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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K/A
AMENDMENT NO. 4
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-5706.
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THE ACTAVA GROUP INC.
(EXACT NAME OF REGISTRANT, AS SPECIFIED IN ITS CHARTER)
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DELAWARE 58-0971455
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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4900 GEORGIA-PACIFIC CENTER, ATLANTA, GEORGIA 30303
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
(404) 658-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
9 1/2% SUBORDINATED DEBENTURES, DUE AUGUST 1, 1998 NEW YORK STOCK EXCHANGE
9 7/8% SENIOR SUBORDINATED DEBENTURES, DUE MARCH 15, 1997 NEW YORK STOCK EXCHANGE
10% SUBORDINATED DEBENTURES, DUE OCTOBER 1, 1999 NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK OF THE REGISTRANT HELD BY
NONAFFILIATES OF THE REGISTRANT AT MARCH 24, 1994 COMPUTED BY REFERENCE TO THE
LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE COMPOSITE TAPE ON SUCH DATE
WAS $127,855,099.
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 24, 1994 WAS
17,635,186 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1. BUSINESS.
The Actava Group Inc. ("Actava" or the "Company") provides high quality,
brand-name products through distribution channels to retail markets across the
United States. Actava operates in three distinct businesses: photofinishing,
lawn and garden equipment and sporting goods. A description of each segment
appears below.
Actava was organized in 1929 under Pennsylvania law and reincorporated in
1968 under Delaware law. On July 19, 1993, the Company changed its name from
Fuqua Industries, Inc. to The Actava Group Inc. Actava's principal executive
offices are located at 4900 Georgia-Pacific Center, Atlanta, Georgia 30303 and
its telephone number is (404) 658-9000.
PHOTOFINISHING
Actava owns 51% of the voting stock and 50% of the equity of Qualex Inc.
("Qualex"). Qualex, the largest wholesale photofinishing company in the United
States, was created in 1988 through a combination of Actava's photofinishing
subsidiary, Colorcraft Corporation, and the United States photofinishing
operations of Eastman Kodak Company ("Kodak"). Kodak owns all of the voting
stock and equity interest of Qualex not owned by Actava. Both Actava and Kodak
have granted to the other a right of first refusal for the purchase of their
respective interests in Qualex.
Qualex is engaged in the processing of photographic film for consumer use
throughout the United States. Qualex primarily processes color film to produce
prints and slides, but also processes black and white and movie film. Qualex is
a wholesale photofinisher, obtaining over 98% of its sales from independent
retailers in 1993. Qualex's business also includes a limited amount of direct
sales to consumers through owned and operated retail photographic stores and
mail order operations.
Qualex offers nonbranded photofinishing products which are sold to major
retailers, largely drug, mass merchant and grocery operators, who market these
products under their own retail brands. In addition, Qualex offers certain
branded photofinishing products, including premium-quality photofinishing
through its Kodalux(R) Processing Services ("KPS"). KPS is available to all
Qualex customers and is currently offered from ten Qualex processing plants.
Kodalux(R) is a Kodak-owned trademark licensed to Qualex under an agreement
which expires on April 15, 1997. In addition to color roll processing, KPS
includes chrome processing (slides and movies) and ancillary work such as
reprints, enlargements and other services.
Qualex provides pickup and delivery services for over 41,000 retail stores
in all 50 states. These pickup and delivery services are provided by either
Qualex-owned vehicles or through third party contract delivery services. Qualex
provides 24-hour (next day) processing services, often on a seven-day-a-week
basis, to all major metropolitan areas it serves. The film to be processed is
picked up throughout the day and then delivered to Qualex's plants for
processing. Consequently, Qualex plants perform the majority of their processing
work at night.
Plants are located as close to customers as possible to minimize the
delivery constraints inherent in next-day service. Qualex currently operates 50
plants located in 33 states. The combination of Colorcraft and Kodak initially
permitted Qualex to consolidate plants and other distribution systems which
serviced overlapping geographic areas. The consolidation of redundant services
has allowed and will continue to allow Qualex to enjoy the benefits of economies
of scale and cost savings.
In early 1987, Colorcraft Corporation entered into long-term arrangements
to purchase a significant portion of its photofinishing materials from Kodak.
