-----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, KTGZOwZSGETI6U36C5aw+KOkqUOgF004dbV44mW2cKBs6dOXo+yZU0nZWHkOrsoQ 7UUg1dKcUg9AiE4uOAd8hw== 0000950144-94-001920.txt : 19941110 0000950144-94-001920.hdr.sgml : 19941110 ACCESSION NUMBER: 0000950144-94-001920 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19941104 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: 94557649 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 10-K/A AMENDMENT NO. 5 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------------- FORM 10-K/A AMENDMENT NO. 5 (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 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 1 3 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. 2 4 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 3 5 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. 4 6 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 5 7 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. 6 8 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. 7 9 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 8 10 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 combined put/call agreements 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 such 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 original effective lives of the agreements and $5.0 million, $1.3 million, $835,000 and $279,000 will be 9 11 amortized in 1994, 1995, 1996 and 1997, respectively. At December 31, 1993, termination of the combined put/call agreements would require cash payments by Qualex of $18.7 million based on market quotes. Termination of the combined put/call 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 mandatory payment (margin call) provisions of the loan, as described in the Notes to Consolidated Financial 10 12 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 systems services for annual charges of approximately $13.0 million, and various pledges of cash and short-term 11 13 investments. SEE "CONTINGENT LIABILITIES AND COMMITMENTS" IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. OTHER ITEMS Photofinishing operations are conducted by Qualex Inc., which was formed in March 1988 by the combination of Actava's photofinishing subsidiary with the domestic photofinishing operations of Eastman Kodak Company. Actava and Kodak currently share equally in Qualex's equity, income and dividends. Actava, however, owns 51% of the voting stock of Qualex, is entitled to and has elected a majority of the members of the Board of Directors of Qualex, and has the ability through its control of the Board of Directors to declare dividends, remove the executive officers of Qualex and otherwise direct the management and policies of Qualex, except for policies relating to certain designated actions requiring the consent of at least one member of the Board of Directors of Qualex designated by Kodak. Because of these rights, the Company believes that it has effective unilateral control of Qualex which is not temporary. As a result, the Company consolidates the results of operations of Qualex with the results of operations of the Company. Upon the formation of Qualex in 1988, the Company and Kodak entered into a Shareholders Agreement (the "Qualex Shareholders Agreement") that provided, among other things, for a reduction in the Company's voting control of Qualex from 51% to 50% and for changes in the composition of the Board of Directors of Qualex in the event of a "change in control" of the Company. The Qualex Shareholders Agreement defined the term "change in control" to include a "transaction or occurrence the effect of which is to give a person or group of affiliated persons or entities the power to direct the management and policies" of the Company. In 1991, Charles R. Scott was elected President and Chief Executive Officer of the Company. At the time of his election, Mr. Scott was also serving as Chairman and Chief Executive Officer of a company that owned approximately 25% of the Company's voting stock and was the Company's single largest stockholder. Because Mr. Scott was serving at the same time as the chief executive officer of both the Company and the Company's single largest stockholder, the Company and Kodak agreed that a "change in control" of the Company had occurred for purposes of the Qualex Shareholders Agreement. Despite this "change in control" of the Company, Kodak agreed that the Company would continue to own 51% of the voting control of Qualex and to elect a majority of the directors of Qualex. The Qualex Shareholders Agreement, however, was amended to provide that Kodak had the right to change the Company's control of Qualex on March 1, 1992 or any subsequent March 1. The Company does not believe that Kodak will exercise the right to change the Company's control of Qualex, and Kodak, in fact, did not exercise this right on March 1, 1992, 1993 or 1994. Actava consolidates the accounts of Qualex and presents Kodak's portion of ownership and equity in the income of Qualex as minority interest. Should Kodak exercise its right to change the Company's control of Qualex or if an additional change in control of Actava were to occur, 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 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. 12 14 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 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 13 15 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. 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. 14 16 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
