993 and 1992, the uncollected balance of receivables sold amounted to
$60,000,000 and $30,000,000, respectively. The proceeds are reported as cash
flows from discontinued operations in the statement of cash flows and a
reduction of receivables in Qualex's balance sheet. Total proceeds received by
Qualex during the year were $519,000,000 for 1993 and $220,000,000 for 1992. The
allowance for doubtful accounts for Qualex includes a reserve for losses on
receivables sold with recourse pursuant to this agreement which was recorded at
the time of sale. During 1993 and 1992, Qualex recorded expense of $2,200,000
and $1,100,000, respectively, which represents the discount and fees charged on
these sales included in income from discontinued operations. No other gains or
losses are recorded on the sale of these receivables.
Qualex has a supply contract with Kodak for the purchase of sensitized
photographic paper and purchases substantially all of the chemicals used in
photoprocessing from Kodak. Qualex also purchases various other production
materials and equipment from Kodak.
Qualex and DP handle and store various materials in the normal course of
business that have been classified as hazardous by various federal, state and
local regulatory agencies. As of December 31, 1993, Qualex and DP are continuing
to conduct tests at various sites and will perform any necessary cleanup where
and to the extent legally required. At those sites where tests have been
completed, cleanup costs have been immaterial. The Company may also be liable
for remediation of environmental damage relating to businesses previously sold
in excess of amounts accrued. At the sites currently being tested, it is
management's opinion that cleanup costs will not have a material effect on
Actava's financial position or results of operations.
In January 1993, Qualex signed a ten year agreement to purchase its
information systems services from an outside agency. Annual service charges
under this agreement are approximately $13,000,000.
At December 31, 1993, approximately $5,000,000 of Actava's cash and
short-term investments were pledged to secure a Snapper credit line and
approximately $20,700,000 of cash and short-term investments were pledged to
support outstanding letters of credit.
SEGMENT INFORMATION
A description of Actava's segments is presented in the first four
paragraphs of Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Additional segment information as of and
for the three years ended December 31, 1993 is presented in the tables captioned
"Segment Performance" and "Other Segment Data" which are included in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
32
<PAGE> 34
THE ACTAVA GROUP INC. AND SUBSIDIARIES
SUMMARY OF QUARTERLY EARNINGS AND DIVIDENDS
<TABLE>
<CAPTION>
QUARTERS ENDED IN 1993
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(RESTATED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales............................................. $ 99,701 $112,753 $113,746 $139,612
Gross Profit.......................................... 20,770 21,210 12,955 9,406
Income (loss) from continuing operations.............. (1,340) (3,669) (16,283) (30,424)
Income (loss) from discontinued operations............ (1,860) 3,712 7,236 (562)
Cumulative effect of change in accounting
principle(c)........................................ (4,404) -- -- --
Net loss(a)(c)(d)(e).................................. $ (7,604) $ 43 $ (9,047) $(30,986)
======== ======== ======== ========
Earnings (loss) per share:
Income (loss) from continuing operations.............. $ (.08) $ (.22) $ (.92) $ (1.73)
Income (loss) from discontinued operations............ (.11) .22 .41 .03
Cumulative effect of change in accounting principle... (.27) -- -- --
Net loss.............................................. $ (.46) $ -- $ (.51) $ (1.76)
======== ======== ======== ========
Cash dividends........................................ $ .09 $ .09 $ .09 $ .09
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED IN 1992
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(RESTATED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales............................................. $113,088 $ 88,840 $ 78,256 $ 97,706
Gross Profit.......................................... 26,216 21,719 20,373 25,947
Income (loss) from continuing operations.............. (167) (1,288) (2,630) 3,763
Income (loss) from discontinued operations............ (1,639) 3,919 7,343 1,264
Cumulative effect of change in accounting principle... 1,034 -- -- --
Net income (loss)(a)(b)............................... $ (772) $ 2,631 $ 4,713 $ 5,027
======== ======== ======== ========
Earnings (loss) per share:
Income (loss) from continuing operations.............. $ (.01) $ (.08) $ (.16) $ .23
Income (loss) from discontinued operations............ (.10) .24 .44 .08
Cumulative effect of change in accounting principle... .06 -- -- --
Net income (loss)..................................... $ (.05) $ .16 $ .28 $ .31
======== ======== ======== ========
Cash dividends........................................ $ .09 $ .09 $ .09 $ .09
</TABLE>
- - ---------------
(a) Actava's lawn and garden division estimates certain sales related expenses
for the year and charges these expenses to income based upon estimated sales
for the year. Sales and expenses for 1993 were different than estimated in
the first three quarters. If the expenses had been charged to income based
upon actual sales for the year, net loss would have increased in the first
and second quarter by $4,500,000 and $7,450,000, respectively, and decreased
in the third and fourth quarters by $1,750,000 and $10,200,000,
33
<PAGE> 35
respectively. Sales and expenses for the year were also different in 1992
than estimated in the first three quarters. If the expenses had been charged
to income based upon actual sales for the year, net income would have
increased in the first and third quarters by $3,500,000 and $700,000,
respectively, and decreased in the fourth quarter by $4,200,000.