Upon its formation, Qualex assumed these arrangements on substantially the same
terms and conditions. Additionally, all of Qualex's photofinishing plants which
offer nonbranded products participate in the Kodak Colorwatch(R) photofinishing
marketing program and, therefore, use exclusively Kodak consumable materials. As
a result of the long-term arrangements and the fact that substantially all of
Qualex's plants are on the Kodak Colorwatch(R) program, Qualex purchases
substantially all
1
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of its photofinishing material from Kodak. SEE "CONSOLIDATED STATEMENTS OF
OPERATIONS" IN CONSOLIDATED FINANCIAL STATEMENTS.
In addition to its traditional photofinishing services, Qualex also
provides microlabs and related maintenance and supplies to customers who desire
to offer on-site processing. Because of the continuing development of the
microlab, the ultimate level of acceptance by retail stores and consumers cannot
be determined. Management believes the new microlabs will allow both Qualex and
its retail customers to participate in the well established on-site processing
market. SEE ITEM 3. "LEGAL PROCEEDINGS."
Qualex has not incurred significant research and development costs. In
order to deliver high-quality pictures in a brief period of time at a
competitive price, Qualex utilizes high-speed printers, paper processors and
other sophisticated equipment which require significant ongoing capital
expenditures. Capital expenditures in 1993 were approximately $44 million.
Competition in the photofinishing industry is aggressive and is based upon
price, quality processing, dependable delivery time and convenience. There are
many processors in each market, including mini-labs and microlabs which offer
"one-hour" on-site developing. In 1993, Qualex's largest account constituted 11%
of its sales volume, its five largest accounts produced approximately 31% of its
sales volume and its 10 largest accounts produced approximately 43% of its sales
volume. Due to the next day processing nature of the business, there is no
material backlog.
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, under
generally accepted accounting principles, 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
Shareholder 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 Kodak will exercise the right to change
the Company's control of Qualex, and Kodak, in fact, did not exercise this right
on March 1, 1992, 1993 or 1994.
The results of Qualex are consolidated with the results of Actava. In 1993,
Qualex accounted for 62% of Actava's consolidated sales. SEE ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." If Actava in the future is deemed to be no longer in control of
Qualex, then Actava would cease to consolidate the accounts of Qualex. In that
event, Actava would account for its ownership of Qualex using the equity method
of accounting. SEE "PHOTOFINISHING TRANSACTION" IN NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
2
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LAWN AND GARDEN EQUIPMENT
Actava's Snapper Division manufactures Snapper(R) brand power lawnmowers,
lawn tractors, garden tillers, snow throwers, and related parts and accessories
and distributes blowers, string trimmers and edgers. The lawnmowers include rear
engine riding mowers, front engine riding mowers or lawn tractors, and self-
propelled and push-type walk-behind mowers. Snapper also manufactures a line of
commercial lawn and turf equipment, a Blackhawk(TM) line of mowers and markets a
fertilizer line under the Snapper(R) brand.
Snapper products are premium priced, generally selling at retail from $250
to $8,200. They are sold exclusively through 54 independent distributors and to
approximately 7,800 dealers throughout the United States. In addition, Snapper
products are exported to 27 independent distributors and four company-owned
distributors covering 41 foreign countries. Snapper does no private label
manufacturing of lawn and garden equipment and does not sell directly to
multi-unit retailers or mass merchandisers. While the ultimate consumers
generally purchase lawnmowers in the spring and early summer, Snapper sells to
its distributors nearly year-round utilizing accounts receivable dating
programs, with the greatest volume of production and shipment preceding ultimate
consumer purchasing periods. Accounts receivable dating programs establish the
due dates for distributor accounts receivable to coincide with the anticipated
sales to the ultimate consumer. Therefore, Snapper's cash flow needs are
seasonal, with the greatest need for funds being in the first quarter of the
year. SEE ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS."
Snapper makes available, through General Electric Credit Corporation, a
retail customer revolving credit plan which allows consumers to pay for Snapper
products in installments. Consumers also receive Snapper credit cards which can
be used to purchase additional Snapper products.
In addition, Snapper 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 by the
financial institution to both the distributor and 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.
Snapper manufactures its products in McDonough, Georgia at facilities
totaling approximately 1,000,000 square feet. A substantial portion of the
component parts for Snapper products is manufactured by Snapper, excluding
engines and tires.