15 17 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: November 4, 1994 16 18 THE ACTAVA GROUP INC. ANNUAL REPORT ON FORM 10-K ITEM 14(A)(1) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1993 F-1 19 FORM 10-K-ITEM 14(A)(1) The Actava Group Inc. and Subsidiaries List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of The Actava Group Inc. and subsidiaries are included in Item 8: Consolidated balance sheets -- December 31, 1993 and 1992 Consolidated statements of operations -- Years ended December 31, 1993, 1992 and 1991 Consolidated statements of cash flows -- Years ended December 31, 1993, 1992 and 1991 Consolidated statements of stockholders' equity -- Years ended December 31, 1993, 1992 and 1991 Notes to consolidated financial statements -- December 31, 1993 F-2 20 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 21 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 22 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 23 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 24 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) Other, principally foreign currency translation adjustment.................................... (2,089 ) (2,089) ------ ------- ---------- -------- ------ --------- -------- Balance -- December 31, 1993...................... 22,768 $22,768 $ 46,362 $236,333 6,223 $(121,549) $183,914 ====== ======= ========= ======== ====== ========= ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 25 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 26 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 27 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Marketable equity securities which are classified as long-term investments are carried at the lower of aggregate cost or market value. Marketable debt securities which are classified as long-term investments are carried at cost which approximates market value. Market values for these securities are based on quoted market prices. Interest income is accrued as earned, while dividend income is recorded on the exdividend date. The cost of marketable securities sold is determined on the specific identification method and realized gains and losses are reflected in income. Inventories Inventories of finished goods, work in process and raw materials are stated at the lower of cost or market. The Last-In, First-Out (LIFO) method of determining cost is used for a substantial portion of these inventories. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated over their expected useful lives. Generally, depreciation is provided on the straight-line method for financial reporting purposes and on accelerated methods for tax purposes. Amortization associated with capitalized leases is included in depreciation expense. Intangibles Intangibles consist of the excess of the purchase price over the net assets of businesses acquired, customer lists and covenants not to compete. Amounts relating to the excess of the purchase price over the net assets of businesses acquired are amortized over a 40-year period using the straight-line method. Amounts relating to customer lists and covenants not to compete are amortized over two to five years or the life of the agreement, respectively. Management continuously evaluates intangible assets to determine that no diminishment in value has occurred. Management evaluates intangible assets on the basis of the operations of the particular entity to which the intangible relates to determine whether any changes in the nature and expected benefits to be derived from the intangible have occurred which would require an adjustment to its recorded value. The Company prepares an undiscounted cash flow value analysis to compare with the recorded cost of intangibles, including goodwill, to evaluate whether the value of the intangible has been impaired. In the event management believes that the value of the intangible has been impaired because the recorded value of the intangible is greater than its calculated value, the Company will write-down the recorded value of the intangible. In conjunction with the evaluation of any possible impairment of its intangibles, the Company also similarly assesses whether a change in the life of the intangible is required for amortization purposes. Intangible assets are summarized as follows:
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 F-10 28 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) income tax laws to reduce current taxes payable. Deferred income taxes are provided for temporary differences in recognition of income and expenses for tax and financial reporting purposes. Effective January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes." Under Statement 109, the liability method is used in accounting for income taxes: deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Postemployment Benefits The Company and its subsidiaries provide benefits to former or inactive employees after employment, but before retirement, such as severance benefits, continuation of health care benefits and life insurance coverage. The costs of these are currently accounted for on a pay-as-you-go (cash) basis. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," which requires employers to recognize the obligation to provide these benefits when certain conditions are met. The Company is required to adopt the new method of accounting for these benefits no later than January 1, 1994. The adoption of Statement No. 112 will not have a significant effect on the Company's financial position or results of operations. Certain Investments in Debt and Equity Securities The Company and its subsidiaries invest in various debt and equity securities. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires certain debt securities to be reported at amortized cost, certain debt and equity securities to be reported at market with current recognition of unrealized gains and losses, and certain debt and equity securities to be reported at market with unrealized gains and losses as a separate component of shareholders' equity. The Company is required to adopt the new method of accounting no later than January 1, 1994. The adoption of Statement No. 115 will not have a significant impact on the Company's financial position or results of operations. Earnings Per Share of Common Stock Primary earnings per share are computed by dividing net income (loss) by the average number of common and common equivalent shares outstanding during the year. Common equivalent shares include shares issuable upon the assumed exercise of stock options using the treasury stock method when dilutive. Computations of common equivalent shares are based upon average prices during each period. Fully diluted earnings per share are computed using such average shares adjusted for any additional shares which would result from using end-of-year prices in the above computations, plus the additional shares that would result from the conversion of the 6 1/2% Convertible Subordinated Debentures. Net income (loss) is adjusted by interest (net of income taxes) on the 6 1/2% Convertible Subordinated Debentures. The computation of fully diluted earnings per share is used only when it results in an earnings per share number which is lower than primary earnings per share. Revenue Recognition Sales from the lawn and garden and sporting goods segments are recognized when the products are shipped to their customers. Sales from the photofinishing segment are recognized when the products are delivered to their customer. F-11 29 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Index Protection Agreements The Company uses index protection agreements to hedge interest rate risk associated with its borrowings and to hedge the risk or market price fluctuations of commodities bought and sold in the normal course of business. These contracts are accounted for as hedges and any gains or losses are deferred and included in the basis of the underlying transactions. Cash flows from the contracts are accounted for in the same categories as the cash flows from the items being hedged. During 1993, Qualex entered into a hedge agreement with a bank which expires in 1996 related to Qualex's $200,000,000 of Senior Notes. The hedge agreement includes a Basic Transaction for a notional amount of $100,000,000 under which Qualex pays an interest rate based on the three-month London Interbank Offered Rate (LIBOR) and receives a fixed interest rate of 4.0587% quarterly, and an Enhancement Transaction for a notional amount of $163,000,000 under which Qualex pays an interest rate based on the three-month LIBOR and receives a variable interest rate based on the prime rate less 2.49%. A net settlement is calculated and paid on a quarterly basis. At December 31, 1993, termination of this interest rate swap agreement would require a cash payment by Qualex of $1,158,000 based on market quotes. Qualex also entered into combined put/call agreements 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 such 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 combined put/call 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 30 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, owns 51% of the voting stock of Qualex, is entitled to and has elected a majority of the members of the Board of Directors of Qualex, and has the ability through its control of the Board of Directors to declare dividends, remove the executive officers of Qualex and otherwise direct the management and policies of Qualex, except for policies relating to certain designated actions requiring the consent of at least one member of the Board of Directors of Qualex designated by Kodak. Because of these rights, the Company believes that it has effective unilateral control of Qualex which is not temporary. As a result, the Company consolidates the results of operations of Qualex with the results of operations of the Company. Upon the formation of Qualex in 1988, the Company and Kodak entered into a Shareholders Agreement (the "Qualex Shareholders Agreement") that provided, among other things, for a reduction in the Company's F-13 31 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) voting control of Qualex from 51% to 50% and for changes in the composition of the Board of Directors of Qualex in the event of a "change in control" of the Company. The Qualex Shareholders Agreement defined the term "change in control" to include a "transaction or occurrence the effect of which is to give a person or group of affiliated persons or entities the power to direct the management and policies" of the Company. In 1991, Charles R. Scott was elected President and Chief Executive Officer of the Company. At the time of his election, Mr. Scott was also serving as Chairman and Chief Executive Officer of a company that owned approximately 25% of the Company's voting stock and was the Company's single largest stockholder. Because Mr. Scott was serving at the same time as the chief executive officer of both the Company and the Company's single largest stockholder, the Company and Kodak agreed that a "change in control" of the Company had occurred for purposes of the Qualex Shareholders Agreement. Despite this "change in control" of the Company, Kodak agreed that the Company would continue to own 51% of the voting control of Qualex and to elect a majority of the directors of Qualex. The Qualex Shareholders Agreement, however, was amended to provide that Kodak had the right to change the Company's control of Qualex on March 1, 1992 or any subsequent March 1. The Company does not believe that Kodak will exercise the right to change the Company's control of Qualex, and Kodak, in fact, did not exercise this right on March 1, 1992, 1993 or 1994. Actava consolidates the accounts of Qualex and presents Kodak's portion of ownership and equity in the income of Qualex as minority interest. Should Kodak exercise its right to change the Company's control of Qualex or if an additional change in control of Actava were to occur, Actava would own 50% of the voting securities of Qualex. While Actava's voting stock would be reduced from 51% to 50%, this change would not alter Actava's and Kodak's current equal interest in the equity, earnings and cash dividends of Qualex. In addition, the Board of Directors of Qualex would be composed of 11 members, comprised of five representatives of Actava, five representatives of Kodak and the chief executive officer of Qualex, and all actions of the Board