-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, mppg/LWANv4Y7ORe+6uHn1eX/QkmVuV/B3KF6tuczVwurHNFB2pULHMRVM2xfdI2 9Yk0HlMB1rVlSNfUStfoCA== 0000950144-94-001762.txt : 19941010 0000950144-94-001762.hdr.sgml : 19941010 ACCESSION NUMBER: 0000950144-94-001762 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19941007 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTAVA GROUP INC CENTRAL INDEX KEY: 0000039547 STANDARD INDUSTRIAL CLASSIFICATION: 7384 IRS NUMBER: 580971455 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-05706 FILM NUMBER: 94552121 BUSINESS ADDRESS: STREET 1: 4900 GEORGIA PACIFIC CTR CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4046589000 MAIL ADDRESS: STREET 1: 4900 GEORGIA PACIFIC CTR CITY: ATLANTIA STATE: GA ZIP: 30303 FORMER COMPANY: FORMER CONFORMED NAME: FUQUA INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19920703 10-K/A 1 ACTAVA GROUP FORM 10-K AMENDMENT #3 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------------- FORM 10-K/A AMENDMENT NO. 3 (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 COMMISSION FILE NUMBER 1-5706. --------------------- THE ACTAVA GROUP INC. (EXACT NAME OF REGISTRANT, AS SPECIFIED IN ITS CHARTER) DELAWARE 58-0971455 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4900 GEORGIA-PACIFIC CENTER, ATLANTA, GEORGIA 30303 (ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES) (404) 658-9000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED 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
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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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 3 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 and Kodak are parties to a Shareholders' Agreement (as amended, the "Qualex Shareholders' Agreement") which sets forth certain rights of and limitations on Actava and Kodak with regard to their Qualex stock. The Qualex Shareholders' Agreement provides that certain decisions regarding Qualex's operations are to be approved by a majority of the members of the Qualex Board of Directors, including at least one of Kodak's representatives on the Board. The declaration of dividends by Qualex merely requires the approval of a majority of the Qualex directors. Actava has control over the distribution of dividends from Qualex because its appointees constitute a majority of the Qualex directors. Upon any change of control of Actava, as defined in the Qualex Shareholders' Agreement ("Qualex Control Event"), the Qualex Shareholders' Agreement provides for changes in the stock ownership and the composition and voting requirements of the Qualex Board of Directors that would eliminate Actava's ability, among other things, unilaterally to cause the declaration of dividends by Qualex. Pursuant to the terms of an amendment to the Qualex Shareholders' Agreement (the "Amendment"), the parties have stipulated that the election of Mr. Charles R. Scott as president and chief executive officer of Actava on February 6, 1991 constituted a Qualex Control Event. Under the terms of the Amendment, Kodak initially waived its Qualex Control Event rights under the Qualex Shareholders' Agreement with respect to such Qualex Control Event, but Kodak reserved the right to withdraw its waiver and enforce such rights on March 1, 1992 or any subsequent March 1, by providing Actava with at least 30 days' prior written notice. Kodak did not withdraw its waiver and seek to enforce its rights as a result of such Qualex Control Event on March 1, 1992, March 1, 1993 or March 1, 1994. Kodak also retained its rights to require the changes permitted by the Qualex Shareholders' Agreement if any other Qualex Control Event occurs. If Kodak in the future elects to enforce its Qualex Control Event rights, Actava would lose the ability to control the declaration of dividends by Qualex, and therefore, any distribution of profits by Qualex. 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. 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. 2 4 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. 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 3 5 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 6 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. A reserve of approximately $1.5 million has been established for expected clean-up costs by DP. This estimate was based on discussions with legal counsel, 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. 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." ITEM 2. PROPERTIES. The following is a list of Actava's principal properties. Certain of the properties are subject to mortgages securing indebtedness, which, as of December 31, 1993, aggregated approximately $1.8 million, including mortgages on machinery and equipment. SEE "NOTES PAYABLE AND LONG-TERM DEBT" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NUMBER -------------------- DESCRIPTION OWNED LEASED LOCATION ------------------------------------------------- ----- ------ ------------ Lawn and Garden: Manufacturing plant............................ 1 -- 1 state Distribution facility.......................... -- 1 1 state Photofinishing: Processing plants.............................. 19 31 33 states Retail photographic stores..................... -- 5 5 states Sporting Goods: Distribution facility.......................... -- 4 4 states Manufacturing plant............................ 1 -- 1 state
The owned lawn and garden manufacturing plant is located in Georgia. The leased lawn and garden distribution facility is also located in Georgia and is subject to a lease which terminates in 1994 with a five- 5 7 year option. The photofinishing processing plants are located in Alabama, Alaska, Arizona, California, Colorado, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Carolina, North Dakota, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia and Washington. The photofinishing retail photographic stores are located in Georgia, North Carolina, Pennsylvania, South Carolina, Virginia and Wisconsin. There are 3, 6, 5, 7, 3, and 12 leased photofinishing facilities with terminations of 1994, 1995, 1996, 1997, 1998 and post-1998, respectively. The sporting goods distribution facilities are located in California, Kansas, Kentucky and North Carolina with lease terminations of 1998, 1999, 1996 and 1994, respectively. The sporting goods manufacturing plant is located in Alabama. The management of Actava believes that its various facilities have productive capacity sufficient to meet its current and anticipated production needs and are, in general, reasonably well utilized. In addition, Actava owns or leases miscellaneous real estate, offices and warehouse facilities, machinery and equipment at various locations which are not currently utilized in Actava's current operations and are, or may be, offered for sale or other disposal. The properties are generally from the divestiture of former subsidiaries and are not material individually or in the aggregate. ITEM 3. LEGAL PROCEEDINGS. Qualex 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 $33.3 million in revenues and $7.3 million in gross profits, and Qualex expects such business to increase in the future. PCI alleges, among other things, that Qualex breached an agreement to purchase an interest in PCI, violated a confidentiality 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. Divested Subsidiary 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 dispute, involving events occurring on or before June 22, 1987. The DOJ alleges that American Seating failed to disclose certain information relating to its price discount practices that it contends was required in an offer submitted by American Seating to the General Services Administration for possible contracts for sales of systems furniture and related services. The complaint seeks recovery of unspecified single and treble damages, penalties, costs and prejudgment and post-judgment interest. The parties have engaged in settlement discussions but have not agreed on a disposition of the case. The DOJ has asserted damages against American Seating of approximately $3.5 million. If such damages were awarded and then trebled, the total damages, excluding penalties, costs and interest, could 6 8 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. Shareholder Litigation In 1991, Virginia E. Abrams and Fuqua Industries, Inc. v. J. B. Fuqua, et al., Civil Action No. 11974, was filed in the Delaware Chancery Court. The named defendants are certain current and former members of Actava's Board of Directors and Intermark, Inc., a predecessor of Triton Group Ltd., which currently owns 25.0% of the Company's Common Stock. The Company was named as a nominal defendant. The action is brought derivatively in the right of and on behalf of the Company and was purportedly brought as a class action on behalf of all common stockholders of the Company other than the defendants. The complaint alleges, among other things, a long-standing pattern and practice by the defendants of misusing and abusing their power as directors and insiders of the Company by manipulating the affairs of the Company to the detriment of the Company's past and present stockholders. The complaint seeks (i) monetary damages from the director defendants, including a joint and several judgment for $15.7 million for alleged improper profits obtained by Mr. J. B. Fuqua in connection with the sale of his shares in the Company to Intermark; (ii) injunctive relief against the Company, Intermark and its current directors, including a prohibition against approving or entering into any business combination with Intermark without specified approval; and (iii) costs of suit and attorneys' fees. In 1991, two additional complaints, Behrens and Harris v. Fuqua Industries, Inc., et al., Civil Action No. 11988 and Freberg and Lewis v. Fuqua Industries, Inc., et al., Civil Action No. 11989, were filed in the Delaware Chancery Court by plaintiffs who allege that they are stockholders of the Company. Each of these complaints purport to be brought on behalf of a class of stockholders of the Company other than the named defendants. The named defendants are the Company and certain of its current and former directors. The complaints allege, among other things, that members of the Company's Board of Directors presently contemplate either a sale, a merger or other business combination involving Intermark and the Company or one or more of its subsidiaries or affiliates. The complaints seek costs of suit and attorneys' fees and preliminary and permanent injunctive relief and other equitable remedies, ordering the director defendants to carry out their fiduciary duties to the plaintiffs and other members of the class and to take all appropriate steps to enhance the Company's value as a merger or acquisition candidate. On motion by the defendants in all three class action suits, the Delaware Chancery Court ordered the consolidation of the three suits in re Fuqua Industries, Inc. Shareholder Litigation, Civil Action No. 11974 on May 1, 1991. The action is in the discovery stage and no significant events occurred in regard to these legal proceedings in 1993. Other Litigation Actava is the defendant in various other legal proceedings. Actava is not aware, however, of any other action which, in the opinion of management, would materially and adversely affect liquidity, results of operations or the financial position of Actava. SEE ITEM 1. "ENVIRONMENTAL PROTECTION." 7 9 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Actava provides high-quality, brand name consumer products through distribution channels to retail markets across the United States. The Company's businesses encompass the broad leisure industry, including photofinishing, fitness equipment and sporting goods, as well as lawn and garden equipment. Actava owns 51% of the voting stock of Qualex, the largest photofinisher in the United States, processing approximately 20% of all color print rolls of film. Qualex also processes black and white and movie film. Qualex is a wholesale photofinisher, obtaining substantially all of its sales from independent retailers in 1993. Qualex's business also includes a limited amount of direct sales to consumers through owned and operated retail photographic stores and mail-order operations. Actava's Snapper Division manufactures Snapper(R) brand power lawnmowers, lawn tractors, garden tillers, snow throwers, and related products, parts and accessories and distributes blowers, string trimmers and edgers. The lawnmowers include rear engine riding mowers, front engine riding mowers or lawn tractors, and walk-behind mowers. Snapper also manufactures a line of commercial lawn and turf equipment and a Blackhawk(TM) line of mowers and markets a fertilizer line under the Snapper(R) brand. Actava Sports companies manufacture, import and distribute products for a broad cross-section of the sporting goods, fitness and leisure markets. Products are sold under a variety of Actava companies' own brand names, as well as under licenses from the National Football League, National Basketball Association, Major League Baseball, The Walt Disney Company, Inc., Remington Arms Company, Inc., The Keds Corporation (Keds(R) and Pro-Keds(R)), Body by Jake Licensing Corporation (Body by Jake(R)), and numerous colleges and universities. Actava's long-range strategy is to maximize stockholder wealth by concentrating its capital resources on its companies which offer the highest potential returns. As a result, the Company continues to analyze its businesses with a view toward enhancing their value through marketing alliances, licensing arrangements and joint ventures, with particular emphasis on cost efficiencies through plant consolidations or product-line expansions or improvements. The following is a discussion of the operating results and financial position of the Company on a consolidated basis and the operating results of each of these business segments. CONSOLIDATED CONTINUING OPERATIONS The Company's consolidated sales for 1993 increased $92.4 million, or 8.0% from 1992 principally because of the acquisition of DP. Gross profit as a percentage of sales for 1993 of 22.9% is a decrease from 29.2% while gross profit dollars decreased by $52.1 million to $283.7 million. This is primarily due to gross profit declines suffered by Snapper and Qualex, but partially offset by an increase in gross profits by Actava Sports companies. The Snapper gross profit decline is primarily attributable to manufacturing problems associated with the introduction of a new Blackhawk(TM) product line for which current manufacturing has been limited and new Snapper mowers which incorporated additional operational features. The manufacturing problems included costs due to new tooling requirements and higher direct labor variances. The manufacturing problems have been corrected and the Company believes that there will be no material effect on future results of operations. In 1992, sales increased $224.1 million, or 24.2%, from 1991, primarily as a result of the resumption of production and shipment to distributors at Snapper, the impact of the acquisitions at Qualex in the fourth quarter of 1991 and the first quarter of 1992 as well as increased market share with certain Qualex customers and the expansion of business with existing customers for each of the companies comprising Actava Sports. The gross profit for 1992 of $335.8 million compared to the gross profit for 1991 of $255.5 million, an increase of $80.3 million. This increase was primarily attributable to the increased production and shipment levels at Snapper for 1992 which resulted in significantly higher sales and absorption of fixed manufacturing 8 10 costs and the additional gross profit at Qualex attributable to acquisition activities. During 1991, certain inventory quantities at Snapper were reduced, resulting in a liquidation of LIFO inventory quantities which were carried at lower costs prevailing in years prior to 1991 as compared with the cost of 1991 purchases. The effect of this decreased the 1991 net loss by approximately $1.5 million and decreased loss per share of common stock by $.09. Selling, general and administrative expenses, which include provisions for doubtful accounts, decreased by $11.5 million, or 4.3%, to $253.7 million for 1993 in comparison to 1992. The reductions in selling, general and administrative expenses are primarily attributable to cost reductions at Qualex achieved through plant closures. Provisions for doubtful accounts increased by $3.8 million for 1993 in comparison to 1992, primarily due to increases of $1.2 million and $2.1 million for Snapper and Qualex, respectively. The increase in Snapper's expense is primarily due to reserves established upon the sale of a company-owned Snapper distributor. The Company historically experiences higher losses upon the sale of a distributor due to the termination of the Company's relationship with the distributor's customers. The increase in Qualex's expense is primarily due to additional reserves established for bad debts related to financial difficulties experienced by certain retail customers. Selling, general and administrative expenses, which include provisions for doubtful accounts, decreased by $200,000 in 1992 in comparison to 1991. The 1992 decrease is related to the additional costs at Qualex associated with the increased volume of prints processed as well as higher promotional and advertising expenses partially offset by reductions at Snapper due to the curtailment of special promotional programs. In 1993, Actava recorded an operating profit of $26.7 million, compared to an operating profit from 1992 of $72.1 million. The 1993 operating profit includes provisions of $3.2 million for plant closures and an additional $4.0 million for a change in estimate of future warranty costs at Snapper due to increased warranty claims. The increase in warranty claims was the result of claims associated with the new Blackhawk(TM) product line for which manufacturing has been limited and from costs related to an all-inclusive warranty program which was initiated in 1991 and has expired except for products previously sold under the program. Since the new products have been subject to limited manufacturing and improvements have been implemented while the all-inclusive warranty program has expired, management believes there will not be a material effect on future results of operations. The need for an accrual for additional warranty costs was not estimable until 1993 due to the time lag in reported claims under the all-inclusive warranty program since the products covered by the program beginning in 1991 were not sold to the ultimate consumer until some time after that. Sufficient claims history for the preceding two year period was established during 1993 to identify the existence of greater than anticipated warranty claims under the all-inclusive program and the need for an additional accrual. A similar time lag was experienced for the warranty claims related to Blackhawk(TM) products as the products were manufactured for recent model years and the claims history had not developed until 1993. Also negatively impacting operating profits for 1993 in comparison to 1992 was underutilization of plant capacity and manufacturing inefficiencies at Snapper and DP, lower gross margins on initial product introductions by Snapper, and an increase in corporate expenses of approximately $4.0 million. The corporate expense increase is primarily attributable to additional self-insurance reserves, as well as an increase in insurance administrative expense, and the impact of reduced expense for 1992 due to the reversal in 1992 of certain reserves previously established for settlement of employee agreements and office lease agreements. The 1992 operating profit of $72.1 million compares to an operating loss of $35.7 million for 1991. The operating loss for 1991 included provisions for plant closures totaling $19.0 million and provisions for the settlement of employee agreements and related costs of $6.8 million. Operating profit for 1991 was adversely affected by production costs at Snapper. The $1.5 million credit to income in 1992 related primarily to the reversal of $1.1 million of costs accrued in 1991 for the termination of Actava's corporate office lease. These costs 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 of $1.4 million. 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 and utilize its remaining space until the lease expires in 1995. 9 11 Interest expense for 1993 of $43.3 million is an increase of $9.8 million from 1992. This increase is primarily attributable to higher average borrowings at both Qualex and Snapper and the addition of interest associated with DP. The increased borrowing resulted from the Qualex $200 million Senior Note private placement completed in the second quarter of 1992 and the revolving credit facilities established to provide working capital for Snapper and the Actava Sports companies, including DP. These credit lines have substantially reduced subsidiary reliance on Actava for working capital needs. Interest expense for 1992 of $33.5 million is an increase of $9.9 million from 1991. This increase is primarily attributable to higher average borrowings at both Qualex and Snapper. The increased borrowing resulted from the financing required for the acquisitions made by Qualex in the fourth quarter of 1991 and January 1992, borrowings in excess of debt repayments from the Qualex Senior Note private placement, and the revolving credit facilities established in 1992 to provide working capital for Snapper. Other income (net of other deductions) decreased $9.0 million for 1993 when compared to 1992. This is primarily due to a decrease in investment income from lower levels of investment, increases in early payment interest credit expense at Snapper, losses on asset sales at Qualex and an increase of $3.0 million in a valuation allowance for a real estate investment due to an accelerated plan of 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. The Company revised its disposition plan in order to accelerate a sale to provide additional liquidity. Other income (net of other deductions) in 1992 increased $2.6 million in comparison to 1991. This increase is the result of a decrease in early payment interest credit expenses at Snapper, partially offset by reduced investment income due to lower average investment levels and rates of return. During the year, the Company provides for income taxes using anticipated effective annual tax rates for Qualex and for all other company operations. The rates are based on expected operating results for the year and estimated permanent differences between book and taxable income. Due to the recognition of net operating loss benefits to the extent possible through a reduction in deferred income tax liabilities in a prior year, Actava, excluding Qualex, recognizes the benefit of current net operating losses only to the extent of potential refunds from carrybacks. SEE "INCOME TAXES" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Company has net deferred taxes of approximately $24.3 million composed of deferred tax liabilities of approximately $78.1 million offset by deferred tax assets of approximately $53.8 million. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Included in the approximate $53.8 million of deferred tax assets is approximately $16.2 million as recognized by Qualex, which is not included in the Actava consolidated federal income tax return. The remaining approximate $37.6 million of deferred assets have been recognized by Actava due to available income tax carrybacks and the company's determination that available net operating losses should not be allowed to expire, as the tax savings represent significant amounts. The Company plans to implement actions to create sufficient taxable income to utilize the carryover prior to any expiration. In order to implement its tax planning strategy to utilize its tax carryforwards, the Company would pursue the sale of certain corporate assets, including its investment in Qualex. SEE "INCOME TAXES" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The minority interest shown on Actava's Consolidated Statements of Operations represents Kodak's portion of the earnings of Qualex. In accordance with the Shareholders' Agreement, the Company and Kodak are each entitled to 50% of Qualex's net income for income reporting purposes. Although Qualex accounted for 62% of Actava's 1993 revenues and had pre-tax profits of $33.7 million in 1993, only approximately 25% of its pre-tax profits ($8.5 million in 1993) is reported in Actava's consolidated net income due to Qualex's income tax provision at an effective rate of 49% and the 50% minority interest effect. SEE "PHOTOFINISHING TRANSACTION" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Effective January 1, 1992, Qualex changed its method of accounting for the cost of its proof advertising program to recognize advertising expense as it is incurred rather than at the time of the initial sale to the 10 12 customer. SEE "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- ACCOUNTING CHANGES -- CHANGE IN ACCOUNTING FOR CERTAIN ADVERTISING COSTS" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The Company adopted the new method of accounting for income taxes as of January 1, 1993. Statement No. 109 affects the manner and rates at which deferred income taxes are reflected on the balance sheet and the amount of taxes reflected in the statement of operations. The adoption of Statement No. 109 did not result in a material effect on net income for 1993. SEE "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING CHANGES -- CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". Statement No. 106 requires the cost of postretirement benefits to be recognized in the financial statements over an employee's active working career. The Company adopted the new method of accounting for these benefits as of January 1, 1993. The adoption of Statement No. 106 resulted in a charge to net income of $4.4 million and was reported as the cumulative effect of change in accounting principle in the first quarter of 1993. SEE "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- ACCOUNTING CHANGES -- CHANGE IN METHOD OF ACCOUNTING FOR POSTRETIREMENT BENEFITS" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 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. 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. As a result of the items described above, Actava reported a net loss in 1993 of $47.6 million in comparison to net income in 1992 of $11.6 million and a net loss in 1991 of $50.8 million, respectively. 11 13 OPERATING SEGMENTS SEGMENT PERFORMANCE THE ACTAVA GROUP INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1993 1992 1991 1990 1989 -------- -------- ------ ------ ------ (IN MILLIONS) NET SALES Photofinishing............................. $ 775.3 $ 770.8 $649.7 $623.9 $629.9 Lawn and Garden............................ 225.0 248.2 158.5 237.7 190.8 Sporting Goods............................. 240.8 129.7 116.4 110.7 105.0 -------- -------- ------ ------ ------ Total............................... $1,241.1 $1,148.7 $924.6 $972.3 $925.7 ======== ======== ====== ====== ====== PRE-TAX EARNINGS (LOSS)(A) Photofinishing............................. $ 51.3(c) $ 54.6 $ 28.0(c) $ 44.1(c) $ 43.7(c) Lawn and Garden............................ (17.1)(d) 17.8 (50.6) (.3)(d) 2.3 Sporting Goods............................. 2.7 5.9 4.3 3.6 2.9 -------- -------- ------ ------ ------ Operating profit (loss) -- segments(b)... 36.9 78.3 (18.3) 47.4 48.9 Unallocated corporate expenses............... (10.2) (6.2) (10.6) (9.6) (12.3) Settlement of employee agreements and related costs...................................... -- -- (6.8) -- -- -------- -------- ------ ------ ------ Operating profit (loss)...................... 26.7 72.1 (35.7) 37.8 36.6 Interest expense............................. (43.3) (33.4) (23.5) (25.7) (27.8) Other income (expense) -- net................ (2.9) 6.1 3.5 9.9 14.7 -------- -------- ------ ------ ------ Total pre-tax earnings (loss)....... $ (19.5) $ 44.8 $(55.7) $ 22.0 $ 23.5 ======== ======== ====== ====== ======