During the three years ended December 31, 1993, Snapper has expended an
average of $4.9 million per year for research and development. While it holds
several design and mechanical patents, Snapper is not dependent upon any one or
more patents, nor does it consider that patents play a material role in its
business. Snapper does believe, however, that its registered trademark
Snapper(R) is an important asset in its business. Snapper walk-behind mowers are
subject to Consumer Product Safety Commission safety standards and are designed
and manufactured in accordance therewith.
The lawn and garden business is highly competitive, with the competition
being based upon price, image, quality and service. While no one company
dominates the market, Actava believes Snapper is one of the significant
manufacturers of lawn and garden products. There are approximately 50
manufacturers in competition with Snapper. Snapper's principal brand name
competitors in the sale of power lawnmowers include The Toro Company, Lawn-Boy
(a product group of The Toro Company), Sears, Roebuck and Co., Deere & Company,
Ariens Company, Honda Corporation, Murray Ohio Manufacturing Co., American Yard
Products, Inc. (a subsidiary of AB Electrolux), MTD Products, Inc. and
Simplicity Manufacturing, Inc.
The Company announced in March 1993 that it had retained Merrill Lynch to
assist in exploring alternatives for realizing value from the Company's
investment in Snapper. These efforts have not been successful and management
believes they have resulted in a substantial distraction for Snapper's
management, distributors and dealers. As a result, the Company has suspended its
efforts to find alternatives for Snapper and has instructed Snapper's management
to devote their full time and attention to improving operating results.
3
<PAGE> 5
At December 31, 1993, Snapper had approximately $122 million in backlog
orders believed to be firm as compared to approximately $114 million at December
31, 1992. In 1993, Snapper accounted for 18% of Actava's consolidated sales. SEE
ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."
SPORTING GOODS
The companies which comprise Actava Sports manufacture, import and
distribute products for a broad cross section of the sporting goods and leisure
time markets. Products are sold under a variety of Actava's own brand names,
including DP(R), Hutch(R), Reach(R), Weather-Rite(R) and American Camper(R).
Actava also sells exercise equipment under a license for the Body By Jake(R)
trademark and various other products under licenses from the National Football
League, National Basketball Association, National Hockey League, Major League
Baseball, The Walt Disney Company, Inc., Remington Arms Company, Inc. and
numerous colleges and universities. In addition, Actava has a nationally
distributed line of hosiery and is a licensee for the officially licensed socks
of the National Football League, Major League Baseball, Keds(R) and Pro-Keds(R)
(copyrights and registered trademarks which are held by third parties) and
various colleges and universities.
On June 8, 1993, Actava acquired substantially all of the assets of
Diversified Products Corporation ("DP"), a fitness and recreation equipment
company based in Opelika, Alabama, for a net purchase price consisting of
$11,629,500 in cash, the issuance of 1,090,909 shares of the Company's Common
Stock valued at $12,000,000 and the assumption or payment of certain liabilities
including trade payables and a revolving credit facility. Actava also entered
into an agreement which may provide the seller with the right to receive
additional payments, or additional shares of Actava Common Stock, depending upon
the value of the issued shares over a period of not longer than one year from
the purchase. SEE ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." The transaction has been accounted for
using the purchase method of accounting; accordingly, the purchased assets and
liabilities have been recorded at their estimated fair value at the date of the
acquisition. The results of operations of the acquired business have been
included in the consolidated financial statements of Actava since the date of
acquisition.
Approximately 57% of the sales of Actava Sports consists of products
manufactured or purchased domestically by Actava. These include hosiery,
footballs, uniforms and related equipment. The remaining 43% of sales comes from
imported merchandise, including fitness and camping equipment, soccer balls,
volleyballs, basketballs, footballs, rainwear and other related sports items.
Imported products come from a large number of suppliers, located primarily in
the Far East. Analyzed by product lines, camping and outdoor equipment comprised
approximately 26% of the Actava Sports sales in 1993, exercise equipment
represented 36% and products for team and other recreational activities
comprised approximately 38%.
International buying is an important part of the Actava Sports operations.
Actava World Trade Corporation maintains offices in The People's Republic of
China, Taiwan, Hong Kong and South Korea to facilitate purchasing in the Pacific
Rim.