would require the affirmative vote of at least seven board members. In the event these changes were to occur, Actava may possibly be deemed to no longer control Qualex and Actava would no longer be in a position unilaterally to control, among other things, the declaration of dividends to Actava and Kodak by Qualex. If Actava were deemed in the future to no longer be in control of Qualex, Actava would cease to consolidate the accounts of Qualex. In that event, Actava would account for its ownership of Qualex by using the equity method of accounting. Such a development would not affect the net income or shareholders' equity of Actava. However, Actava's consolidated total assets, liabilities, sales and costs and expenses would be reduced as they would no longer include the specific accounts of Qualex. If Actava had accounted for Qualex using the equity method during all of 1993, Actava's total assets and liabilities would have been $696,374,000 and $500,460,000, respectively, and sales and total costs and expenses would have been $465,812,000 and $518,963,000, respectively. ACQUISITIONS On June 8, 1993, the Company acquired substantially all the assets of Diversified Products Corporation ("DP") for a net purchase price consisting of $11,629,500, the issuance of 1,090,909 shares of the Company's Common Stock valued at $12,000,000, and the assumption or payment of certain liabilities including trade payables and a revolving credit facility. The Company also entered into an agreement which may provide the seller the right to additional payments depending upon the value of the issued shares over a period of not longer than one year from the purchase date. The issuance of additional payments of cash since the cost of DP will be increased by the amount of the cash payment and simultaneously reduced by the same amount due to a corresponding adjustment to the respective redeemable common stock. This transaction was accounted for using the purchase method of accounting; accordingly, the purchased assets and liabilities have been recorded at their estimated fair value at the date of the acquisition. The purchase price resulted in an excess of costs F-14 32 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) over net assets acquired of approximately $11,417,000. The results of operations of the acquired business have been included in the consolidated financial statements since the date of acquisition. The following data represents the combined unaudited operating results of Actava on a pro forma basis as if the above transaction had taken place at the beginning of 1992. The pro forma information does not necessarily reflect the results of operations as they would have been had the transaction actually taken place at that time. Adjustments include amounts of depreciation to reflect the fair value and economic lives of property, plant and equipment and amortization of intangible assets:
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)
F-15 33 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTS AND NOTES RECEIVABLE Receivables from sales of Actava's lawn and garden products amounted to $146,994,000 and $157,605,000 at December 31, 1993 and 1992, respectively. The receivables are primarily due from independent distributors located throughout the United States. Amounts due from distributors are supported by a security interest in the inventory or accounts receivable of the distributors. The receivables generally have extended due dates which correspond to the seasonal nature of the products' retail selling season. Concentrations of credit risk due to the common business of the customers are limited due to the number of customers comprising the customer base and their geographic location. Ongoing credit evaluations of customer's financial condition are performed and reserves for potential credit losses are maintained. Such losses, in the aggregate, have not exceeded management's expectations. Photofinishing sales are made to national, regional and local retailers located throughout the United States, including mass merchants, grocery store chains and drug store chains. Photofinishing receivables, which were $70,744,000 and $76,202,000 at December 31, 1993 and 1992, respectively, are unsecured and generally due within 20 days following the end of each month. Included in accounts receivable at December 31, 1993 and 1992 are $54,711,000 and $47,564,000, respectively, due from national retail chains. Of these amounts, $9,812,000 and $9,465,000 at December 31, 1993 and 1992, respectively, were receivable from one such customer on net sales of $84,297,000 and $86,611,000, respectively. The Company provides an allowance for doubtful accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable. Such losses have consistently been within management's expectations. Receivables from the sale of sporting goods are primarily from mass merchants and sporting goods retailers located throughout the United States. The receivables, which are unsecured, were $71,836,000 and $19,781,000 at December 31, 1993 and 1992, respectively, and are generally due within 30 to 60 days. Of these amounts, $23,362,000, and $4,686,000 are from the same four highest balance customers for December 31, 1993 and 1992, respectively. The companies which comprise the sporting goods group maintain allowances for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations. TRITON GROUP LTD. LOAN At December 31, 1993, the Company had a $26,726,000 million note receivable from Triton Group Ltd. secured by 4,413,598 shares of Actava Common Stock. At December 31, 1992, $31,726,000 was outstanding under the agreement and was secured by 4,338,598 shares of Actava Common Stock. Effective June 25, 1993, the Company and Triton modified the terms of the loan as part of a plan of reorganization filed by Triton under Chapter 11 of the U.S. Bankruptcy Code. The modifications, which became effective June 25, 1993, included: extending the due date of the Loan to April 1, 1997; reducing the interest