(b) 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.
Information for the first quarter of 1992, as previously reported, differs
from the above amounts as a result of this change. The effects of this
change do not have a significant effect on the other quarters.
(c) Effective January 1, 1993, Actava adopted FASB Statement No. 106,
"Accounting for Postretirement Benefits Other Than Pensions". Actava and its
subsidiaries provide group medical plans and life insurance coverage for
certain employees subsequent to retirement. In prior years, these benefits
had been charged to operations on a pay-as-you-go (cash) basis; effective as
of 1993 they are charged to operations on an accrual basis. Information for
the first quarter of 1993, as previously reported, differs from the above
amounts because the cumulative effect was originally reported net-of-tax.
(d) During the fourth quarter of 1993, Actava's lawn and garden division revised
its estimate of accrued product warranty expense to reflect an increase in
the amount of future warranty cost to be incurred due to increased warranty
claims. This change in accounting estimate resulted in an increase in the
net loss for the fourth quarter of approximately $4,000,000.
(e) During the fourth quarter of 1993, Actava increased its valuation allowance
for an investment in a real estate development from $1,425,000 to
$4,425,000, due to an accelerated plan for disposition. This change in
estimate resulted in an increase in the net loss for the fourth quarter of
approximately $3,000,000.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
<PAGE> 1
EXHIBIT 99(B)
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash............................................................... $ 11,684 $ 18,770
Short-term investments............................................. 30,418 29,635
Receivables (less allowances for doubtful accounts of $8,768 in
1994 and $10,227 in 1993)....................................... 277,872 276,018
Current portion of notes receivable................................ 5,000 --
Inventories........................................................ 99,188 108,439
Prepaid expenses................................................... 43,361 43,809
Future income tax benefits......................................... 35,371 32,434
----------- ------------
Total current assets....................................... 502,894 509,105
Property, plant and equipment........................................ 462,725 474,235
Less allowances for depreciation................................... (191,679) (198,881)
----------- ------------
271,046 275,354
Notes receivable from Triton Group Ltd............................... 20,476 26,726
Other assets......................................................... 60,721 50,702
Long-term investments................................................ 27,456 26,611
Intangibles.......................................................... 390,243 386,626
----------- ------------
Total assets............................................... $ 1,272,836 $1,275,124
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable, accrued expenses and other current liabilities... $ 251,289 $ 263,883
Notes payable...................................................... 147,742 135,114
Current portion of long-term debt.................................. 6,453 6,665
----------- ------------
Total current liabilities.................................. 405,484 405,662
Deferred income taxes................................................ 56,564 56,715
Long-term debt....................................................... 248,336 220,887
Subordinated debt.................................................... 187,671 190,551
Minority interest in photofinishing subsidiary....................... 190,586 205,395
Redeemable common stock.............................................. 12,000 12,000
Stockholders' equity
Common stock (22,767,744 shares in 1994 and 1993).................. 22,768 22,768
Additional capital................................................. 46,362 46,362
Retained earnings.................................................. 224,614 236,333
Less treasury stock -- at cost (4,432,558 shares in 1994 and
5,132,558 in 1993).............................................. (121,549) (121,549)
----------- ------------
172,195 183,914
----------- ------------
Total liabilities and stockholders' equity................. $ 1,272,836 $1,275,124
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE> 2
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1994(A) 1993(A)
-------- --------
<S> <C> <C>
Net sales.............................................................. $155,271 $ 99,701
Operating costs and expenses
Cost of products sold................................................ 128,071 78,931
Selling, general and administrative expenses......................... 27,438 19,015
Provision for doubtful accounts...................................... 249 284
-------- --------
Operating profit (loss)........................................... (487) 1,471