To the extent the business of Actava Sports is dependent upon imports,
factors affecting foreign trade (such as dock and carrier strikes, tariff rates,
import and export quotas, currency fluctuations and revaluations, local economic
conditions in foreign countries, foreign relations between the United States and
other countries and international political and economic situations) are
significant in determining the general availability and prices paid by Actava
Sports for purchases abroad. Actava Sports has not encountered a shortage of raw
materials or finished goods and is generally not dependent upon any sole
supplier, although in 1993 DP was adversely affected by delays experienced in
receiving electronic components for DP treadmills. SEE ITEM 7. "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Sporting goods are sold by Actava Sports through manufacturers'
representatives and directly to mass merchandisers and other retailers. The
sporting goods market is highly competitive. Actava Sports does not spend a
significant amount of funds for research and development. The trademarks used by
Actava Sports in the aggregate are considered to be of material importance, but
no single patent or trademark is of material importance to consolidated
operations. The loss of certain significant patents or trademarks could have a
material effect on the affected individual Actava Sports company.
4
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Actava Sports had approximately $34 million in backlog orders believed to
be firm as of December 31, 1993 as compared to approximately $19 million at
December 31, 1992. This increase is primarily due to the acquisition of DP. In
1993, Actava Sports accounted for 19% of Actava's consolidated sales. SEE ITEM
7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
ENVIRONMENTAL PROTECTION
Actava's manufacturing and processing plants are subject to federal, state
and local pollution laws and regulations. Compliance with such laws and
regulations has not materially affected, and is not expected to have a material
effect on, Actava's competitive position, financial condition or results of
operations. Actava's capital expenditures for environmental control facilities
and incremental operating costs in connection therewith were not material in
1993, and are not expected to be material in future years for compliance
relating to facilities owned by Actava in 1993. The Company is involved in
various environmental matters including clean-up efforts at landfill or refuse
sites and groundwater contamination. The Company's participation in three
existing superfund sites has been quantified and its remaining exposure is
estimated to be less than $300,000 for all three sites. The Company is
participating with the Federal and Ohio Environmental Protection Agencies in
initial investigations of a potential environmental contamination site involving
a divested subsidiary. The Company has been advised by the Ohio agency that
remediation costs for the site may be as much as $1.7 million; however, at this
time the Company's share of these costs, if any, cannot be reasonably estimated.
DP is also complying with various requirements under a compliance order under
the Resource Conservation Recovery Act as administered by the State of Alabama.
Approximately $750,000 of this reserve was accrued by DP and charged to
operations prior to its acquisition by the Company based on management's initial
estimate of such clean-up costs. This estimate was based on discussions with
legal counsel, the initial findings of a feasability study performed by an
environmental engineering company commissioned by the Company and a review of
the compliance order as administered by the State of Alabama. The Company
recorded an additional $750,000 for such costs at the acquisition date based
upon subsequent findings in the study performed by an environmental engineering
company.
EMPLOYEES
At December 31, 1993, Actava, including Qualex, had approximately 11,200
employees, of whom approximately 1,400 were represented by unions under various
collective bargaining agreements. In general, Actava believes its employee
relations to be good.
INDUSTRY SEGMENT DATA
Industry Segment Data is included in ITEM 7. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
5
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PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this item is submitted as a separate section
in this report.
6
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
INDEX OF FINANCIAL STATEMENTS
The following consolidated financial statements of The Actava Group Inc.
and subsidiaries are included in Item 8:
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Report of Independent Auditors................................................ F-3
Consolidated Balance Sheets as of December 31, 1993 and 1992.................. F-4
Consolidated Statements of Operations for the years ended December 31, 1993,
1992 and 1991............................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1992 and 1991............................................................... F-6
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1993, 1992 and 1991..................................................... F-7
Notes to Consolidated Financial Statements -- December 31, 1993............... F-8
Summary of Quarterly Earnings and Dividends................................... F-31
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE ACTAVA GROUP INC.
By: FREDERICK B. BEILSTEIN, III
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Frederick B. Beilstein, III
Senior Vice President and
Chief Financial Officer
Dated: October 31, 1994
8
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THE ACTAVA GROUP INC.