- --------------- (a) Pre-Tax Earnings include the minority interest of Eastman Kodak Company in Qualex Inc. (b) Operating profit represents total sales less costs of products sold and selling, general and administrative expenses including goodwill amortization. There were no significant intersegment sales or transfers. (c) Includes a provision of $4.1 million in 1993, $17.0 million in 1991, $15.7 million in 1990, and $2.9 million in 1989 before tax for the closure of certain photofinishing plants. (d) Includes warranty expense of $4.0 million before tax in 1993 due to a change in accounting estimate and provisions in 1990 of $13.7 million before tax for the consolidation of lawn and garden manufacturing facilities and $4.8 million before tax for the write-off of excess inventory created as a result of the elimination of certain models from lawn and garden product lines. Also, includes losses in 1993 due to inventory shortages and shut-down costs of approximately $2.0 million due to employee misconduct and the subsequent closing of a company owned foreign distributor. Photofinishing: In 1988, the Company combined its photofinishing operations, with the domestic photofinishing operations of Eastman Kodak Company in a transaction accounted for as a purchase, forming a jointly owned company, Qualex Inc. SEE "PHOTOFINISHING TRANSACTION" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. In October, 1993, Qualex entered into an Agreement of General Partnership with JVQ Capital One, Inc. for the purpose of acquiring, owning, holding, leasing, and selling on-site microlab equipment. In the future, Qualex intends to sell to this partnership qualifying leases of microlab equipment with the result that Qualex will record income upon the sale of the lease rather than over the life of the lease. Qualex will continue to service the equipment under an agreement with the lessee of the equipment and will pay fees for management and leasing services to the parent corporation of JVQ Capital One, Inc., a general partner. Actava, which owns 51% of the voting shares of Qualex, consolidates the accounts of Qualex with its accounts. Kodak's interest in the earnings and equity of Qualex are reflected as minority interest. Photofinishing sales increased $4.4 million or .6% in 1993 as compared to 1992 due primarily to the conversion of former microlab operating leases to salestype financing leases as a result of the expiration of early cancellation periods for certain of such leases. An overall increase in equivalent prints processed from 1992 to 1993 partially offset continued per print price declines. Photofinishing sales increased $121.1 million or 12 14 18.6% in 1992 as compared to 1991. Generally, Qualex experienced price declines of 4% to 5% during the 1992 year while sales increased. These price decreases occurred due to the effect of price reductions offered by competitors and the associated demand for similar prices from Qualex customers. The primary reasons for the sales increase were the added print volume resulting from acquisitions finalized in the last quarter of 1991 and in January 1992 (SEE "ACQUISITIONS" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS), and an overall increase in rolls processed through comparable 1991 plants, partially offset by continued price declines. Although sales increased in 1993, per print price continued to decline, resulting in a decrease in gross profit as a percent of sales from 31.3% for 1992 to 28.3% for 1993, with 1992 restated to include route distribution costs as a cost of sales component. Gross profit dollars decreased $22.2 million in 1993 from 1992 levels. Gross profit as a percentage of sales was 31.3% for 1992 and 1991. However, because of the increase in sales, gross profit dollars rose $38.4 million or 18.9% in 1992 in comparison to 1991. The 1991 increase, however, was partially offset by increases in selling, general and administrative expenses. As a result of the additional sales volume, selling expense increased $8.1 million or 16.4% and route pick-up and delivery costs increased by $9.0 million or 14.7% for 1992 in comparison to 1991. In addition, advertising and promotional expenses decreased $1.7 million or 5.5% as a result of an accounting principle change which resulted in the deferral of $3.5 million of advertising expenses to later periods. If the accounting principle for the recognition of certain advertising expenses had not been changed, advertising and promotional expenses would have increased by $1.8 million or 5.8% in 1992. Qualex also incurred increased administrative expenses of $19.3 million or 24.8% for 1992 in comparison to 1991. This increase was primarily due to acquired administrative offices, amortization of intangibles associated with the 1991 and 1992 acquisitions and the increased volume of prints processed, even though the cost per print has decreased. This contributed to the increase in operating profit of $26.6 million, or 95%, from 1991 to 1992, and to a decrease in operating profit of $3.3 million, or 6%, from 1992 to 1993. As a result of the above factors, Qualex recorded an operating profit of $51.3 million for 1993, a decrease of $3.3 million or 6.0% from 1992. The operating profit for 1992 of $54.6 million was an increase of $26.6 million from 1991. Management anticipates lower pricing trends in the wholesale photofinishing industry to continue in 1994. Qualex will attempt to offset the effects of lower pricing with improved product mix, lower prices for paper and chemicals, the sale of certain microlab leases and continuing plant closures and consolidations of administrative offices. In an effort to achieve operating efficiencies, Qualex consolidated certain photofinishing labs during 1991, 1992 and 1993. The provisions for plant closure costs were a result of an extensive study performed by Qualex to evaluate the number of photo labs needed for anticipated sales volume and the optimal location of such labs. This evaluation included operations, engineering, distribution, sales and finance analyses and was based on the locations of customers, sales volume and required level of customer service. This study resulted in Qualex management and the Board of Directors deciding in late 1991 to close 12 existing photo labs resulting in a charge for restructuring of approximately $17.0 million as well as closing several labs acquired during 1991. In 1993, Qualex management and the Board decided to consolidate the operations of three additional photo labs with other existing photo labs and provided a reserve for restructuring of approximately $4.1 million. The costs of closing existing labs was charged to operations by a provision for plant closure costs. The components of the provisions for plant closure costs are described below:
1991 1993 ------- ------ (IN THOUSANDS) Employee severance and termination.............................. $ 4,827 $1,475 Lease termination costs......................................... 4,494 1,294 Fixed asset and facility closure................................ 7,716 1,327 ------- ------ Total................................................. $17,037 $4,096 ======= ======
Employee severance and termination. In connection with the consolidation of photofinishing labs, Qualex reduced its workforce in an effort to achieve efficiencies. The related restructuring charge consists of severance pay and other personnel related costs incurred in connection with the closing of photo labs. 13 15 Lease termination costs. Qualex recorded a restructuring charge for estimated lease termination costs for each location closed based on the period of time the lease would remain in place after each lab was closed. Fixed asset and facility closure. This charge consists of fixed asset write-offs of equipment to be disposed of as deemed worthless and the cost of relocating other equipment to remaining photofinishing labs. In addition, Qualex recorded a restructuring charge for the estimated loss on the sale of certain buildings and the estimated costs of other expenses relating to the closure of the buildings including clean-up costs and insurance, property taxes and utilities costs. In an effort to increase market share, Qualex acquired 11 photo labs during 1991, and 1 photo lab in 1992. In connection with management's plan of achieving a certain sales volume level and operating efficiencies, these labs were included in management's overall analysis of determining optimal locations of photofinishing labs. Due to existing photo labs serving the same market area of labs acquired, Qualex recorded plant closing reserves on certain labs acquired. The costs of closing acquired photofinishing labs was provided for through purchase accounting adjustments. During 1991 and 1992, Qualex recorded approximately $15.4 million and $1.2 million, respectively, in purchase accounting reserves for the closing of acquired photo labs. Based on the financial analysis of the economic benefits of consolidation and the costs for expanding certain locations to handle increased volumes considered with the goals of maintaining quality and customer service, management feels that the process of acquiring and consolidating photofinishing labs during 1991, 1992 and 1993 has resulted in increased market share and the attainment of operating efficiencies through the reduction of lab overhead, labor costs and route costs. Lawn and Garden: Snapper's sales to distributors decreased by $23.2 million, or 9.4% for 1993 in comparison to 1992, despite a strong retail sales year for lawn and garden equipment, as Snapper continued to control production to estimated retail sales by reducing production and shipments to distributors in order to decrease retail inventories. Sales for 1993 and 1992 were $225.0 million and $248.2 million, respectively. Gross profit as a percentage of sales decreased to 13.9% for 1993 as compared to 27.5% in 1992. Gross profit in dollars decreased by $37.0 million from $68.2 million to $31.2 million for these same respective periods. These decreases resulted from continued manufacturing problems which resulted in unfavorable manufacturing variances and cost over-runs incurred in the production of a new Blackhawk(TM) product line for which manufacturing has been limited and new Snapper mowers which incorporated additional operational features. The manufacturing problems included costs due to new tooling requirements and higher direct labor variances. The manufacturing problems have been corrected and the Company believes that there will be no material effect on future results of operations. An increase in product related expenses such as warranty expense also contributed to the decrease. The start-up costs, overall product mix and delays associated with these new products negatively impacted Snapper's cost of sales. In addition, because Snapper's new Blackhawk(TM) line of mowers, which represented sales of approximately $10.9 million in 1993, is a lower price-point and margin product than the Snapper(TM) brand line, per unit gross margin has been lower when compared to last year's margins. Management does not expect sales of Blackhawk(TM) line to be as significant in 1994 as in 1993. A $4.0 million warranty expense was charged to operations in the fourth quarter of 1993 due to recent unanticipated increases in warranty claims. The increase in warranty claims was the result of claims associated with the new Blackhawk(TM) product line for which manufacturing has been limited and from costs related to an all-inclusive warranty program which was initiated in 1991 and has expired except for products previously sold under the program. Since the new products have been subject to limited manufacturing and improvements have been implemented while the all-inclusive warranty program has expired, management believes there will not be a material effect on future results of operations. Also, gross profit was lower because of inventory shortages and shut-down costs for a company owned foreign distributor. Management believes the inventory shortages resulted from employee misconduct and the distributor was closed down upon discovery. The Company is presently pursuing reimbursement under its insurance program. Snapper's sales to distributors and gross profit increased $89.7 million and $40.2 million or 56.5% and 143.7%, respectively, for 1992 in comparison to 1991. 1991 sales to distributors were purposely reduced as a result of the decision to decrease retail inventories by producing and shipping less product than that sold at retail. Production and shipment to distributors was increased for the 1992 model year. In addition, in 1992 Snapper redesigned and reengineered its product offerings, with particular emphasis on recycling and mulching capability. 14 16 Because sales were down for 1993, selling, general and administrative expenses, including sales volume related expenses such as co-operative advertising, decreased by 2.5% in comparison to 1992. Income of $849,000 was provided by reducing a reserve for plant closures in recognition of finalizing a plant closing. During 1993, Snapper's management extended the due dates of certain receivables for terms beyond one year and as a result recorded unearned discounts in the amount of approximately $1.8 million as a charge to other expense. The decreased gross profit, partially offset by reduced selling, general and administrative expenses, resulted in an operating loss of $17.1 million at Snapper in 1993 as compared to an operating profit of $17.8 million for 1992. Operating profit decreased $34.9 million in 1993, compared to 1992, because selling, general and administrative expenses remained relatively constant whereas gross profit decreased by $37.0 million. In 1991, Snapper initiated an aggressive retail marketing campaign in order to further accelerate the reduction of inventory. Snapper reduced its expenditures for marketing promotions and advertising campaigns in 1992 in comparison to 1991, concentrating its 1992 programs on the new product offerings with particular emphasis on mulching capabilities as well as quality and service. As a result, selling, general and administrative expenses decreased $28.1 million or 35.8% in 1992, in comparison to 1991. In addition, certain cost reductions were achieved as a result of the 1991 closing of two of the three Snapper manufacturing facilities. Management believes these savings were approximately $10.0 million. As a result of the factors discussed above, Snapper recorded an operating profit of $17.8 million in 1992 in comparison to an operating loss of $50.6 million for 1991. 