Interest (expense)..................................................... (7,359) (6,125)
Other income (expense) -- net.......................................... (56) 1,868
-------- --------
Loss before income taxes, discontinued operations and cumulative
effect of change in accounting principle......................... (7,902) (2,786)
Income taxes (benefit)................................................. 187 (1,446)
-------- --------
Loss from continuing operations................................... (8,089) (1,340)
Discontinued operations
Loss from operations................................................. (4,584) (1,860)
Loss on disposal of business......................................... -- --
-------- --------
Income (loss) from discontinued operations........................... (4,584) (1,860)
Loss before cumulative effect of change in accounting principle... (12,673) (3,200)
Cumulative effect of change in accounting
principle............................................................ -- (4,404)
-------- --------
Net loss.......................................................... $(12,673) $ (7,604)
======== ========
Loss per share of common stock
Continuing operations................................................ $ (.46) $ (.08)
Discontinued operations.............................................. (.26) (.11)
Cumulative effect of change in accounting principle.................. -- (.27)
-------- --------
Primary and fully diluted......................................... $ (.72) $ (.46)
======== ========
Cash dividends per common share................................... $ -- $ .09
======== ========
Average common and common equivalent shares....................... 17,635 16,544
======== ========
</TABLE>
- - ---------------
(a) Restated for discontinued operations.
See Notes to Consolidated Financial Statements.
2
<PAGE> 3
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN
CASH
------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
1994(A) 1993(A)
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations..................................... $ (8,090) $ (5,745)
Cumulative effect of change in accounting principle............... -- 4,404
--------- --------
Loss before cumulative effect of change in accounting principle... (8,090) (1,341)
Items not providing cash from operations.......................... (28,917) (24,558)
--------- --------
Net cash used by continuing operations......................... (37,007) (25,899)
--------- --------
Loss from discontinued operations................................... (4,583) (1,859)
Items providing cash from discontinued operations................. 15,467 3,834
--------- --------
Net cash provided by discontinued operations................... 10,884 1,975
--------- --------
Net cash used by operating activities.......................... (26,123) (23,924)
--------- --------
Cash flows from investing activities:
Purchases of investments (maturities over 90 days)................ (29,572) (33,452)
Sales of investments (maturities over 90 days).................... 21,546 51,881
Net sales of other investments (maturities less than 90 days)..... 7,243 2,891
Payments for property, plant & equipment.......................... (7,344) (6,523)
Proceeds from disposals of property, plant & equipment............ 376 241
Collections on notes receivable................................... 1,473 332
Payments for purchases of businesses.............................. -- (8,842)
Payments from Triton Group Ltd.................................... 1,250 --
Other investing activities -- net................................. (2,575) (4,425)
--------- --------
Net cash provided (used) by investing activities............... (7,603) 2,103
Cash flows from financing activities:
Net borrowings under short-term bank agreements................... 12,628 30,837
Borrowings under other long-term debt agreements.................. 48,000 986
Payments on long-term debt agreements............................. (20,763) (2,817)
Payments of subordinated debt..................................... (3,000) (1,536)
Cash dividends paid by Qualex to minority interest................ (10,225) (7,714)
Cash dividends paid by The Actava Group........................... -- (1,489)
--------- --------
Net cash provided by financing activities...................... 26,640 18,267
--------- --------
Decrease in cash.......................................... (7,086) (3,554)
Cash at beginning of year........................................... 18,770 20,792
--------- --------
Cash at June 30........................................... $ 11,684 $ 17,238
========= ========
</TABLE>
- - ---------------
(a) Restated for discontinued operations.
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, such
financial statements reflect all adjustments necessary for a fair statement of
the results of operations and financial position for the interim periods
presented. All such adjustments are of a normal recurring nature. Operating
results for the three months ended March 31, 1994 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1994.