rate to prime plus 1 1/2% for the first six months following June 25, 1993, to prime plus 2% for the next six months, and to prime plus 2 1/2% for the remainder of the term of the note; revising collateral maintenance (margin call) requirements; and providing for release of collateral under certain circumstances. Under the modified agreements, Actava's right of first refusal with respect to any sale by Triton of its Actava Common stock will continue in effect until the loan is paid off. The Stockholder Agreement was amended to permit Triton to designate two directors (who are not officers or employees of Triton) on an expanded nine-member Board of Directors so long as Triton continues to own 20% or more of Actava's outstanding Common Stock. Triton filed a motion on July 30, 1993, with the United States Bankruptcy Court for the Southern District of California seeking to modify Triton's recently approved Plan of Reorganization. The modifications sought by Triton would have amended or eliminated the collateral maintenance (margin call) provisions that are an integral part of the Amended and Restated Loan Agreement. On August 2, 1993, the Bankruptcy Court entered a temporary restraining order suspending the effectiveness of the margin call provisions until the Court had an opportunity to hear Triton's motion seeking preliminary injunction. The motion seeking a preliminary F-16 34 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) injunction was heard on August 10, 1993, and was denied. Triton then withdrew its motion to modify its Plan of Reorganization. Therefore, the provisions of the Amended and Restated Loan Agreement continue to remain in effect. On August 19, 1993, the Amended and Restated Loan agreement was amended to allow Triton to satisfy certain margin call requirements by making deposits to a Collateral Deposit Account in lieu of delivering certificates of deposit. The margin call provisions for principal repayments and transfers of shares of Company Common Stock were not amended. On December 7, 1993, the Amended and Restated Loan Agreement was amended, in connection with a $5,000,000 prepayment of principal received on December 7, 1993, to provide for quarterly principal payment installments of $1,250,000 due on the last day of each quarter of each year beginning March 31, 1994, with any unpaid principal and accrued interest due on April 1, 1997. The Agreement was also amended to require 75,000 additional shares of Actava Common Stock to be pledged as collateral and to modify the margin call provisions of the Agreement to provide a $7.50 minimum per share value of Actava Common Stock for purposes of determining the amount of any margin call mandatory payments. These modifications limit the circumstances under which Triton must pledge additional collateral for the loan; however, the 4,413,598 shares of Actava Common Stock owned by Triton will continue to be pledged to secure the loan until the loan is paid in full. At March 3, 1994, the pledged shares had a market value of $30,895,000 as compared to the loan balance of $26,726,000. In the opinion of management, the shares held as collateral are, and will continue to be, sufficient to provide for realization of the loan. INVENTORIES Inventory balances are summarized as follows:
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 ======= =======
F-17 35 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net realized gains (losses) on the sale of these securities totaled $(185,000) and $134,000 in 1993 and 1992, respectively, and have been included in the determination of income. At December 31, 1993, the value of marketable equity securities exceeded their cost by $265,000, while at December 31, 1992, unrealized losses on these securities of $201,000 were recorded to a valuation allowance and included in shareholders' equity. The market value of debt securities approximates cost. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accounts payable, accrued expenses and other current liabilities, including $31,392,000 in 1993 and $44,274,000 in 1992 due to Eastman Kodak Company, are summarized as follows:
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 F-18 36 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) available as collateral are, in the aggregate, $23,681,000. At December 31, 1993, $1,846,000 was outstanding under the agreement while no amounts were outstanding at December 31, 1992. During 1992, in order to provide additional working capital and for general corporate purposes, an Actava Sports subsidiary entered into a one-year Revolving Loan Agreement with a financial institution to provide up to $6,500,000 for working capital. Interest is payable at the prime rate of the financial institution. The loan is unsecured and requires the subsidiary to comply with various restrictive financial covenants. In August, 1993, the agreement was amended to increase the facility limit to $8,000,000 for a six-month period beginning September 1, 1993, and to extend the term of the agreement until August 31, 1994. At December 31, 1993, $2,700,000 was outstanding under the Agreement while no amounts were outstanding at December 31, 1992. In April 1993, a Revolving Loan and Security Agreement with respect to a revolving credit facility of up to $10,000,000 was entered into by an Actava Sports subsidiary. Interest is payable at the prime rate plus 1%. The agreement provides for a facility fee of $25,000. The loan is principally secured by certain receivables and inventory of the subsidiary and requires the subsidiary to comply with various restrictive financial covenants. The assets which serve as collateral are determined by reference to the outstanding balance under the credit agreement and the qualification of the assets as collateral is defined in the credit agreement; however, the assets potentially available as collateral are, in the aggregate, $12,881,000. At December 31, 1993 and 1992, no amounts were outstanding under the agreement. In December 1993, an