Definitive Proxy Solicitation Material — Schedule 14A
Filing Table of Contents
Document/Exhibit Description Pages Size
1: DEF 14A Definitive 14A 142 767K
2: EX-1 Form 10K/A (6/18/97) 117 630K
3: EX-2 Form 10-Q (3/31/97) 38 191K
4: EX-3 Form 8-K (2/11/97) 5 11K
5: EX-4 Form 8-K (5/2/97) 4 18K
6: EX-5 Form 10-K/A (7/13/95) 35 192K
7: EX-6 Form 10-K (3/31/96) 19 104K
8: EX-7 Form 8-A (10/30/95) 9 19K
EXHIBIT 5
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, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule 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, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in the notes to consolidated financial statements, in 1993
Actava changed in its method of accounting for postretirement benefits, and in
1992 Actava changed its method of accounting for the cost of its proof
advertising program.
ERNST & YOUNG LLP
Atlanta, Georgia
March 10, 1995
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
December 31,
----------------------------
1994 1993
-------- --------
(In thousands)
ASSETS
Current Assets
Cash and cash equivalents .............................................. $ 47,916 $ 18,770
Short-term investments ................................................. 14,321 29,635
Receivables (less allowance for doubtful accounts of $6,851 in 1994 and
$10,227 in 1993) ..................................................... 132,948 276,018
Note receivable from Eastman Kodak Co. (less allowance for unearned
discount of $3,635 in 1994) .......................................... 96,365 --
Note receivable from Metromedia Company ................................ 32,395 --
Current portion of note receivable from Triton Group Ltd. .............. 6,250 3,750
Inventories ............................................................ 13,403 108,439
Prepaid expenses and other assets ...................................... 7,384 43,809
Income tax benefits .................................................... 6,911 28,894
--------- -----------
Total current assets ............................................... 357,893 509,315
Investment in Roadmaster Industries, Inc. ................................ 68,617 --
Property, plant and equipment
Land ................................................................... 1,471 8,303
Buildings and improvements ............................................. 11,802 72,289
Machinery and equipment ................................................ 61,629 393,643
--------- -----------
74,902 474,235
Less allowances for depreciation ....................................... (40,005) (198,881)
--------- -----------
Total property, plant and equipment ................................ 34,897 275,354
Note receivable from Triton Group Ltd., less current portion ............. 16,726 22,976
Other assets (less allowances for doubtful notes and accounts of $3,988 in
1993) .................................................................. 15,013 50,702
Long-term investments .................................................... -- 26,611
Intangibles (less accumulated amortization of $88,281 in 1993) ........... 633 386,626
--------- -----------
Total assets ....................................................... $ 493,779 $ 1,271,584
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ....................................................... $ 8,397 $ 86,163
Accrued expenses and other current liabilities ......................... 83,256 186,515
Notes payable .......................................................... 64,573 135,114
Current portion of long-term debt ...................................... 417 2,915
Current portion of subordinated debt ................................... 33,827 3,750
Redeemable common stock ................................................ 12,000 --
--------- -----------
Total current liabilities .......................................... 202,470 414,457
Deferred income taxes .................................................... 6,911 44,380
Long-term debt ........................................................... 2,547 220,887
Subordinated debt ........................................................ 157,193 190,551
Minority interest in photofinishing subsidiary ........................... -- 205,395
Redeemable common stock .................................................. -- 12,000
Stockholders' equity
Common stock (22,767,485 shares in 1994 and 22,767,744 in 1993) ........ 22,768 22,768
Additional capital ..................................................... 35,482 46,362
Retained earnings ...................................................... 173,639 236,333
Less treasury stock -- at cost (5,490,327 shares in 1994 and
6,223,467 shares in 1993) ............................................ (107,231) (121,549)
--------- -----------
Total stockholders' equity ......................................... 124,658 183,914
--------- -----------
Total liabilities and stockholders' equity ......................... $ 493,779 $ 1,271,584
========= ===========
See Notes to Consolidated Financial Statements.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Years Ended December 31,
---------------------------------------
1993 1992
1994 (Restated) (Restated)
-------- ---------- ----------
(In thousands except per share
amounts)
Net sales ................................................................ $ 551,828 $ 465,812 $ 377,890
Costs, expenses and other costs of products sold ......................... 461,175 401,471 283,635
Selling, general and administrative ...................................... 86,470 85,179 74,946
Interest expense ......................................................... 28,434 26,811 20,811
Provision for doubtful accounts .......................................... 3,204 4,661 2,941