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. On August 9, 1993, the Company announced that a new Chief Executive Officer had been employed for Snapper. Sporting Goods: Sales for Actava Sports increased by $111.2 million, or 85.7% for 1993 when compared to 1992. This increase is primarily due to the acquisition of DP in June, 1993. In addition to the increase resulting from the acquisition, sales increased for other Actava Sports companies during 1993. Gross profit as a percent of sales decreased from 20.1% to 13.8% for 1993 but gross profit in dollars increased by $7.2 million, or 27.4%, from $26.0 million to $33.2 million, when compared to 1992. Selling, general and administrative expenses increased by $10.3 million for 1993 as compared to 1992, from $20.1 million to $30.4 million. This was due to $8.6 million of DP selling, general and administrative expense incurred from the acquisition date to year-end 1993. Operating profit decreased from $5.9 million in 1992 to $2.7 million in 1993. The decrease in operating profit is primarily attributable to DP, which recorded a loss for the six months ended December 31, 1993 due to the cautious retail environment and production problems caused by late delivery of electronic components for treadmill equipment. Actava announced on October 26, 1993, that a new President and Chief Executive Officer had been appointed for DP. Sales for Actava Sports increased $13.2 million or 11.4% in 1992 as compared to 1991. Each of the three subsidiaries that comprised this segment in 1992 had increased net sales in 1992 to their major multi-unit retail customers. The Actava Sports operating profit of $5.9 million for 1992 was an increase of 33.3% from 1991. Operating profit as a percent of net sales was 4.5% and 3.7%, respectively, for 1992 and 1991. In addition, operating profit for 1991 included the impact of provisions for plant closures of $500,000 before tax benefits for the costs of closing certain manufacturing and warehouse facilities of one of the companies in Actava Sports. FINANCIAL POSITION Actava's working capital was $103.4 million at December 31, 1993 as compared to $176.1 million at December 31, 1992. The decrease reflects the loss incurred by the Company for 1993, repayment by Qualex of long-term debt using cash realized through collections and sales of accounts receivable, the payment of certain 15 17 sinking fund requirements, the use of approximately $11.6 million of cash in the DP acquisition and $23.0 million of additional cash provided to DP. Increases in accounts receivable and increases in inventory are principally financed by borrowings from working capital lines of credit. Cash and short-term investments at Actava, excluding Qualex, decreased by $31.6 million in 1993, to $44.3 million. The primary reasons for this decrease were the cash requirements for the DP acquisition, plus a $15.0 million equity contribution and an $8.0 million working capital advance made by Actava to DP following the acquisition. Increased inventory also contributed to the decrease in cash. At December 31, 1993, approximately $5.0 million of Actava's cash and short-term investments were pledged to secure a Snapper credit line and approximately $20.7 million of cash and short-term investments were pledged to support outstanding letters of credit. Due to the seasonal nature of its businesses, the Company has the greatest need for funds in the first and last quarters of the year. For 1993, consolidated cash flows of $12.9 million were used by operations, investing activities used $25.0 million of cash, and financing activities provided $35.9 million of cash. Cash flow used by operations included depreciation of $44.7 million and amortization of $25.8 million. Investing activities used $25.0 million of cash, including payments for property, plant and equipment (net of disposals) of $39.5 million, payments for purchases of businesses of $9.4 million, representing the acquisition of DP, and net sales of investments of $34.2 million. Financing activities provided $35.9 million during the year with borrowings under short-term bank agreements of $52.3 million, net payments of $311,000 under longterm debt agreements, payments of subordinated debt of $1.8 million, and payments of dividends by Qualex and the Company of $8.6 million and $6.3 million, respectively. Actava's senior long-term debt increased slightly from $220.4 million at December 31, 1992 to $220.9 million at December 31, 1993. This increase is primarily attributable to borrowings by Qualex, partially offset by the termination of capitalized lease obligations for Snapper. Actava's long-term subordinated debt position of $190.6 million at December 31, 1993 is a decrease of $3.0 million from year-end 1992. Subordinated debt is 46.5% of Actava's total long-term debt, including the current portion, with the first significant maturity due in 1996. The Company has a currency swap agreement with a financial institution in order to eliminate exposure to foreign currency exchange rates for its 6% Senior Subordinated Swiss Franc Bonds. A default by the financial institution that is a party to the swap agreement would expose the Company to potential currency exchange risk on the remaining bond interest and principal payments. SEE "SUBORDINATED DEBENTURES" IN NOTES TO FINANCIAL STATEMENTS. 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 regarding future variable prices for silver recoveries from photofinishing processes by setting a current price for future silver sales. The outstanding contracts at December 31, 1993 cover the sale of 2.9 million troy ounces of silver at index amounts of $3.85 to $4.67 per ounce in 1994 and 1.4 million 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 4.3 million troy ounces covered by swap agreements at an index amount of $5.15 per ounce. During 1993 and 1992, $2.9 million and $1.7 million of these gains were amortized as reductions of cost of sales while $1.9 million and $782,000 of gain amortization reduced interest expense in 1993 and 1992, respectively. At December 31, 1993 and 1992, respectively, $7.4 million and $11.5 million of these gains were recorded as deferred income. The deferred gains are amortized over the 16 18 original effective lives of the agreements and $5.0 million, $1.3 million, $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 $18.7 million based on market quotes. Termination of the commodity swap agreements could occur at Qualex's election and an economic gain could result, due to changes in silver market prices. See "Index Protection Agreements" in "Summary of Significant Accounting Policies" in Notes to Consolidated Financial Statements. On June 8, 1993, the Company acquired substantially all the assets of DP for a net purchase price consisting of $11.6 million in cash, the issuance of 1,090,909 shares of the Company's Common Stock valued at $12 million, and the assumption or payment of certain liabilities including trade payables and a revolving credit facility. SEE "ACQUISITIONS" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Company also entered into an agreement which may provide the seller with the right to receive additional payments of cash, or additional shares of Company Common Stock, depending upon the value of the issued shares over a period of not longer than one year from the purchase date. The agreement gives the seller the right under certain circumstances, to require the Company to purchase the 1,090,909 shares issued to the seller in connection with the acquisition (the "Acquisition Shares") at a price equal to $11.00 per share. The payment of additional cash or the issuance of additional shares will not increase the cost recorded by Actava for DP, but will affect the manner in which the total purchase price is recorded by Actava. The right of the seller to receive additional payments of cash or additional shares of Company Common Stock becomes exercisable after June 8, 1994. In the event that a registration statement under the Securities Act of 1933, as amended, is in effect with respect to the Acquisition Shares, the Company may require the seller to sell the Acquisition Shares to purchasers other than the Company and pay to the seller the difference between the price received and $11.00 per share. The Company has filed a Registration Statement under the Securities Act of 1933, as amended, with respect to the Acquisition Shares. If the Registration Statement is not declared effective on or before June 8, 1994, the Company will be required to repurchase the Acquisition Shares for $12.0 million in cash. Any such repurchase would violate covenants in the Company's credit and subordinated debt agreements. Actava's debt agreements contain covenants which, among other things, place restrictions upon the amount of stock the Company may repurchase and dividends it may pay. Under the terms of Actava's 6% Senior Subordinated Swiss Franc Bonds due 1996, Actava may not make any cash redemptions (in excess of the aggregate net cash proceeds from the sale of Common Stock) of its Common Stock or declare any cash dividends after September 30, 1985 in excess of $25 million plus (or minus) the net income (or loss) of Actava subsequent to September 30, 1985. As of December 31, 1993 Actava had approximately $3.4 million available for dividends or redemptions pursuant to this covenant. The Qualex credit agreement and the Shareholders' Agreement with Eastman Kodak Company also restrict the amount of net assets of Qualex which may be transferred to the Company or Kodak by dividend or other means. In addition, the DP credit agreement requires that Actava maintain, at all times, an unrestricted cash and short-term investment position of $20 million after September 30, 1994. Non-compliance with this requirement subjects this agreement to termination by the lender upon seventy-five days notice to Actava. In November 1991, the Company entered into a Loan Agreement with its 25.0% stockholder, Triton Group Ltd. ("Triton"), whereby Triton could borrow up to $32.0 million from the Company secured by the stock in the Company owned by Triton (the "Triton Loan"). SEE "TRITON GROUP LTD." IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Triton Loan Agreement was modified in June 1993, pursuant to the Plan of Reorganization filed by Triton in its Chapter 11 bankruptcy proceeding. The modification reduced the interest rate on the Triton Loan, extended the maturity date from November 1994 to April 1997 and modified the mandatory payment (margin call) provisions and the Stockholder Agreement between Actava and Triton, as described in the Notes to the Consolidated Financial Statements. As modified, the Triton Loan provided for quarterly payments of interest only with no scheduled principal payments due until final maturity in April 1997. In December 1993, Triton and Actava entered into a further amendment to the Loan Agreement pursuant to which Triton made a principal payment of $5.0 million plus accrued interest on the Triton Loan, reducing the loan balance to approximately $26.7 million. In addition, the December 1993 amendment provided for quarterly principal payments of $1.25 million commencing March 31, 1994 and modified the 17 19 mandatory payment (margin call) provisions of the loan, as described in the Notes to Consolidated Financial Statements. Triton has announced that it is seeking to make arrangements to prepay the remaining balance of approximately $26.7 million due under the Triton Loan and has obtained a bank commitment, subject to certain conditions, that would enable Triton to prepay its obligations in full. Triton has also announced, however, that it may seek to impose additional requirements on Actava as a condition to Triton's repayment of the loan. On December 31, 1993, the Company, excluding its subsidiaries and Snapper, had $9.3 million of unrestricted cash and short-term investments. The Company's subsidiaries, excluding Qualex, had unused borrowing capacity of approximately $36.5 million at December 31, 1993 under credit agreements secured by assets such as accounts receivable and inventory. Such subsidiaries, however, are restricted by financial covenants in their credit agreements from paying the Company more than 70% of their net income as dividends. Qualex is subject to similar restrictions under its credit agreements. In addition, Qualex is subject to the Change of Control provisions in the Shareholders Agreement between the Company and Kodak. These Change of Control provisions could have the effect of eliminating the Company's ability to control the payment of dividends by Qualex. During 1994, the Company will be entitled, under these covenants, to receive approximately $8.8 million in cash dividends from its subsidiaries, including Qualex and Snapper, based on their earnings in 1993 plus an additional dividend of approximately $4.7 million from Qualex pursuant to a waiver of the dividend restrictions by the lender to Qualex. These subsidiary dividends are usually paid in the first three months of the year. The Company uses its existing cash and short-term investments, as well as dividends from its subsidiaries and payments on the Triton Loan, to provide for items such as operating expense payments, debt service, and dividend payments to shareholders. On March 3, 1994, the Company announced it was suspending dividend payments to shareholders, which will result in approximately $6.3 million of cash savings in 1994. The Company, excluding its subsidiaries and Snapper, has debt service payments scheduled in 1994 of approximately $21.3 million, and the Company anticipates that its total cash needs in 1994 will exceed the anticipated amount of additional cash to be received by the Company, including dividends from its subsidiaries. As a result, if the Company does not receive additional cash through either a refinancing, the repayment of the Triton Loan or the realization of value from the sale or partial sale of one of its operating entities, the Company will end 1994 with less unrestricted cash and short-term investments than it held at the end of 1993. The amended credit agreements (SEE "NOTES PAYABLE AND LONG-TERM DEBT" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS), with Snapper and one of the Company's sporting goods subsidiaries