CHANGES IN ACCOUNTING PRINCIPLES
Change in Method of Accounting for Income Taxes
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes". Under Statement 109, the liability method is used
in accounting for income taxes: deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of Statement 109, income tax expense was determined using the
deferred method: deferred tax expense was based on items of income and expense
that were reported in different years in the financial statements and tax
returns and were measured at the tax rate in effect in the year the difference
originated.
As permitted by Statement 109, the Company has elected not to restate the
financial statements of any prior years. The presentation of some items, such as
depreciation, has changed; however, the cumulative effect of the change in
accounting principle on pre-tax income from continuing operations, net income,
and the effective tax rate was not material.
Change in Method of Accounting for Postretirement Benefits
Effective January 1, 1993, the Company adopted FASB Statement No. 106,
"Accounting for Postretirement Benefits Other Than Pensions". The Company and
its subsidiaries provide group medical plans and life insurance coverage for
certain employees subsequent to retirement. The plans have been funded on a
pay-as-you-go (cash) basis. The plans are contributory, with retiree
contributions adjusted annually, and contain other cost-sharing features such as
deductibles, coinsurance and life-time maximums. The plan accounting anticipates
future cost-sharing changes that are consistent with the Company's expressed
intent to increase the retiree contribution rate annually for the expected
medical trend rate for that year. The coordination of benefits with medicare
uses a supplemental, or exclusion of benefits, approach.
As permitted by Statement 106, the Company elected to immediately recognize
the effect in the statement of operations for the first quarter of 1993 as a
$4,404,000 charge to net income as the cumulative effect of a change in
accounting principle. The annual net periodic postretirement benefit expense for
1993 decreased by $38,000 as a result of adopting the new rules. The annual net
periodic postretirement benefit expense for 1994 will be $240,000. The assumed
health care cost trend rate used to measure the expected cost of benefits by the
plan for 1993 was 14%, with 1% decrements to 6% in 2001 and years thereafter. A
7% discount rate per year, compounded annually, was assumed to measure the
accumulated postretirement benefit obligation as of December 31, 1993. A 1%
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1993, by 16%
and the net periodic postretirement benefit cost by 18%.
4
<PAGE> 5
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Change in Method of Accounting for Postemployment Benefits
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits." The Company and its subsidiaries provide benefits to former or
inactive employees after employment but before retirement such as severance
benefits, disability-related benefits (including workers' compensation), and
continuation of health care benefits and life insurance coverage. The cumulative
effect as of January 1, 1994, of this change in accounting was not material.
Prior to January 1, 1994, the Company recognized the cost of providing some
postemployment benefits on a cash basis while substantially all other
postemployment benefits were accounted for in the Company's self-insurance
program. Under the new method of accounting, the Company will accrue benefits
when it becomes probable that such benefits will be paid and when sufficient
information exists to make reasonable estimates of the amounts to be paid. As
required by the Statement, prior year financial statements have not been
restated to reflect the change in accounting method.
Change in Method of Accounting for Certain Investments in Debt and Equity
Securities
The Company and its subsidiaries invest in various debt and equity
securities. The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", which requires certain debt securities to be
reported at amortized cost, certain debt and equity securities to be reported at
market with current recognition of unrealized gains and losses, and certain debt
and equity securities to be reported at market with unrealized gains and losses
as a separate component of shareholders' equity. The Company adopted the
provisions of the new standard for investments held as of or acquired after
January 1, 1994. In accordance with the Statement, prior period financial
statements have not been restated to reflect the change in accounting principle.
The cumulative effect as of January 1, 1994, of adopting Statement 115 was not
material.
REDEEMABLE COMMON STOCK
Redeemable common stock represents 1,090,909 shares of common stock which
were issued in the acquisition of substantially all the assets and liabilities
of Diversified Products Corporation. These shares are subject to a right of
redemption at the option of the holder with an exercise date of February 17,
1995.
SALE OF SPORTS GROUP
On July 20, 1994 the Company entered into a definitive agreement with
Roadmaster Industries, Inc. (Roadmaster) to combine the Company's four sports
companies with Roadmaster in exchange for common stock of Roadmaster which would
represent an approximate 39% ownership interest in Roadmaster.