Income from equity investment in Roadmaster Industries, Inc. ............. (365) -- --
Other (income) expenses - net ............................................ (4,934) 1,706 (4,651)
Provision for plant closure costs ........................................ -- (865) (1,132)
Provision for employee agreements and related costs ...................... 1,300 -- --
--------- --------- ---------
Total costs, expenses and other ...................................... 575,284 518,963 376,550
Income (loss) before income taxes, discontinued operations,
extraordinary loss and cumulative effect of changes in accounting
principles ............................................................. (23,456) (53,151) 1,340
Income tax expense (benefit) ............................................. -- (1,435) 1,662
--------- --------- ---------
Loss from continuing operations .......................................... (23,456) (51,716) (322)
Income (loss) from discontinued operations ............................... (40,693) (8,526) 10,887
--------- --------- ---------
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles ............................................... (64,149) (43,190) 10,565
Extraordinary loss related to Swiss Franc Bonds .......................... (1,601) -- --
--------- --------- ---------
Income (loss) before cumulative effect of changes in accounting
principles ............................................................. (65,750) (43,190) 10,565
Cumulative effect of changes in accounting principles .................... -- (4,404) 1,034
--------- --------- ---------
Net income (loss) ........................................................ $ (65,750) $ (47,594) $ 11,599
========= ========= =========
Earnings (loss) per share of common stock
Primary
Continuing operations .................................................. $ (1.29) $ (3.01) $ (.02)
Discontinued operations ................................................ (2.24) .49 .66
Extraordinary loss ..................................................... (.09) -- --
Cumulative effect of changes in accounting principles .................. -- (.25) .06
--------- --------- ---------
Net income (loss) ........................................................ $ (3.62) $ (2.77) $ .70
========= ========= =========
Pro forma effect assuming the changes in accounting principles are applied
retroactively:
Net income (loss) ........................................................ $ (65,750) $ (43,190) $ 10,565
========= ========= =========
Net income (loss) per share .............................................. $ (3.62) $ (2.52) $ .64
========= ========= =========
See Notes to Consolidated Financial Statements.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Years Ended December 31,
---------------------------------------
1993 1992
1994 (Restated) (Restated)
-------- ------------ ------------
(In thousands)
Cash Flows from Operating Activities:
Net loss from continuing operations ................................. $ (23,456) $ (56,120) $ (322)
Less: Cumulative effect of change in accounting principle ......... -- (4,404) --
--------- --------- ---------
Loss before cumulative effect of change in accounting principle and
extraordinary item .............................................. (23,456) (51,716) (322)
Less: Items providing (using) cash from continuing operating
activities ...................................................... 24,215 (16,082) (44,181)
--------- --------- ---------
Net cash provided by (used in) continuing operations .............. 759 (67,798) (44,503)
--------- --------- ---------
Income (loss) from discontinued operations .......................... (40,693) 8,526 11,921
Less: Cumulative effect of change in accounting principle ......... -- -- 1,034
--------- --------- ---------
Income before cumulative effect of change in accounting principle . (40,693) 8,526 10,887
Less: Items providing cash from discontinued operations ........... 37,862 46,325 57,895
--------- --------- ---------
Net cash provided by (used in) discontinued operations ............ (2,831) 54,851 68,782
--------- --------- ---------
Net cash provided by (used in) all operations ..................... (2,072) (12,947) 24,279
Cash Flows from Investing Activities:
Repayment of advance to businesses sold ........................... 10,502 -- --
Purchases of investments (maturities over 90 days) ................ (52,584) (99,510) (99,198)
Sales of investments (maturities over 90 days) .................... 63,036 111,851 107,932
Net sales of other investments .................................... 4,862 21,866 6,143
Purchase of long-term investments ................................. -- -- (24,719)
Payments for property, plant and equipment ........................ (25,022) (55,554) (81,800)
Proceeds from disposals of property, plant and equipment .......... 4,551 16,024 10,230
Proceeds from the sale of businesses .............................. 50,000 -- --
Payments for purchases of businesses net of cash required ......... -- (9,415) (30,560)
Loans to Triton Group Ltd. ........................................ 3,750 5,000 (1,426)
Loans to Metromedia Company ....................................... (32,395) -- --
Other investing activities -- net ................................. (6,515) (15,221) (3,604)
--------- --------- ---------
Net cash provided by (used in) investing activities ............... 20,185 (24,959) (117,002)
--------- --------- ---------
Cash Flows from Financing Activities:
Net borrowings (payments) under short-term bank agreements ........ (13,076) 52,284 51,107
Borrowings under long-term debt agreements ........................ 228,579 21,503 817,000