contain financial covenants (involving tangible net worth, book net worth and other matters) which the Company must comply with to prevent a default. A default under these credit agreements would have serious adverse consequences, including the elimination of funding for the operations of Snapper and the sporting goods company, as well as the prohibition on payment of any dividends to the Company by these businesses. As a result of the net loss for 1993, it was necessary for the Company to obtain financial covenant amendments from the lenders in order for the Company to be in compliance with these covenants at December 31, 1993. Management expects the Company to remain in compliance with these covenants, as amended, for the first and second quarters of 1994 and thereafter if certain events take place, including increased earnings. Management expects that the Company would continue to be in compliance after the second quarter of 1994 without regard to increased earnings if the $26.7 million Triton Loan is repaid because the Triton Loan is excluded for purposes of determining compliance with certain covenants in the credit agreements. If existing cash, dividends from subsidiaries and payments on the Triton Loan are not sufficient to meet its cash requirements, the Company will seek to generate additional cash by selling or pledging certain assets, and will consider additional options to reduce its cash expenditures. The Company is subject to various contingent liabilities and commitments. These include a floor plan agreement entered into by Snapper under which approximately $23.0 million is outstanding for 1993, various guaranties of debt totaling approximately $8.6 million, various real estate leases with estimated future payments of approximately $9.1 million, an agreement for Qualex which involves sales of an undivided interest in certain accounts receivable with a maximum of $75.0 million, a supply agreement between Qualex and Kodak, various environmental matters, a ten year agreement entered into by Qualex to purchase information 18 20 systems services for annual charges of approximately $13.0 million, and various pledges of cash and short-term investments. SEE "CONTINGENT LIABILITIES AND COMMITMENTS" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. OTHER ITEMS On March 28, 1991, the Qualex Shareholders Agreement between Actava and Eastman Kodak Company was amended. The amendment stipulates that a change of control of Actava, as defined in the Shareholders' Agreement ("Change of Control"), occurred on February 6, 1991. However, in the amendment, Kodak waived its Change of Control rights under the Shareholders' Agreement with respect to the February 6, 1991 Change of Control. Kodak may withdraw its waiver and enforce its rights under the agreement as of each March 1, by providing Actava with 30 days written notice. Kodak did not give the notice required to exercise its Change of Control rights on March 1, 1994. The amendment also provides that the Board of Directors of Qualex would be increased to nine members, comprised of five representatives of Actava, three representatives of Kodak and the chief executive officer of Qualex. Since the formation of Qualex in March, 1988, Actava has consolidated the accounts of Qualex as Actava has a controlling interest in the entity. Actava is deemed to control Qualex because it 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. The Company believes that consolidation of the accounts of Qualex with those of the Company clearly reflects the financial position and results of operation of the Company and its subsidiaries. The effect on the Company of accounting for its ownership in Qualex by using the equity method -- rather than by consolidation -- is disclosed under "PHOTOFINISHING TRANSACTION" IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. While the March, 1991 amendment does not change Actava's controlling interest in Qualex, if Kodak were to withdraw its waiver, or if an additional Change of Control of Actava were to occur, the Shareholders' Agreement, as amended, provides for the redemption of certain of Qualex's preferred stock, including the voting preferred stock owned by Actava. Upon redemption, 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 to unilaterally control, among other things, the declaration of dividends to Actava and Kodak by Qualex as the declaration would require the concurrence of Kodak. 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 using the equity method of accounting. Such a development would not affect the net income and 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 specific accounts of Qualex. If Actava had accounted for Qualex using the equity method during all of 1993, Actava's total assets and liabilities at December 31, 1993 would have been $696.4 million and $500.5 million, respectively, and sales and total costs and expenses would have been $465.8 million and $519.0 million, respectively. 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 in regard to its 1993 facilities. 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 19 21 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. Upon the acquisition of DP, a reserve of approximately $1.5 million was established for expected clean-up costs. OTHER SEGMENT DATA THE ACTAVA GROUP INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, -------------------------------- 1993 1992 1991 -------- -------- -------- (IN MILLIONS) ASSETS Photofinishing............................................... $ 778.2 $ 787.8 $ 702.2 Lawn and Garden.............................................. 230.7 236.8 186.3 Sporting Goods............................................... 165.7 47.2 45.3 -------- -------- -------- Segments.................................................. 1,174.6 1,071.8 933.8 Corporate(a).............................................. 100.5 146.1 155.8 -------- -------- -------- Total................................................ $1,275.1 $1,217.9 $1,089.6 ======= ======= ======= DEPRECIATION AND AMORTIZATION Photofinishing............................................... $ 58.3 $ 50.3 $ 35.7 Lawn and Garden.............................................. 8.9 8.1 7.6 Sporting Goods............................................... 3.1 .4 .4 -------- -------- -------- Segments.................................................. 70.3 58.8 43.7 Corporate................................................. .1 .2 .3 -------- -------- -------- Total................................................ $ 70.4 $ 59.0 $ 44.0 ======= ======= ======= CAPITAL EXPENDITURES Photofinishing............................................... $ 43.9 $ 68.5 $ 45.5 Lawn and Garden.............................................. 6.4 13.0 13.7 Sporting Goods............................................... .3 .2 .2 -------- -------- -------- Segments.................................................. 50.6 81.7 59.4 Corporate................................................. -- .1 .1 -------- -------- -------- Total................................................ $ 50.6 $ 81.8 $ 59.5 ======= ======= =======
- --------------- (a) Corporate assets consist primarily of short-term investments, land, notes receivable and certain property and equipment. ACCOUNTING PRINCIPLE DEVELOPMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Actava adopted the new method of accounting for income taxes on January 1, 1993. Statement No. 109 affects the manner and rates at which deferred income taxes are reflected on the balance sheet and therefore, possibly the amount of taxes reflected in the statement of operations. The adoption of Statement No. 109 did not result in a significant impact to net income when reported as the cumulative effect of a change in accounting principle in the first quarter of 1993. SEE "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- INCOME TAXES" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 22 The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Statement No. 106 requires the cost of postretirement benefits to be recognized in the financial statements over an employee's active working career. Actava adopted the new method of accounting for these benefits on January 1, 1993. The adoption of Statement No. 106 resulted in a $4.4 million charge to net income and was reported as the cumulative effect of a change in accounting principle in the first quarter of 1993. SEE "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 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. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required under this item is submitted as a separate section in this report. 21 23 PART III ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CERTAIN RELATIONSHIPS BETWEEN THE COMPANY AND DIRECTORS Mr. Sanders is Chairman of Troutman Sanders, a law firm which provides legal services to the Company. During 1993, the Company paid approximately $785,000 to Troutman Sanders for legal services. Triton reimbursed the Company for approximately $332,500 of this amount as required by the provisions of the Loan Agreement between the Company and Triton. See "RELATIONSHIP WITH TRITON -- TRITON LOAN." Mr. Darden is chairman and chief executive officer of Sands, a food service business headquartered in Atlanta. For approximately ten years, Sands has provided snack bar and vending machine services to the employees of the Company's Snapper Division in McDonough, Georgia ("Snapper"). During 1993, the revenue received by Sands from this relationship totalled approximately $314,000, all of which was paid by employees of Snapper rather than by the Company. The relationship between Sands and Snapper existed before Mr. Darden was elected as a director of the Company. INDEMNIFICATION AGREEMENTS The Company entered into indemnification agreements (the "Indemnification Agreements") with each person who was an officer or director of the Company during 1993, and the Company has approved Indemnification Agreements for Mr. Cahr and Mr. Phillips, who became directors in 1994. The Indemnification Agreements provide for indemnification of directors and officers to the full extent authorized or permitted by law. The Indemnification Agreements also provide for (i) advancement by the Company of expenses incurred by the director or officer in defending certain litigation, (ii) the appointment of an independent legal counsel to determine whether the director or officer is entitled to indemnity after a change in control, and (iii) the continued maintenance by the Company of the directors' and officers' liability insurance currently in effect ($5 million of primary coverage and an excess policy providing $5 million of additional coverage). These Indemnification Agreements were approved by the stockholders of the Company at the 1993 Annual Meeting of Stockholders. INDEBTEDNESS OF MANAGEMENT During 1991, certain executive officers of the Company purchased shares of Common Stock from the Company under the Company's Restricted Stock Plan in exchange for full recourse promissory notes issued to the Company in the amounts indicated below:
NO. OF SHARES OF AMOUNT OF NAME AND TITLE OF RESTRICTED INDEBTEDNESS EXECUTIVE OFFICER STOCK PURCHASED TO COMPANY - ------------------------------------------------------------------- ---------------- ------------ Frederick B. Beilstein, III........................................ 20,000 $254,719 Senior Vice President -- Treasurer and Chief Financial Officer Paul N. Kiel....................................................... 2,000 $ 26,569 Former Vice President -- Legal and Secretary Michael A. Lustig.................................................. 6,000 $ 81,334 Former Vice President -- Corporate Development
These notes are payable on August 1, 2001 and originally provided for interest at 9% per annum. In addition, as a condition of his employment, the Company loaned to Mr. Beilstein $117,000, pursuant to a full recourse promissory note which originally provided for interest at 9% per annum and is payable on August 1, 2001, to finance his purchase of 10,000 shares of the Company's Common Stock in an open market transaction. All of the notes described above were modified in 1993, with the approval of the Compensation Committee, to provide for interest at the prime rate plus 1/2% per annum. 