Actava Sports subsidiary, DP, entered into a Finance and Security Agreement with two financial institutions in order to provide up to $50,000,000 of working capital under a revolving credit facility. The agreement is secured by certain receivables, inventories, property, plant and equipment, and intangibles, as well as DP's issued and outstanding common stock and requires compliance with various restrictive financial covenants. The assets which serve as collateral are determined by reference to the outstanding balance under the credit agreement and the qualification of the assets as collateral is defined in the credit agreement; however, the assets potentially available as collateral are, in the aggregate, $109,000,000. As of March 29, 1994, effective December 31, 1993, various provisions of the Agreement, including the financial covenants, were amended. Interest is payable at the prime rate plus 1 1/2%. The Agreement provides for an annual facility fee of $375,000. At December 31, 1993, $36,178,000 was outstanding under the agreement. Long-term debt is summarized as follows:
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, F-19 37 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1993, $10,000,000 was outstanding under the agreement while no amounts were outstanding at December 31, 1992. The Qualex Credit Agreement and the Shareholders' Agreement with Eastman Kodak Company restrict the amount of net assets of Qualex which may be transferred to Actava by dividend or other means. At December 31, 1993, approximately $166,000,000 of the $194,000,000 representing Actava's share of the net assets of Qualex was restricted under the terms of these agreements. Collateral for certain of the long-term debt includes real property. Assets pledged as collateral under the borrowings are not material. Maturities of long-term and subordinated debt are $15,142,000 in 1995, $35,172,000 in 1996, $75,783,000 in 1997 and $59,121,000 in 1998. The fair value of Actava's long-term and subordinated debt, including the current portion, at December 31, 1993 is estimated to be approximately $445,000,000 and was estimated at $425,000,000 at December 31, 1992. This estimate is based on a discounted cash flow analysis using Actava's current incremental borrowing rates for similar types of agreements and on quoted market prices for issues which are traded. Actava does not anticipate settlement of long-term debt at fair value and currently does not intend to pay the debt prior to maturity. SUBORDINATED DEBT Subordinated debt is summarized as follows:
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. F-20 38 THE ACTAVA GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Actava, at its option, may redeem the Senior Subordinated Swiss Franc Bonds at 101.0% plus accrued interest for one year subsequent to March 6, 1994 and at decreasing amounts thereafter. The Bonds include a covenant which restricts the amount of stockholders' equity available for cash dividends and the cash redemption of capital stock. At December 31, 1993, $3,412,000 was available for these purposes pursuant to this covenant. In 1987 Actava issued $75,000,000 of 6 1/2% Convertible Subordinated Debentures due in 2002 in the Euro-dollar market. The Debentures are convertible into Actava's Common Stock at a conversion price of $41 5/8 per share. At Actava's option the Debentures may be redeemed at 101% plus accrued interest prior to August 4, 1994 and at 100% thereafter. The 9 7/8% Senior Subordinated Debentures are redeemable at the option of Actava at 101.555% of the principal amount plus accrued interest if redeemed prior to March 15, 1994, and at decreasing prices thereafter. Mandatory sinking fund payments of $3,000,000 (which Actava may increase to $6,000,000 annually) began in 1982 and are intended to retire, at par plus accrued interest, 75% of the issue prior to maturity. At the option of Actava, the 10% Subordinated Debentures are redeemable, in whole or in part, at the principal amount plus accrued interest. Sinking fund payments of 10% of the outstanding principal amount commenced in 1989; however, Actava receives credit for Debentures redeemed or otherwise acquired in excess of sinking fund payments. REDEEMABLE COMMON STOCK Redeemable common stock represents 1,090,909 shares of common stock which were issued in the acquisition of substantially all the assets and liabilities of Diversified Products Corporation. These shares are subject to a right of redemption at the option of the holder with an exercise date, as amended on August 17, 1994, of February 7, 1995. CAPITAL STOCK Preferred and Preference Stock There are 5,000,000 authorized shares of Preferred Stock and 1,000,000 authorized shares of Preference Stock, none of which were outstanding or designated as to a particular series at December 31, 1993. Common Stock There are 100,000,000 authorized shares of Common Stock, $1 par value. At December 31, 1993, 1992 and 1991 there were 17,635,186, 16,544,277 and 16,544,027 shares issued and outstanding, respectively, after deducting 6,223,467, 6,223,467 and 6,223,717 treasury shares, respectively, and after the issuance of 1,090,909 shares of redeemable common stock during the year ended December 31, 1993. Actava has reserved the shares of Common Stock listed below for possible future issuance:
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 39 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 40 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 41 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 42 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 43 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 44 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 45 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 46 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 47 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 48 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 49 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-----