QUALEX INC. -- DISCONTINUED OPERATIONS
Qualex, Inc. is a photofinishing business formed in March 1988 by the
combination of Actava's photofinishing operations with the domestic
photofinishing operations of Eastman Kodak Company. Prior to June 30, 1994,
Actava owned 51% of the voting stock of Qualex, was entitled to and elected a
majority of the members of the Board of Directors of Qualex, and had the ability
through its control of the Board of Directors to declare dividends, remove the
executive officers of Qualex and otherwise direct the management and policies of
Qualex, except for policies relating to certain designated actions requiring the
consent of at least one member of the Board of Directors of Qualex designated by
Kodak. Because of these rights, the Company believes that it has effective
unilateral control of Qualex which was not temporary during the period from 1988
until the second quarter of 1994. As a result, the Company consolidated the
results of operations of Qualex with the results of operations of the Company
for periods ending prior to June 30, 1994.
5
<PAGE> 6
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon the formation of Qualex in 1988, the Company and Kodak entered into a
Shareholders Agreement (the "Qualex Shareholders Agreement") that provided,
among other things, for a reduction in the Company's voting control of Qualex
from 51% to 50% and for changes in the composition of the Board of Directors of
Qualex in the event of a "change of control" of the Company. The Qualex
Shareholders Agreement defined the term "change in control" to include a
"transaction or occurrence the effect of which is to give a person or group of
affiliated persons or entities the power to direct the management and policies"
of the Company. In 1991, Charles R. Scott was elected President and Chief
Executive Officer of the Company. At the time of his election, Mr. Scott was
also serving as Chairman and Chief Executive Officer of a company that owned
approximately 25% of the Company's voting stock and was the Company's single
largest stockholder. Because Mr. Scott was serving at the same time as the chief
executive officer of both the Company and the Company's single largest
stockholder, the Company and Kodak agreed that a "change in control" of the
Company had occurred for purposes of the Qualex Shareholders Agreement. Despite
this "change in control" of the Company, Kodak agreed that the Company would
continue to own 51% of the voting control of Qualex and to elect a majority of
the directors of Qualex. The Qualex Shareholders Agreement, however, was amended
to provide that Kodak had the right to change the Company's control of Qualex on
March 1, 1992 or on any subsequent March 1. During the period from 1991 until
the second quarter of 1994, the Company did not believe that Kodak would
exercise the right to change the Company's control of Qualex, and Kodak, in
fact, did not exercise this right on March 1, 1992, 1993 or 1994.
Mr. Phillips was elected as President and Chief Executive Officer of the
Company on April 19, 1994. The Company did not believe that the election of Mr.
Phillips constituted a "change in control" of the Company as defined in the
Qualex Shareholders Agreement. This belief was based in part on the fact that
(i) Mr. Phillips beneficially owned less than 4% of the Company's voting stock
at the time of his election, (ii) Delaware corporate law, under which the
Company is governed, provides that the business and affairs of a corporation
shall be managed by and under the direction of the board of directors -- not the
president, and (iii) eight of the nine members of the Board of Directors of the
Company after the election of Mr. Phillips were serving as directors before the
election of Mr. Phillips. Kodak informed the Company that it believed that the
election of Mr. Phillips constituted "change in control" of the Company under
the Qualex Shareholders Agreement and requested that changes be made in the
Company's voting control of Qualex and in the composition of the Board of
Directors of Qualex. The disagreement between the Company and Kodak as to
whether or not a "change in control" had occurred was resolved on June 8, 1994
when the Company agreed that it would not contest Kodak's interpretation of the
Qualex Shareholders Agreement. As a result, on June 30, 1994, the Company's
ownership of the voting stock of Qualex was reduced to 50% and the Company and
Kodak each became entitled to elect an equal number of members of the Board of
Directors of Qualex. Because of these changes affecting the Company's control of
Qualex, the Company discontinued its practice of consolidating the accounts of
Qualex and began accounting for its ownership in Qualex under the equity method
effective as of June 30, 1994.