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1993
F-1
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FORM 10-K-ITEM 14(A)(1)
The Actava Group Inc. and Subsidiaries
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of The Actava Group Inc.
and subsidiaries are included in Item 8:
Consolidated balance sheets -- December 31, 1993 and 1992
Consolidated statements of operations -- Years ended December 31, 1993, 1992
and 1991
Consolidated statements of cash flows -- Years ended December 31, 1993, 1992
and 1991
Consolidated statements of stockholders' equity -- Years ended December 31,
1993, 1992 and 1991
Notes to consolidated financial statements -- December 31, 1993
F-2
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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. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules 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. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
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
Atlanta, Georgia
March 3, 1994,
except for the
Notes Payable
and Long-Term Debt Note
as to which the date
is March 29, 1994
F-3
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THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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DECEMBER 31,
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1993 1992
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(IN THOUSANDS)
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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
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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
========== ==========
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
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THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1993 1992 1991
---------- ---------- --------
<S> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
Net sales................................................. $1,241,111 $1,148,743 $924,635
Costs, expenses and other costs of products sold (includes
$219,825 in 1993, $202,360 in 1992 and $172,652 in 1991
purchased from Eastman Kodak Company)................... 957,440 812,932 669,129
Selling, general and administrative....................... 246,465 261,762 259,904
Interest expense.......................................... 43,299 33,454 23,534
Provision for doubtful accounts........................... 7,262 3,419 5,485
Other (income) expense-net................................ 2,915 (6,099) (3,537)
Provision for plant closure costs......................... 3,231 (1,506) 18,969
Provision for employee agreements and related costs....... -- -- 6,839
---------- ---------- --------
Total costs, expenses and other........................... 1,260,612 1,103,962 980,323
Income (Loss) before Income Taxes, Minority Interest and
Cumulative Effect of Change in Accounting
Principle............................................ (19,501) 44,781 (55,688)
Income tax expense (benefit).............................. 15,163 23,328 (10,033)
---------- ---------- --------
Income (Loss) before Minority Interest and Cumulative
Effect of Change in Accounting Principle............. (34,664) 21,453 (45,655)
Minority interest......................................... (8,526) (10,888) (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..................................... $ (2.52) $ .64 $ (3.08)
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.
F-5
<PAGE> 15
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
-------- --------- ---------
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss)............................................ $(47,594) $ 11,599 $ (50,821)
Cumulative effect of change in accounting principle.......... (4,404) 1,034 --
-------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle....................................... (43,190) 10,565 (50,821)
Items providing cash from operating activities............... 30,243 13,714 95,965
-------- --------- ---------
Net Cash Provided (Used) by Operating Activities............. (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.
F-6
<PAGE> 16
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.
F-7
<PAGE> 17
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
Effective January 1, 1992, Qualex changed its method of accounting for the
cost of its proof advertising program to recognize these costs at the time the
advertising is placed by the customer. Under the proof advertising program,
Qualex reimburses certain advertising costs incurred by its customers up to a
percentage of sales to that customer. Qualex previously accrued such costs at
the time of the initial sale. Qualex believes that this new method is preferable
because it recognizes advertising expense as it is incurred rather than at the
time of the initial sale to the customer. The 1992 adjustment of $1,034,000, net
of income taxes of $1,437,000 and minority interest of $1,033,000, was included
in income for 1992 to apply retroactively the new method. The 1992 adjustment
before income taxes and minority interest was $3,504,000. 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 and related
taxes and minority interest.
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,
F-8
<PAGE> 18
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded on a cash basis, has not been restated. The pro forma amounts presented
in the consolidated 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 (gain) or 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.
F-9
<PAGE> 19
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. The Company prepares an undiscounted cash flow value analysis to compare
with the recorded cost of intangibles, including goodwill, to evaluate whether
the value of the intangible has been impaired. In the event management believes
that the value of the intangible has been impaired because the recorded value of
the intangible is greater than its calculated value, the Company will write-down
the recorded 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
F-10
<PAGE> 20
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. Sales from the photofinishing
segment are recognized when the products are delivered to their customer.
F-11
<PAGE> 21
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, $2,928,000 and $1,683,000 of
these gains were amortized as reductions of cost of sales while $1,961,000 and
$782,000 of gain amortization reduced interest expense in 1993 and 1992,
respectively. 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.