Payments on long-term debt agreements ............................. (195,046) (21,192) (771,136)
Payments of subordinated debt ..................................... (3,750) (1,847) (200)
Proceeds from issuance of Actava common stock ..................... 4,776 -- --
Cash dividends paid by Qualex to minority interest ................ (10,450) (8,614) (3,886)
Cash dividends paid by Actava ..................................... -- (6,250) (5,956)
--------- --------- ---------
Net cash provided by financing activities ......................... 11,033 35,884 86,929
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ................ 29,146 (2,022) (5,794)
Cash and cash equivalents at beginning of year ...................... 18,770 20,792 26,586
--------- --------- ---------
Cash and cash equivalents at end of year ........................ $ 47,916 $ 18,770 $ 20,792
========= ========= =========
See Notes to Consolidated Financial Statements.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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Common Stock Treasury Stock
------------ Additional Retained --------------
Shares Amount Capital Earnings Shares Amount Total
------ ------ ------- -------- ------ ------ -----
(In thousands)
Balance -- January 1, 1992 ................ 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 loss 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
Net loss for the year ................... (65,750) (65,750)
Common Stock issued ..................... (9,542) (733) 14,318 4,776
Net unrealized loss on available-for-sale
securities ............................ (609) (609)
Other, principally foreign currency
translation adjustment ................ (1,338) 3,665 2,327
------ -------- ------- -------- ----- --------- --------
Balance -- December 31, 1994 .............. 22,768 $ 22,768 $35,482 $173,639 5,490 $(107,231) $124,658
====== ======== ======= ======== ===== ========= ========
See Notes to Consolidated Financial Statements.
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. The equity method of accounting is used when
the Company has a 20% to 50% interest in other companies. Under the equity
method, original investments are recorded at cost and adjusted by the Company's
share of undistributed earnings or losses of these companies. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Investments
The Company and its subsidiaries invest in various debt and equity
securities. In May, 1993, the Financial Accounting Standards Board 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 stockholders' equity. The
Company adopted the provisions of the new standard for investments held as of or
acquired after January 1, 1994. In accordance with the Statement, prior period
financial statements have not been restated to reflect the change in accounting
principle. The cumulative effect of adopting Statement 115 as of January 1, 1994
was not material.
Management determines the appropriate classification of investments as
held-to-maturity or available-for-sale at the time of purchase and reevaluates
such designation as of each balance sheet date. The Company has classified all
investments as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported in
stockholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment 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.
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 was placed by the customer. Under the proof advertising program,
Qualex reimbursed 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 believed that this new method was
preferable because it recognized advertising expense as it was incurred rather
than at the time of the initial sale to the customer. The 1992 adjustment of
$1,034,000 was included in the cumulative effect of change in accounting
principle for 1992 to apply retroactively the new method. The pro forma amounts
presented in the consolidated statements of operations for 1992 and 1991 reflect
the effect of the retroactive application of applying the new method.
Production advertising costs are expensed in the period incurred. The
costs of communicating advertising are expensed at the time of communication.
Amounts paid in advance for communicating advertising are reported as prepaid
expenses. Total advertising expense was $15,178,000, $12,624,000 and $16,120,000
for
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1994, 1993 and 1992, respectively. Total prepaid advertising was $4,751,000 at
December 31, 1994. There were no prepaid advertising costs at December 31, 1993.
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 and also included customer lists and covenants not
to compete in prior years. 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, unless acquired prior to November 1, 1970.
Amounts relating to customer lists and covenants not to compete were amortized
over two to five years or the life of the agreement, respectively. Management
continuously evaluates intangible assets to determine that no diminishment in
value has occurred. Management evaluates intangible assets on the basis of the
operations of the particular entity to which the intangible relates to determine
whether any changes in the nature and expected benefits to be derived from the
intangible have occurred which would require an adjustment to its recorded
value. In the event management believes that the recorded value of the
intangible is greater than its actual value, the Company will write-down the
value of the intangible. In conjunction with the evaluation of any possible
impairment of its intangibles, the Company also similarly assesses whether a
change in the life of the intangible is required for amortization purposes.