FINANCIAL POSITION OF QUALEX
(000'S)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
<S> <C> <C>
Cash and short-term investments.............................. $ -- $ 4,060
Net accounts receivable...................................... 43,489 69,015
Inventories.................................................. 23,048 29,381
Other assets................................................. 39,633 38,153
--------- ------------
Total current assets............................... 106,170 140,609
======== ==========
</TABLE>
6
<PAGE> 7
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
<S> <C> <C>
Net property, plant and equipment............................ 200,911 202,150
Other assets................................................. 41,018 30,413
Long-term investments........................................ 26,611 26,611
Intangibles.................................................. 374,772 371,106
--------- ------------
Total assets....................................... $ 749,482 $770,889
======== ==========
Current liabilities.......................................... $ 111,435 $130,845
Deferred income taxes........................................ 22,612 22,446
Long-term debt............................................... 245,441 217,987
Stockholders' equity......................................... 369,994 399,611
--------- ------------
Total liabilities and stockholders' equity......... $ 749,482 $770,889
======== ==========
</TABLE>
In June 1994, the Company decided to sell its interest in Qualex and
engaged in negotiations with Kodak regarding the sale of such interest.
Accordingly, the results of Qualex for all years presented are reported in the
accompanying statements of operations under discontinued operations. In the
second quarter of 1994, the Company provided for an anticipated loss of
$37,858,000 on the sale of its interest in Qualex and the related covenant not
to compete and release. No income tax expenses or benefits were recognized due
to the Company's net operating loss carryforwards and recognition of tax
benefits in prior periods.
On August 12, 1994, Kodak purchased all of the Company's interest in Qualex
and obtained a covenant not to compete and related releases from the Company in
exchange for $50,000,000 in cash and a promissory note in the principal amount
of $100,000,000. The promissory note is payable in installments of $50,000,000
each, without interest, on February 13, 1995 and August 11, 1995. Because the
principal amount due under the note does not bear interest, the Company
discounted the value of the note to $92,832,000 and will record imputed interest
income of $7,168,000 over the term of the note. All amounts received in exchange
for the covenant not to compete and release were included in the computation of
the anticipated loss on sale of Qualex.
The results of operations of Qualex have been reclassified from income from
continuing operations to income from discontinued operations and are as follows:
RESULTS OF OPERATIONS OF QUALEX
(000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1994 1993
-------- --------
<S> <C> <C>
Net sales.................................................. $148,407 $164,186
Operating expenses......................................... 162,392 168,160
-------- --------
Operating loss............................................. (13,985) (3,974)
Interest expense........................................... (3,949) (4,004)
Other expense.............................................. (401) (135)
-------- --------
Loss before tax............................................ (18,335) (8,113)
Income taxes (benefit)..................................... (9,167) (4,393)
-------- --------
Net loss from discontinued operations before minority
interest................................................. (9,168) (3,720)
Minority interest.......................................... 4,584 1,860
-------- --------
Net loss from discontinued operations...................... $ (4,584) $ (1,860)
======== ========
</TABLE>
7
<PAGE> 8
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
<S> <C> <C>
Finished goods and goods purchased for resale.................. $ 75,993 $ 82,559
Raw materials and supplies..................................... 43,768 46,018
--------- ------------
119,761 128,577
Reserve for LIFO cost valuation................................ (20,573) (20,138)
--------- ------------
$ 99,188 $108,439
======== ==========
</TABLE>
OTHER INCOME (EXPENSE)
Other income (expense) is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1994 1993
------- ------
<S> <C> <C>
Interest and investment income...................................... $ 854 $2,378
Miscellaneous expense............................................... (910) (510)
------- ------
$ (56) $1,868
======= ======
</TABLE>
Early payment interest credit expense results from cash payments received
by Snapper from distributors prior to receivable due dates which reduce accrued
interest and increase miscellaneous (expense). The early payment interest credit
expense was $1,163,000 and $1,140,000 for the three month periods ended March
31, 1994 and 1993, respectively
INCOME TAXES
Income tax expense is based upon statutory tax rates and book income or
loss adjusted for permanent differences between book and taxable income or loss.
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
8
<PAGE> 9
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax advantaged investments and other items. For the three month period ended
March 31, 1994, the Company's consolidated effective tax rate has decreased as
compared to the same prior period because the Company is not able to recognize a
tax benefit for its losses due to limitations from prior period recognition.
During the year, the Company provides for income taxes using anticipated
effective annual tax rates for all Company operations. The rates are based on
expected operating results for the year, estimated permanent differences between
book and tax income, and estimated utilization of any net operating loss
carryovers.