22 24 SHAREHOLDER RIGHTS AGREEMENT WITH WESTINGHOUSE On June 8, 1993, in connection with the Company's acquisition of substantially all of the assets of Diversified Products Corporation ("DP"), the Company and Westinghouse entered into a Shareholder Rights Agreement with regard to the 1,090,909 shares (the "Westinghouse Shares") which were included in the net purchase price for DP's assets. The Shareholder Rights Agreement provides that Westinghouse has the right (the "Put Right"), under certain circumstances, to require the Company to purchase any Westinghouse Shares owned by Westinghouse at a price equal to $11.00 per share which price is subject to adjustment (the "Applicable Price"). This Put Right may be exercised on June 8, 1994, the first anniversary date of the Shareholder Rights Agreement. In the event that a registration statement is in effect with respect to the Westinghouse Shares under the Securities Act of 1933, as amended, at the time the Put Right is exercised, the Company may request that Westinghouse sell the Westinghouse Shares to purchasers other than the Company in lieu of requiring the Company to purchase such shares. If, pursuant to this request, Westinghouse sells any Westinghouse Shares to purchasers other than the Company for a price less than the Applicable Price, the Company will be required to pay the difference between the price received by the selling shareholder and the Applicable Price. The Company, at its election, may pay this amount in cash or in additional shares of Common Stock of the Company provided that a registration statement is in effect with respect to such additional shares at the time of exercise of the Put Right. The Shareholder Rights Agreement also provides that the Westinghouse Shares will be voted in favor of the slate of nominees for directors of the Company proposed by management of the Company (i) at each regular or special meeting of the Company's stockholders at which directors are elected held between June 8, 1993 and the sixtieth (60th) day after the Exercise Date of the Put Right and (ii) pursuant to any solicitation of votes for directors of the Company circulated between June 8, 1993 and the sixtieth (60th) day after the Exercise Date. Westinghouse has agreed to cause certain transferees of the Westinghouse Shares, including the Westinghouse Executive Pension Trust Fund which currently holds the Westinghouse Shares, to agree in writing with the Company to vote the Westinghouse Shares held by it in accordance with such provisions. RELATIONSHIP WITH TRITON Triton is the beneficial owner of approximately 24% of the outstanding shares of the Company's Common Stock. See "OWNERSHIP OF COMPANY STOCK BY CERTAIN HOLDERS." Charles R. Scott, the former president and chief executive officer of the Company and currently a senior officer of the Company, served, until February 15, 1993, as chairman and a director of Intermark (which was merged into Triton on June 25, 1993) and as chairman of the board of Triton. Triton and the Company are parties to a Stockholder Agreement which, among other things, contains provisions regarding the composition of the Board of Directors of the Company. Richard Nevins and Michael E. Cahr were designated by Triton and elected as directors of the Company pursuant to the Stockholder Agreement. See "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT." STOCKHOLDER AGREEMENT On May 22, 1989, Triton and the Company entered into a Stockholder Agreement, as amended (the "Original Stockholder Agreement"), pursuant to which Triton agreed to certain conditions required by the Board of Directors of the Company to obtain its approval, pursuant to Section 203(a)(1) of the Delaware General Corporation Law, for the purchase by Triton of in excess of 15% of the outstanding shares of the Company's Common Stock in open market or private purchases. The Original Stockholder Agreement provided that Triton may not engage, or cause any affiliate of Triton to engage, in any "business combination" (as defined in Section 203 of the Delaware General Corporation Law) with the Company without the prior approval of a majority of the directors of the Company who are "disinterested" from Triton or any affiliate of Triton (except the Company). The Original Stockholder Agreement further provided that the Board of Directors of the Company would consist of not less than seven directors, at least three of whom would be disinterested from Triton, and that Triton would cause all shares of voting stock of the Company owned by it or any affiliate to vote for all of the Company's nominees to the Board of Directors. Under the Original Stockholder Agreement, the term "disinterested director" is defined to mean "any member of the Board of Directors of the Company who is not an officer, director or a person who controls or is under common control 23 25 with [Triton] or any Affiliate of [Triton]." The Company is not deemed an "Affiliate" of Triton for purposes of the agreement. The Original Stockholder Agreement was entered into when Triton owned 9.9% of the outstanding shares of the Company's Common Stock. The term of the Original Stockholder Agreement originally expired on July 7, 1992, which is the third anniversary of Triton's becoming a 15% owner of Common Stock. On November 27, 1991, the Company and Triton entered into an amendment to the Original Stockholder Agreement in connection with a loan made by the Company to Triton. See "TRITON LOAN" below. The 1991 amendment extended the term of the Original Stockholder Agreement until the later to occur of: (i) July 7, 1993; or (ii) twelve (12) months from the payment in full of the loan made by the Company to Triton, but in no event later than November 27, 1994 unless the loan has not been paid in full by such date, in which case the Original Stockholder Agreement would expire on the date the loan is paid in full. In October 1992, Intermark and Triton filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Chapter 11 Proceeding"). On February 10, 1993, Triton filed a motion with the bankruptcy court in the Chapter 11 Proceeding seeking to have the Original Stockholder Agreement rejected as an executory contract and seeking the bankruptcy court's approval for the use of estate property to fund the solicitation of proxies for Triton's own slate of directors at the Company's 1993 Annual Meeting of Stockholders. On March 8, 1993, the bankruptcy court denied Triton's motion and Triton voted its shares in favor of the Company's nominees for the Board of Directors at the 1993 Annual Meeting of Stockholders. On June 4, 1993, the bankruptcy court approved the Joint Plan of Reorganization of Triton and Intermark in the Chapter 11 Proceeding, and Intermark was merged into Triton pursuant to the Plan of Reorganization on June 25, 1993. The Original Stockholder Agreement was amended on June 25, 1993 (the "Stockholder Agreement") pursuant to the Plan of Reorganization to permit Triton to designate two directors (who are not officers or employees of Triton) on an expanded nine-member Board of Directors of the Company as long as Triton continues to own 20% or more of the outstanding shares of the Company's Common Stock. The Stockholder Agreement provides that if Triton's ownership of the Company's Common Stock is reduced to less than 20%, but not less than 10%, then Triton can designate one director, and if Triton's ownership is reduced to less than 10% of the Common Stock, then Triton is not entitled to designate any directors. Under the Stockholder Agreement, Triton is obligated to vote the shares of Common Stock owned by it in favor of the Company's nominees to the Board of Directors so long as any obligations are outstanding under the loan made by the Company to Triton. See "TRITON LOAN" below. "The Stockholder Agreement continues to require approval of a majority of the "disinterested directors" of the Company for any business combination between the Company and Triton or any of its Affiliates, and the definition of 'disinterested director' was not changed from the Original Stockholder Agreement." Mr. Nevins and Mr. Cahr are the only current directors of the Company who are not disinterested directors. In addition, Triton's right to designate any directors under the Stockholder Agreement terminates and each designated director is required to resign if Triton directly or indirectly initiates, participates in, finances or otherwise supports any effort to solicit from other stockholders proxies or consents for the election of directors of the Company other than the Company's nominees for the Board of Directors. The Stockholder Agreement terminates after Triton's obligations under the loan made by the Company to Triton have been satisfied in full and after Triton is no longer entitled to designate any of the Company's directors under the Stockholder Agreement. See "TRITON LOAN". TRITON LOAN In November 1991, after an independent review by the Company's disinterested directors, the Company and Triton entered into a Loan Agreement (the "Triton Loan Agreement") under which the Company agreed to lend up to $32 million to Triton secured by a pledge of the shares of the Company's Common Stock owned by Triton (the "Triton Loan"). The directors of the Company who were then affiliated with Triton did not attend the meeting of the Company's Board of Directors at which the Triton Loan Agreement was approved. Triton's initial draw under the Triton Loan was approximately $27 million, but subsequent draws, in accordance with margin requirements, increased the principal amount of the Triton Loan to $32 million. In connection with the Triton Loan, Triton granted to the Company a right of first refusal to purchase the shares of the Company's Common Stock held by Triton upon a proposed sale of all or any portion of such shares (voluntary or involuntary) by Triton. 24 26 The proposed Plan of Reorganization originally filed by Triton in the Chapter 11 Proceeding contemplated significant revisions in the terms of the Triton Loan and the elimination of the Stockholder Agreement and the Company's right of first refusal to purchase the shares of the Company's Common Stock owned by Triton. The Company filed an objection to the proposed Plan of Reorganization after a special committee of the Board of Directors consisting of directors not affiliated with Triton (the "Special Committee") concluded that the terms of the proposed Plan of Reorganization were not acceptable. Triton then initiated settlement discussions with the Special Committee in an effort to eliminate the Company's objections to the Plan of Reorganization. As a result of these discussions, the proposed revisions to the terms of the Triton Loan and related documents were modified in a manner acceptable to the Special Committee and the Company withdrew its objections to the Plan of Reorganization. In accordance with the settlement agreement reached between Triton and the Company, the Triton Loan Agreement was amended pursuant to the Plan of Reorganization to extend the maturity date of the Triton Loan from November 1994 to April 1997, the interest rate was reduced from prime plus 4% to an escalating rate averaging prime plus 1 3/4% per annum for the balance of the term of the Triton Loan, the ratio of minimum collateral value to loan balance required under the mandatory payment (margin call) provisions of the Triton Loan Agreement was reduced from approximately 154% (approximately $11.25 per share) to 125% (approximately $9.14 per share), and release provisions were added allowing Triton to withdraw shares pledged as collateral if and to the extent the collateral exceeded approximately 190% of the loan balance ($14.00 per share). The Company's right of first refusal with respect to any sale by Triton of its shares of Common Stock of the Company was continued in effect until the Triton Loan is paid in full. These changes in the Triton Loan Agreement and related documents took effect upon consummation of Triton's Plan of Reorganization on June 25, 1993. On August 19, 1993, following an unsuccessful attempt by Triton to obtain bankruptcy court approval for a modification or elimination of the mandatory payment (margin call) provisions of the Triton Loan Agreement, the Company and Triton entered into an amendment to the Triton Loan Agreement to permit Triton to make deposits into a deposit account in lieu of pledging additional certificates of deposit pursuant to the mandatory payment (margin call) provisions of the Triton Loan Agreement. As of December 6, 1993, as a result of declines in the market price of the Company's Common Stock, Triton had deposited an aggregate of $7.5 million into a deposit account pursuant to these mandatory payment provisions. On December 7, 1993, the Company and Triton executed a further amendment to the Triton Loan Agreement (the "Second Amendment") pursuant to which Triton made a principal payment of $5 million plus accrued interest on the Triton Loan and the loan repayment provisions were revised to provide for quarterly principal payments of $1,250,000 on March 31, June 30, September 30 and December 31 of each year, commencing March 31, 1994, with the remaining balance of the loan being due and payable on April 1, 1997. In addition, the Second Amendment provides that the per share value of the Company's Common Stock shall be deemed to be not be less than $7.50 for purposes of the mandatory payment (margin call) provisions of the Triton Loan. In addition, Triton granted to the Company in connection with the execution of the Second Amendment a security interest in 75,000 additional shares of the Company's Common Stock purchased by Triton earlier in 1993. The effect of the $7.50 valuation floor and the additional security interest was to cause the $7.5 million that had been deposited in the deposit account under the mandatory payment provisions of the Triton Loan Agreement to be released to Triton. TRITON'S EFFORTS TO REFINANCE THE TRITON LOAN In February 1994, Triton informed the Company that it was seeking a bank loan to finance its prepayment of the remaining balance of approximately $27 million owed to the Company under the Triton Loan. The Company was advised that Triton's bank lender, as a condition to making a loan to Triton, required that the Company enter into certain agreements to protect the value of the Company's Common Stock to be held by the bank as collateral for the new loan. These agreements included a Stock Rights Agreement and a Registration Rights Agreement. Under the Stock Rights Agreement, the Board of Directors of the Company approved, for purposes of Section 203 of the Delaware General Corporation Law, any acquisition of the shares of Common Stock of the Company by the bank lender to Triton pursuant to the new loan agreement between 25 27 Triton and the bank. As a result of the Stock Rights Agreement, the bank lender to Triton would be able to foreclose on the shares of Common Stock of the Company held by Triton without incurring the three-year restrictions on transactions with the Company applicable to any new 15% stockholder under the Delaware corporate law. In addition, the Stock Rights Agreement prohibits the Company from taking certain actions such as adopting a shareholder rights agreement, amending certain provisions of the Company's Certificate of Incorporation and Bylaws, and taking other prescribed actions that would detrimentally affect the rights of Triton's new lender as a stockholder of the Company. Under the Registration Rights Agreement, the Company granted certain registration rights to the bank lender to permit it to register with the Securities and Exchange Commission any shares of Common Stock of the Company that it acquires upon foreclosure of the new loan to Triton. The Company's directors approved these agreements, after considerable discussion with representatives of Triton and after the Company had obtained an agreement from Triton committing that Triton would use the proceeds of this new loan to prepay its obligations to the Company in full. These agreements expire if the Triton Loan is not paid in full by July 1, 1994. On March 2, 1994, Triton amended its Schedule 13D filed with the Securities and Exchange Commission to report that it had obtained the bank commitment discussed above which would permit Triton to prepay