Intangible assets are summarized as follows (in thousands):
[Enlarge/Download Table]
December 31,
---------------------------------
1994 1993
------- ---------
Excess of purchase price over net assets of businesses acquired ........ $633 $349,546
Customer lists ......................................................... -- 29,847
Covenants not to compete ............................................... -- 7,233
---- --------
$633 $386,626
==== ========
Income Taxes
Income taxes are provided for all taxable items in the statements of
operations regardless of when these items are reported for Federal income tax
purposes. Actava elects to utilize certain provisions of the Federal income tax
laws to reduce current taxes payable. Deferred income taxes are provided for
temporary differences in recognition of income and expenses for tax and
financial reporting purposes.
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Under Statement 109, the liability method is used
in accounting for income taxes: deferred tax assets 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.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As permitted by Statement 109, the Company elected not to restate the
financial statements of any prior years. The cumulative effect of the change in
accounting principle on pre-tax income from continuing operations, net income
and financial position was not material.
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 are recognized when the products are shipped to customers.
Index Protection Agreements
The Company used index protection agreements to hedge interest rate risk
associated with Qualex's borrowings and to hedge the risk of market price
fluctuations of commodities bought and sold in the normal course of business.
These contracts were accounted for as hedges and any gains or losses were
deferred and included in the basis of the underlying transactions. Cash flows
from the contracts were accounted for in the same categories as the cash flows
from the items being hedged. As of December 31, 1994, the Company did not have
any index protection agreements due to the sale of Qualex. See "Photofinishing
Transaction and Discontinued Operation."
During 1993, Qualex entered into a hedge agreement with a bank which was
to expire in 1996 related to Qualex's $200,000,000 of Senior Notes. The hedge
agreement included a Basic Transaction for a notional amount of $100,000,000
under which Qualex paid an interest rate based on the three-month London
Interbank Offered Rate (LIBOR) and received a fixed interest rate of 4.0587%
quarterly, and an Enhancement Transaction for a notional amount of $163,000,000
under which Qualex paid an interest rate based on the three-month LIBOR and
received a variable interest rate based on the prime rate less 2.49%. A net
settlement was calculated and paid on a quarterly basis. At December 31, 1993,
termination of this rate swap agreement would have required a cash payment by
Qualex of $1,158,000 based on market quotes.
Qualex had also entered into combined put/call agreements which provided
protection for silver recoveries from photofinishing processes. The outstanding
contracts at December 31, 1993 covered 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 had 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, gain amortization
related to these contracts totaled $2,445,000 and $1,232,000, net of tax, and is
included in income from discontinued operations. At December 31, 1993 and 1992,
respectively, $7,442,000 and $11,476,000 of these gains were recorded as
deferred income. At December 31, 1993, termination of the combined put/call
agreements would have required cash payments by Qualex of $18,688,000 based on
market quotes.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Hedging Instruments
At December 31, 1994, the Company had entered into several forward
exchange contracts in the aggregate notional amount of $8,000,000 to effectively
hedge amounts due from foreign subsidiaries. The contracts are accounted for as
hedges and any gains or losses are deferred and included in the basis of the
underlying transaction. The contracts matured or will mature in 1995.
Termination of these forward exchange contracts at December 31, 1994 would
require the Company to make cash payments of $39,000, based on quoted market
prices of comparable contracts or current settlement values. The table below
summarizes by currency the contractual amounts of the Company's forward exchange
contracts at December 31, 1994:
Forward
Exchange Unrealized
Contracts Gain/(Loss)
----------- --------
Belgian Franc ................................. $ 1,400,000 $ (9,000)
French Franc .................................. 2,600,000 (9,000)
Deutschemark .................................. 2,600,000 (17,000)
Pound Sterling ................................ 1,400,000 (4,000)
----------- --------
$ 8,000,000 $(39,000)
=========== ========
Research and Development Costs
Research and development expenditures are expensed when incurred. During
1994, 1993 and 1992 the Company expensed $5,972,000, $4,407,000 and $4,262,000,
respectively.
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. 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.
Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are recorded as current expenses. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable and when the
cost can be reasonably estimated.