Effective January 1, 1993, the Company changed its method of accounting for
income taxes as required by FASB Statement No. 109, "Accounting for Income
Taxes" (See "Changes in Accounting Principles -- Change in Method of Accounting
for Income Taxes"). The adoption of Statement No. 109 did not have a material
effect on net income and the Company's effective tax rate.
LITIGATION
In 1991, three lawsuits were filed against the Company, certain of the
Company's current and former directors and Intermark, Inc., which owned
approximately 26% of the Company's Common Stock. One complaint alleged, among
other things, a long-standing pattern and practice by the defendants of misusing
and abusing their power as directors and insiders of the Company by manipulating
the affairs of the Company to the detriment of the Company's past and present
stockholders. The complaint sought monetary damages from the director
defendants, injunctive relief against the Company, Intermark and its current
directors, and costs of suit and attorneys' fees. The other two complaints
alleged, among other things, that members of the Company's Board of Directors
contemplate either a sale, a merger, or other business combination involving
Intermark and the Company or one or more of its subsidiaries or affiliates. The
complaints sought costs of suit and attorneys' fees and preliminary and
permanent injunctive relief and other equitable remedies, ordering the director
defendants to carry out their fiduciary duties and to take all appropriate steps
to enhance the Company's value as a merger/acquisition candidate. These three
suits were consolidated on May 1, 1991. While these actions are in their
preliminary stages, management currently believes the actions will not
materially affect the results of operations, financial position or liquidity of
the Company.
On November 30, 1993, a lawsuit was filed by the Department of Justice
("DOJ") against American Seating Company ("American Seating"), a former
subsidiary of Actava, in the United States District Court for the Western
District of Michigan. The lawsuit is captioned United States v. American Seating
Co., Civil Action No. 1:93-CV-956. Pursuant to an asset purchase agreement
between Actava and Amseco Acquisition, Inc., dated July 5, 1987, Actava assumed
the obligation for certain liabilities incurred by American Seating arising out
of litigation or other disputes, involving events occurring on or before June
22, 1987. The DOJ alleges among other things that American Seating failed to
disclose certain information relating to its price discount practices that it
contends was required in an offer submitted by American Seating to the General
Services Administration for possible contracts for sales of systems furniture
and related services. The complaint seeks recovery of unspecified single and
treble damages, penalties, costs and prejudgment and post-judgment interest. The
parties have engaged in settlement discussions but have not agreed on a
disposition of the case. A trial, if necessary, has been scheduled for June
1995. The DOJ has asserted damages of approximately $3,500,000. If such damages
were awarded and then trebled, the total damages, excluding penalties, costs and
interest, could exceed $10,000,000. In addition, penalties, if assessed, could
range from several thousand dollars to several million dollars. As a result, the
lawsuit could have a material effect on the results of operations and financial
condition of the Company. Management, however, believes that American Seating
has meritorious defenses to the allegations made by the DOJ and does not expect
the Company to incur any material liability as a result of this suit.
Actava is a defendant in various other legal proceedings. However, the
Company is not aware of any action which, in the opinion of management, would
materially affect the financial position, results of operations or liquidity of
the Company.
9
<PAGE> 10
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES AND COMMITMENTS
Actava, on behalf of its Snapper division, has an agreement with a
financial institution which makes available to dealers floor plan financing for
Snapper products. This agreement provides financing for dealer inventories and
accelerates cash flow to Snapper's distributors and to Snapper. Under the terms
of the agreement, a default in payment by one of the dealers on the program is
non-recourse to both the distributor and to Snapper. However, the distributor is
obligated to repurchase any equipment recovered from the dealer and Snapper is
obligated to repurchase the recovered equipment if the distributor defaults. At
December 31, 1993 and 1992, there was approximately $23,000,000 and $20,000,000,
respectively, outstanding under these floor plan financing arrangements.
Actava is contingently liable under various guarantees of debt totaling
approximately $8,600,000. The debt is primarily Industrial Revenue Bonds which
were issued by former subsidiaries to finance their manufacturing facilities and
equipment, and is secured by the facilities and equipment. In addition, upon the
sale of the subsidiaries, Actava received lending institution guarantees 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 $9,100,000. The leased properties
generally have financially sound subleases.
At March 31, 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.
10