in full its obligations to the Company under the Triton Loan. The amended Schedule 13D stated that the commitment remained subject to the preparation of definitive documents and to certain conditions to closing. The Schedule 13D also stated that Triton intended to communicate with up to ten major holders of the Company's Common Stock with respect to the strategic direction and performance of the Company and that Triton would not make any further decisions with respect to its holdings of the Company's Common Stock until it had received the results of such communications. On March 15, 1994, a further amendment to Triton's Schedule 13D was filed stating that the new loan that would enable Triton to prepay in full the remaining balance owed to the Company under the Triton Loan was scheduled to be funded on or about March 31, 1994, subject to certain conditions, and that Triton "may seek to impose certain requirements on [the Company] as a condition to Triton's prepayment of the loan, including, but not limited to, possible additional nominees of Triton on [the Company's] Board of Directors." Triton's 13D amendment stated that Triton supported the effort of the Company's Board of Directors in its search for a new president and chief executive officer of the Company and that Triton had suggested that the Company's Board of Directors convene a meeting prior to the prepayment of the Triton Loan to consider further these matters. On March 29, 1994, the Company's Board of Directors received a letter from Triton seeking assurances from the Board of Directors that it would not take certain actions (including selection of a new chief executive officer and any sale of a major asset) over the objection of Triton and demanding that the Company pay $1 million of Triton's alleged costs in arranging the loan to refinance the Triton Loan. The Company's counsel responded to this letter by stating that the disinterested directors of the Company had made it clear that they did not believe it is in the best interest of the Company for the repayment of the Triton Loan to be linked to additional concessions to Triton. On March 31, 1994, Triton's representatives advised representatives of the Company that Triton had decided not to proceed at that time with the closing of its bank loan to finance the prepayment of the Triton Loan and that Triton would pursue certain alternatives to reduce the cost of its new bank loan prior to the expiration of the bank lender's commitment on June 30, 1994. 26 28 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:
PAGE ---- 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
(a)(2) Schedules INDEX OF FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedules of The Actava Group Inc. and subsidiaries are included in Item 14(d):
PAGE ---- Schedule II -- Amounts Receivable From Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties........... S-2 Schedule III -- Condensed Financial Information of The Actava Group Inc....... S-3 Schedule V -- Property, Plant and Equipment................................. S-7 Schedule VI -- Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment................................. S-8 Schedule VIII -- Valuation and Qualifying Accounts............................. S-9 Schedule IX -- Short-term Borrowings......................................... S-12 Schedule X -- Supplementary Income Statement Information.................... S-13
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 27 29 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 ------------------------------------ Frederick B. Beilstein, III Senior Vice President and Chief Financial Officer Dated: October 7, 1994 28 30 THE ACTAVA GROUP INC. ANNUAL REPORT ON FORM 10-K ITEM 14(A)(1) AND (2), (C) AND (D) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1993 F-1 31 FORM 10-K-ITEM 14(A)(1) AND (2) 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 The following consolidated financial statement schedules of The Actava Group Inc. and subsidiaries are included in Item 14(d) Schedule II -- Amounts receivable from related parties and underwriters, promoters, and employees other than related parties Schedule III -- Condensed financial information of registrant Schedule V -- Property, plant and equipment Schedule VI -- Accumulated depreciation, depletion, and amortization of property, plant and equipment Schedule VIII -- Valuation and qualifying accounts Schedule IX -- Short-term borrowings Schedule X -- Supplementary income statement information
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-2 32 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 33 THE ACTAVA GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- 1993 1992 ---------- ---------- (IN THOUSANDS) ASSETS Current Assets Cash.......................................................................... $ 18,770 $ 20,792 Short-term investments........................................................ 29,635 63,842 Receivables (less allowance for doubtful accounts of $10,227 in 1993 and $12,805 in 1992)............................................................ 276,018 243,368 Inventories................................................................... 108,439 63,987 Prepaid expenses.............................................................. 43,809 38,365 Income tax benefits........................................................... 32,434 45,790 ---------- ---------- Total Current Assets................................................... 509,105 476,144 Property, Plant and Equipment Land.......................................................................... 8,303 8,700 Buildings and improvements.................................................... 72,289 57,490 Machinery and equipment....................................................... 393,643 343,140 ---------- ---------- 474,235 409,330 Less allowances for depreciation.............................................. (198,881) (165,720) ---------- ---------- Total Property, Plant and Equipment.................................... 275,354 243,610 Notes Receivable from Triton Group Ltd.......................................... 26,726 31,726 Other Assets (less allowance for doubtful notes and accounts of $3,988 in 1993 and $3,104 in 1992)........................................................... 50,702 45,754 Long-term investments........................................................... 26,611 24,719 Intangibles (less accumulated amortization of $88,281 in 1993 and $65,219 in 1992)......................................................................... 386,626 395,913 ---------- ---------- Total Assets........................................................... $1,275,124 $1,217,866 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable.............................................................. $ 86,163 $ 69,665 Accrued expenses and other current liabilities................................ 177,720 160,810 Notes payable................................................................. 135,114 64,795 Current portion of long-term debt............................................. 6,665 10,013 ---------- ---------- Total Current Liabilities.............................................. 405,662 305,283 Deferred Income Taxes........................................................... 56,715 53,431 Long-Term Debt.................................................................. 220,887 220,357 Subordinated Debt............................................................... 190,551 193,566 Minority Interest in Photofinishing Subsidiary.................................. 205,395 205,382 Redeemable Common Stock......................................................... 12,000 -- Stockholders' Equity Common Stock (22,767,744 shares in 1993 and 1992)............................. 22,768 22,768 Additional capital............................................................ 46,362 46,362 Retained earnings............................................................. 236,333 292,266 Less treasury stock -- at cost (6,223,467 shares in 1993 and 1992)............ (121,549) (121,549) ---------- ---------- Total Stockholders' Equity............................................. 183,914 239,847 ---------- ---------- Contingent Liabilities and Commitments Total Liabilities and Stockholders' Equity............................. $1,275,124 $1,217,866 ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 34 THE ACTAVA GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------ 1993 1992 1991 ---------- ---------- -------- (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) ========= ========= ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 35 THE ACTAVA GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------- 1993 1992 1991 -------- --------- --------- (IN THOUSANDS) INCREASE (DECREASE) IN CASH 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 ======== ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 36 THE ACTAVA GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK ---------------- ADDITIONAL RETAINED ------------------ SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL ------ ------- ---------- -------- ------ --------- -------- (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) Common Stock issued from Treasury............... 12,000 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) $195,914 ====== ======= ========= ======== ====== ========= ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 37 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 38 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:
DECEMBER 31, ------------------- 1993 1992 ------- ------- (IN THOUSANDS) 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) $ -- ======= =======
Net periodic postretirement benefit cost includes the following components:
1993 1992 ------- ------- (IN THOUSANDS) Service cost..................................................... $ 96 $ -- Interest cost.................................................... 296 -- Amortization of unrecognized prior service cost.................. (154) -- Cash basis expense............................................... -- 102 ------- ------- $ 238 $ 102 ======= =======
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 39 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. In the event management believes that the recorded value of the intangible is greater than its actual value, the Company will write-down the value of the intangible. In conjunction with the evaluation of any possible impairment of its intangibles, the Company also similarly assesses whether a change in the life of the intangible is required for amortization purposes. Intangible assets are summarized as follows:
DECEMBER 31, ------------------- 1993 1992 -------- -------- (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 ======== ========
Income Taxes Income taxes are provided for all taxable items in the statement of operations regardless of when these items are reported for federal income tax purposes. Actava elects to utilize certain provisions of the federal income tax laws to reduce current taxes payable. Deferred income taxes are provided for temporary differences in recognition of income and expenses for tax and financial reporting purposes. F-10 40 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 F-11 41 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 42 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:
YEARS ENDED DECEMBER 31, ------------------------------ 1993 1992 1991 -------- -------- -------- (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 ======== ======== ========
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, is deemed to control Qualex because it 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. As a result of its control of Qualex, Actava consolidates the accounts of Qualex and presents Kodak's portion of ownership and equity in the income of Qualex as a minority interest. Actava believes that consolidation of the accounts of Qualex with those of Actava clearly reflects the financial position and results of operation of Actava and its subsidiaries. F-13 43 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Actava consolidates the accounts of Qualex and presents Kodak's portion of ownership and equity in the income of Qualex as minority interest. The Qualex Shareholders' Agreement between Actava and Eastman Kodak Company stipulates that upon a change of control at Actava certain Qualex preferred stock, including the voting preferred owned by Actava, will be redeemed. On March 28, 1991, the Qualex Shareholders' Agreement between Actava and Kodak was amended. The amendment stipulates that a change of control of Actava, as defined in the Shareholders' Agreement, occurred on February 6, 1991. However, in the amendment Kodak waived its change of control rights under the Shareholders' Agreement with respect to the February 6, 1991 change of control. As of March 1, 1992, and each subsequent March 1, Kodak may withdraw its waiver, and enforce its rights under the Agreement by providing Actava with 30 days written notice. At March 3, 1994, Kodak had not provided notice to Actava of an election to withdraw its waiver. The Board of Directors of Qualex was increased from seven to nine members, comprised of five representatives of Actava, three representatives of Kodak and the chief executive officer of Qualex, pursuant to the amendment. Should Kodak withdraw its waiver or if an additional change in control of Actava were to occur and if the Qualex preferred stock were redeemed, Actava would own 50% of the voting securities of Qualex. While Actava's voting stock would be reduced from 51% to 50%, this change would not alter Actava's and Kodak's current equal interest in the equity, earnings and cash dividends of Qualex. In addition, the Board of Directors of Qualex would be composed of 11 members, comprised of five representatives of Actava, five representatives 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 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 F-14 44 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
PRO FORMA YEAR ENDED DECEMBER 31, ------------------------- 1993 1992 ---------- ---------- (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
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.