F-12
<PAGE> 22
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
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Items providing (not providing) cash from continuing
operations:
Minority interest............................................ $ 8,526 $ 11,922 $ 5,166
Depreciation................................................. 44,665 35,030 30,896
Amortization................................................. 25,780 24,006 13,118
Provision for doubtful accounts.............................. 7,262 3,419 5,485
Provision for plant closure costs............................ 3,231 -- 18,969
Changes in operating assets and liabilities, net of effects
from purchases and dispositions:
Accounts receivable.......................................... (30,665) (25,464) 41,399
Inventories.................................................. (31,435) (4,763) 27,336
Prepaid expenses and other assets............................ (13,912) (23,621) (2,965)
Accounts payable, accrued expenses and other current
liabilities............................................... 299 (22,129) (12,603)
Current and deferred taxes................................... 16,118 16,332 (24,336)
Other operating activities -- net............................ 374 (1,018) (6,500)
-------- -------- --------
Net items providing cash from continuing operations............ $ 30,243 $ 13,714 $ 95,965
======== ======== ========
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>
PHOTOFINISHING TRANSACTION
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,
however, 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
F-13
<PAGE> 23
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 any subsequent
March 1. The Company does not believe that Kodak will exercise the right to
change the Company's control of Qualex, and Kodak, in fact, did not exercise
this right on March 1, 1992, 1993 or 1994.
Actava consolidates the accounts of Qualex and presents Kodak's portion of
ownership and equity in the income of Qualex as minority interest.
Should Kodak withdraw its waiver or if an additional change in control of
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 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.
If Actava were deemed in the future to no longer be in control of Qualex,
Actava would cease to consolidate the accounts of Qualex. In that event, Actava
would account for its ownership of Qualex by using the equity method of
accounting. Such a development would not affect the net income or shareholders'
equity of Actava. However, Actava's consolidated total assets, liabilities,
sales and costs and expenses would be reduced as they would no longer include
the specific accounts of Qualex. If Actava had accounted for Qualex using the
equity method during all of 1993, Actava's total assets and liabilities would
have been $696,374,000 and $500,460,000, respectively, and sales and total costs
and expenses would have been $465,812,000 and $518,963,000, respectively.
ACQUISITIONS
On June 8, 1993, the Company acquired substantially all the assets of
Diversified Products Corporation ("DP") for a net purchase price consisting of
$11,629,500, the issuance of 1,090,909 shares of the Company's 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
F-14
<PAGE> 24
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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....................................................... $1,294,776 $1,304,993
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 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......................................................................... $1,029,676
Net (loss).................................................................... (53,538)
(Loss) per share -- primary................................................... (3.24)
</TABLE>
F-15
<PAGE> 25
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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
F-16
<PAGE> 26
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-17
<PAGE> 27
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
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
F-18
<PAGE> 28
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
F-19
<PAGE> 29
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-20
<PAGE> 30
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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>
F-21
<PAGE> 31
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 consolidated provisions for plant closure costs include
$4,096,000 and $17,037,000, respectively, before tax and minority interest for
the costs of closing 3 and 12, respectively of Qualex's photofinishing plants.
After tax benefit and minority interest, the Qualex provisions amounted to
$1,038,000 and $5,196,000 or $.06 and $.31 per share for 1993 and 1991,
respectively. The provision for plant closure for Qualex 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
F-22
<PAGE> 32
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>
RECORDED
THROUGH PURCHASE
CHARGED ACCOUNTING IN THE
TO EXPENSE YEAR OF ACQUISITION TOTAL
---------- ------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1991........................... $ 29,534 $ 4,190 $ 33,724
Additions for:
Lease termination costs(a)...................... 5,027 1,292 6,319
Employee severance & termination
benefits(a)................................... 5,926 6,334 12,260
Fixed asset and facility closure costs.......... 8,016 7,734 15,750
---------- ------------------- --------
Total additions............................ 18,969 15,360 34,329
Costs incurred(b)............................... (8,075) (4,132) (12,207)
Balance at December 31, 1991......................... 40,428 15,418 55,846
Additions for:
Fixed asset and facility closure costs.......... -- 1,244 1,244
Reductions in reserves.......................... (1,506) -- (1,506)
---------- ------------------- --------
Total additions (reductions)............... (1,506) 1,244 (262)
Costs incurred(b)............................... (26,073) (11,755) (37,828)
Balance at December 31, 1992......................... 12,849 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, net....................... 3,231 906 4,137
Costs incurred(b).................................. (11,026) (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.