PRO FORMA YEAR ENDED DECEMBER 31, 1991 ---------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) UNAUDITED Sales......................................................................... $1,029,676 Net (loss).................................................................... (53,538) (Loss) per share -- primary................................................... (3.24)
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 F-15 45 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 F-16 46 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
DECEMBER 31, --------------------- 1993 1992 -------- -------- (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 ======== ========
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:
DECEMBER 31, ------------------- 1993 1992 ------- ------- (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 ======= =======
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. F-17 47 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accounts payable, accrued expenses and other current liabilities, including $31,392,000 in 1993 and $44,274,000 in 1992 due to Eastman Kodak Company, are summarized as follows:
DECEMBER 31, ------------------- 1993 1992 -------- -------- (IN THOUSANDS) 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 ======== ========
NOTES PAYABLE AND LONG-TERM DEBT Qualex has three separate line of credit agreements for working capital needs. These agreements are $5,000,000 each, for a total of $15,000,000. The Company pays a facility fee of 1/4% per annum on the committed line of credit agreements. At December 31, 1993, $3,200,000 was outstanding under these agreements while no amounts were outstanding at December 31, 1992. Included in Notes Payable at December 31, 1993 and 1992 is $87,359,000 and $58,243,000, respectively, which was outstanding under a three year Finance and Security Agreement which provides working capital to the Snapper division. The Agreement, dated October 23, 1992, is for $75,000,000 (and may be increased under certain circumstances up to $100,000,000 for a specified period of time). Interest is payable at the prime rate plus 3/4% to 1 1/4%, depending upon the prime rate in effect. The Agreement provides for the payment of an annual line fee of $487,500 which is subject to increases in certain circumstances. The loan is principally secured by Snapper assets and certain inventory of Snapper and requires Actava to comply with various restrictive financial covenants. The assets which serve as collateral are determined by reference to the outstanding balance under the credit agreement and the qualification of the assets as collateral is defined in the credit agreement; however, the assets potentially available as collateral are, in the aggregate, $173,068,000. As of March 29, 1994, effective as of December 31, 1993, various provisions of the Agreement, including the financial covenants, were amended. During 1992, in order to provide additional working capital and for general corporate purposes, an Actava Sports subsidiary entered into a three year Loan and Security Agreement with a financial institution to provide up to $35,000,000 of working capital. Interest is payable at the prime rate plus 1 1/4%. The Agreement provides for a facility fee of $350,000. The loan is principally secured by certain receivables and inventory of the subsidiary and requires the subsidiary to comply with various restrictive financial covenants. The assets which serve as collateral are determined by reference to the outstanding balance under the credit agreement and the qualification of the assets as collateral is defined in the credit agreement; however, the assets potentially available as collateral are, in the aggregate, $23,681,000. At December 31, 1993, $1,846,000 was outstanding under the agreement while no amounts were outstanding at December 31, 1992. During 1992, in order to provide additional working capital and for general corporate purposes, an Actava Sports subsidiary entered into a one-year Revolving Loan Agreement with a financial institution to provide up to $6,500,000 for working capital. Interest is payable at the prime rate of the financial institution. The loan is unsecured and requires the subsidiary to comply with various restrictive financial covenants. In August, 1993, the agreement was amended to increase the facility limit to $8,000,000 for a six-month period beginning F-18 48 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) September 1, 1993, and to extend the term of the agreement until August 31, 1994. At December 31, 1993, $2,700,000 was outstanding under the Agreement while no amounts were outstanding at December 31, 1992. In April 1993, a Revolving Loan and Security Agreement with respect to a revolving credit facility of up to $10,000,000 was entered into by an Actava Sports subsidiary. Interest is payable at the prime rate plus 1%. The agreement provides for a facility fee of $25,000. The loan is principally secured by certain receivables and inventory of the subsidiary and requires the subsidiary to comply with various restrictive financial covenants. The assets which serve as collateral are determined by reference to the outstanding balance under the credit agreement and the qualification of the assets as collateral is defined in the credit agreement; however, the assets potentially available as collateral are, in the aggregate, $12,881,000. At December 31, 1993 and 1992, no amounts were outstanding under the agreement. In December 1993, an Actava Sports subsidiary, DP, entered into a Finance and Security Agreement with two financial institutions in order to provide up to $50,000,000 of working capital under a revolving credit facility. The agreement is secured by certain receivables, inventories, property, plant and equipment, and intangibles, as well as DP's issued and outstanding common stock and requires compliance with various restrictive financial covenants. The assets which serve as collateral are determined by reference to the outstanding balance under the credit agreement and the qualification of the assets as collateral is defined in the credit agreement; however, the assets potentially available as collateral are, in the aggregate, $109,000,000. As of March 29, 1994, effective December 31, 1993, various provisions of the Agreement, including the financial covenants, were amended. Interest is payable at the prime rate plus 1 1/2%. The Agreement provides for an annual facility fee of $375,000. At December 31, 1993, $36,178,000 was outstanding under the agreement. Long-term debt is summarized as follows:
DECEMBER 31, ------------------- 1993 1992 -------- -------- (IN THOUSANDS) 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 ======== ========
Qualex issued through a private placement $200,000,000 of Senior Notes in 1992 with September 1 maturities in 1997, 1999 and 2002 of $60,000,000, $70,000,000 and $70,000,000, respectively, with interest rates of 7.99%, 8.45% and 8.84%, respectively. During 1992, Qualex entered into an unsecured $115,000,000 Revolving Credit Agreement with eight financial institutions which will expire in May 1995. Interest is payable under three rate options which are determined by reference to the prime rate, the London interbank offered rate plus 1/2% to 3/4%, and competitive bids. The Agreement provides for a participation fee of 1/8% and an annual facility fee of 1/4%. At December 31, 1993, $10,000,000 was outstanding under the agreement while no amounts were outstanding at December 31, 1992. The Qualex Credit Agreement and the Shareholders' Agreement with Eastman Kodak Company restrict the amount of net assets of Qualex which may be transferred to Actava by dividend or other means. At December 31, 1993, approximately $166,000,000 of the $194,000,000 representing Actava's share of the net assets of Qualex was restricted under the terms of these agreements. F-19 49 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Collateral for certain of the long-term debt includes real property. Assets pledged as collateral under the borrowings are not material. Maturities of long-term and subordinated debt are $15,142,000 in 1995, $35,172,000 in 1996, $75,783,000 in 1997 and $59,121,000 in 1998. The fair value of Actava's long-term and subordinated debt, including the current portion, at December 31, 1993 is estimated to be approximately $445,000,000 and was estimated at $425,000,000 at December 31, 1992. This estimate is based on a discounted cash flow analysis using Actava's current incremental borrowing rates for similar types of agreements and on quoted market prices for issues which are traded. Actava does not anticipate settlement of long-term debt at fair value and currently does not intend to pay the debt prior to maturity. SUBORDINATED DEBT Subordinated debt is summarized as follows:
DECEMBER 31, --------------------- 1993 1992 -------- -------- (IN THOUSANDS) 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 ======== ========
In 1986 Actava issued 6% Senior Subordinated Swiss Franc Bonds due 1996 for 100,000,000 Swiss francs. Simultaneously, in order to eliminate exposure to fluctuations in the currency exchange rate over the life of the bonds, Actava entered into a currency swap agreement with a financial institution whereby Actava received approximately $48,000,000 in exchange for the Swiss Franc Bond proceeds. As a result of the swap agreement, Actava will, in effect, make its interest and principal bond repayments in U.S. dollars without regard for changes in the currency exchange rate. A default by the counterparty to the swap agreement would expose Actava to potential currency exchange risk on the remaining bond interest and principal payments in that Actava would be required to purchase Swiss francs at current exchange rates rather than at the swap agreement exchange rate. The amount of this potential risk cannot be currently calculated as the principal and interest payments will be made in future years and alternative swap agreements could be entered into by Actava. At December 31, 1993, the swap agreement has an effective exchange rate over its remaining term of .5459 Swiss francs per U.S. dollar while the U.S. dollar equivalent market exchange rate was .6734. After considering the stated interest rate, the cost of the currency swap agreement, taxes and underwriting commissions, the effective cost of the bonds is approximately 11.3%. The fair value of the currency swap as of December 31, 1993 and 1992, was $10,795,000 and $7,242,000, respectively; however, this is subject to change as domestic interest rates and foreign currency markets are determining factors. Actava, at its option, may redeem the Senior Subordinated Swiss Franc Bonds at 101.0% plus accrued interest for one year subsequent to March 6, 1994 and at decreasing amounts thereafter. The Bonds include a covenant which restricts the amount of stockholders' equity available for cash dividends and the cash redemption of capital stock. At December 31, 1993, $3,412,000 was available for these purposes pursuant to this covenant. In 1987 Actava issued $75,000,000 of 6 1/2% Convertible Subordinated Debentures due in 2002 in the Euro-dollar market. The Debentures are convertible into Actava's Common Stock at a conversion price of F-20 50 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 41 5/8 per share. At Actava's option the Debentures may be redeemed at 101% plus accrued interest prior to August 4, 1994 and at 100% thereafter. The 9 7/8% Senior Subordinated Debentures are redeemable at the option of Actava at 101.555% of the principal amount plus accrued interest if redeemed prior to March 15, 1994, and at decreasing prices thereafter. Mandatory sinking fund payments of $3,000,000 (which Actava may increase to $6,000,000 annually) began in 1982 and are intended to retire, at par plus accrued interest, 75% of the issue prior to maturity. At the option of Actava, the 10% Subordinated Debentures are redeemable, in whole or in part, at the principal amount plus accrued interest. Sinking fund payments of 10% of the outstanding principal amount commenced in 1989; however, Actava receives credit for Debentures redeemed or otherwise acquired in excess of sinking fund payments. REDEEMABLE COMMON STOCK Redeemable common stock represents 1,090,909 shares of common stock which were issued in the acquisition of substantially all the assets and liabilities of Diversified Products Corporation. These shares are subject to a right of redemption at the option of the holder with an exercise date, as amended on August 17, 1994, of February 7, 1995. CAPITAL STOCK Preferred and Preference Stock There are 5,000,000 authorized shares of Preferred Stock and 1,000,000 authorized shares of Preference Stock, none of which were outstanding or designated as to a particular series at December 31, 1993. Common Stock There are 100,000,000 authorized shares of Common Stock, $1 par value. At December 31, 1993, 1992 and 1991 there were 17,635,186, 16,544,277 and 16,544,027 shares issued and outstanding, respectively, after deducting 6,223,467, 6,223,467 and 6,223,717 treasury shares, respectively, and after the issuance of 1,090,909 shares of redeemable common stock during the year ended December 31, 1993. Actava has reserved the shares of Common Stock listed below for possible future issuance:
DECEMBER 31, ----------------------- 1993 1992 --------- --------- 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 ========= =========
F-21 51 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:
APPROXIMATE PRICE RANGE SHARES PER SHARE -------- ----------- 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 ======== =========
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 52 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:
RECORDED THROUGH PURCHASE CHARGED ACCOUNTING IN THE TO EXPENSE YEAR OF ACQUISITION TOTAL ---------- ------------------- -------- (IN THOUSANDS) 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 ======== ============== ========
- --------------- (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 53 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:
YEARS ENDED DECEMBER 31, ----------------------------- 1993 1992 1991 ------- ------- ------- (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 ======= ======= =======
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:
YEARS ENDED DECEMBER 31, -------------------------------- LIABILITY DEFERRED METHOD METHOD --------- ------------------- 1993 1992 1991 --------- ------- -------- (IN THOUSANDS) 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) ======= ======= ========
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:
YEARS ENDED DECEMBER 31, -------------------------------- LIABILITY DEFERRED METHOD METHOD --------- ------------------- 1993 1992 1991 --------- ------- -------- (IN THOUSANDS) 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) ======= ======= ========
F-24 54 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:
DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ------------ ------------ (IN THOUSANDS) 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 =========
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:
YEARS ENDED DECEMBER 31, ------------------------ 1992 1991 ------- -------- (IN THOUSANDS) 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) ======= ========
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 55 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:
YEARS ENDED DECEMBER 31, --------------------------- 1993 1992 1991 ------- ------- ------- (IN THOUSANDS) 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 ======= ======= =======
Assumptions used in the accounting for the defined benefit plans are as follows:
YEARS ENDED DECEMBER 31, ---------------------- 1993 1992 1991 ---- ---- ---- 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 %
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 56 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:
DECEMBER 31, --------------------- 1993 1992 -------- -------- (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) ======== ========
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 57 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:
YEARS ENDING OPERATING CAPITAL DECEMBER 31, LEASES LEASES ------------------------------------------------------------- --------- ------- (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 ======
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 58 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 59 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 60 THE ACTAVA GROUP INC. AND SUBSIDIARIES SUMMARY OF QUARTERLY EARNINGS AND DIVIDENDS
QUARTERS ENDED IN 1993 ----------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 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
QUARTERS ENDED IN 1992 ----------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 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
- --------------- (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 61 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. F-32 -----END PRIVACY-ENHANCED MESSAGE-----