F-23
<PAGE> 33
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.......................... $ 8,731 $ 8,399 $ 7,459
Miscellaneous income (expense).......................... (11,646) (2,300) (3,922)
------- ------- -------
$(2,915) $ 6,099 $ 3,537
======= ======= =======
</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>
Current federal........................................ $ 7,620 $ 6,900 $ 7,366
Current state.......................................... 3,451 4,360 3,256
Deferred federal and state............................. 4,092 12,068 (20,655)
--------- ------- --------
$ 15,163 $23,328 $(10,033)
======= ======= ========
</TABLE>
Income tax expense (benefit) computed by applying federal statutory rates
to income (loss) before income taxes is reconciled to the actual income tax
expense (benefit) as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
LIABILITY DEFERRED
METHOD METHOD
--------- -------------------
1993 1992 1991
--------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed tax at statutory rates........................ $ (6,825) $15,226 $(18,934)
State tax, net of federal benefit...................... 2,243 2,877 2,149
Effect of tax rate changes on realization of timing
differences.......................................... 414 153 301
Amortization of goodwill............................... 3,123 3,235 2,753
Effect of nontax basis adjustments in connection with
acquisitions......................................... -- 914 1,037
Tax-exempt interest.................................... (26) (80) (70)
Dividends received deduction........................... (290) -- --
Undistributed earnings of majority-owned subsidiary.... 603 812 351
Over provision of current tax.......................... -- -- 1,675
Deferred tax valuation allowance....................... 16,227 -- --
Other.................................................. (306) 191 705
--------- ------- --------
$ 15,163 $23,328 $(10,033)
======= ======= ========
</TABLE>
F-24
<PAGE> 34
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.................................. $ 5,138 $ 3,273
Provision for loss on loans and receivables............... 366 (1,178)
Reserves for losses and write-down of certain assets...... 1,961 (1,337)
Plant closure costs....................................... 9,148 (1,714)
Gain on hedge transaction................................. (3,356) 273
Difference in book and tax basis of assets disposed of.... (881) 197
Undistributed earnings of majority-owned subsidiary....... 547 (110)
Recognition of income tax net operating loss benefit...... -- (19,986)
Other..................................................... (855) (73)
------- --------
$12,068 $(20,655)
======= ========
</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.
F-25
<PAGE> 35
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......... $ 2,724 $ 3,234 $ 2,707
Interest cost on projected benefit obligation............. 1,892 1,712 1,378
Actual return on plan assets.............................. (2,318) (1,912) (2,304)
Net amortization and deferral............................. 454 298 1,001
------- ------- -------
$ 2,752 $ 3,332 $ 2,782
======= ======= =======
</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%.
F-26
<PAGE> 36
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
$5,900,000 in 1993, $7,000,000 in 1992, and $4,800,000 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.
F-27
<PAGE> 37
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 $19,729,000, $21,499,000 and $17,720,000 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
F-28
<PAGE> 38
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.
F-29
<PAGE> 39
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
operating cash flows 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. 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."
F-30
<PAGE> 40
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
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales............................................. $263,887 $313,261 $344,479 $319,484
Gross Profit.......................................... 61,402 82,210 85,632 54,427
Cumulative effect of change in accounting
principle(c)........................................ (4,404) -- -- --
Net income (loss)(a)(c)(d)(e)......................... $ (7,604) $ 43 $ (9,047) $(30,986)
======== ======== ======== ========
Earnings (loss) per share before cumulative effect of
change in accounting principle...................... $ (.19) $ -- $ (.51) $ (1.76)
Cumulative effect of change in accounting principle... (.27) -- -- --
Net income (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
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales............................................. $276,284 $288,248 $307,585 $276,626
Gross Profit.......................................... 86,607 106,136 119,885 92,985
Cumulative effect of change in accounting
principle(b)........................................ 1,034 -- -- --
Net income (loss)(a)(b)............................... $ (772) $ 2,631 $ 4,713 $ 5,027
======== ======== ======== ========
Earnings (loss) per share before cumulative effect of
change in accounting principle...................... $ (.11) $ .16 $ .28 $ .31
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,
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
F-31
<PAGE> 41
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 plan of
disposition was changed in the fourth quarter in order to facilitate a
return on the real estate investment by offering the real estate for sale as
raw or minimally developed land, rather than fully developing or
participating in the full development of the real estate. 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.
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