Reclassifications
Certain reclassifications were made in prior years' financial statements
to conform to current presentations.
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 (in thousands):
[Enlarge/Download Table]
Years Ended December 31,
-------------------------------
1993 1992
1994 (Restated) (Restated)
--------- -------- --------
Items providing (not providing) cash from continuing operations:
Income from equity investment in Roadmaster Industries,
Inc. ................................................................ $ (365) $ -- $ --
Depreciation ........................................................... 12,832 11,472 8,638
Amortization ........................................................... 504 631 108
Provision for doubtful accounts ........................................ 3,204 4,661 2,941
Provision for plant closure costs ...................................... -- (865) (1,132)
Changes in operating assets and liabilities, net of effects from purchases
and dispositions:
Accounts receivable .................................................... (8,607) (34,319) (45,283)
Inventories ............................................................ 13,908 (17,529) (7,259)
Prepaid expenses and other assets ...................................... (2,742) 1,591 (1,616)
Accounts payable, accrued expenses and other current
liabilities ........................................................... 3,230 17,814 (14,350)
Current and deferred taxes ............................................. 574 88 14,790
Other operating activities - net ....................................... 1,677 374 (1,018)
--------- -------- --------
Net items providing (using) cash from continuing operations .............. $ 24,215 $(16,082) $(44,181)
========= ======== ========
Items providing (not providing) cash from discontinued operations:
Minority interest ...................................................... $ (2,835) $ 8,526 $ 11,922
Loss on disposal ....................................................... 37,858 -- --
Depreciation ........................................................... 16,780 33,193 26,392
Amortization ........................................................... 11,633 25,149 23,898
Provision for doubtful accounts ........................................ 1,263 2,601 478
Provision for plant closure costs ...................................... 930 4,096 --
Changes in operation of assets and liabilities, net of effects from
purchases and dispositions of discontinued operations:
Accounts receivable .................................................... (14,443) 3,654 19,819
Inventories ............................................................ 1,303 (13,906) 2,496
Prepaid expenses and other assets ...................................... 3,552 (15,503) (22,005)
Accounts payable, accrued expenses and other current
liabilities .......................................................... (7,723) (17,515) (6,647)
Current and deferred taxes ............................................. (10,456) 16,030 1,542
--------- -------- --------
Net items providing cash from discontinued operations .................... $ 37,862 $ 46,325 $ 57,895
========= ======== ========
Net assets of business sold:
Total assets ........................................................... $ 770,901 $ -- $ --
Total liabilities ...................................................... 398,973 -- --
--------- -------- --------
Net assets ............................................................. $ 371,928 $ -- $ --
========= ======== ========
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Years Ended December 31,
-------------------------------------
1993 1992
1994 (Restated) (Restated)
----------- ----------- -----------
Net assets of businesses purchased:
Total assets ................... $ -- $ 71,693 $ 58,040
Total liabilities .............. -- 48,063 27,448
----------- ----------- -----------
Net assets ..................... $ -- $ 23,630 $ 30,592
=========== =========== ===========
Interest paid .................. $ 34,729 $ 44,570 $ 27,279
Income taxes paid .............. $ 393 $ 11,406 $ 3,334
Photofinishing Transaction and Discontinued Operation
Qualex, Inc. is a photofinishing business formed in March 1988 by the
combination of Actava's photofinishing operations with the domestic
photofinishing operations of Eastman Kodak Company. Prior to June 30, 1994,
Actava owned 51% of the voting stock of Qualex, was entitled to and elected a
majority of the members of the Board of Directors of Qualex, and had the ability
through its control of the Board of Directors to declare dividends, remove the
executive officers of Qualex and otherwise direct the management and policies of
Qualex, except for policies relating to certain designated actions requiring the
consent of at least one member of the Board of Directors of Qualex designated by
Kodak. Because of these rights, the Company believes that it had effective
unilateral control of Qualex which was not temporary during the period from 1988
until the second quarter of 1994. As a result, the Company consolidated the
results of operations of Qualex with the results of operations of the Company
for periods ending prior to June 30, 1994 and presented Kodak's portion of
ownership and equity in the income of Qualex as a minority interest.
In June 1994, the Company decided to sell its interest in Qualex and
engaged in negotiations with Kodak regarding the sale of such interest.
Accordingly, the results of Qualex for all years presented are reported in the
accompanying reclassified statements of operations under discontinued
operations. In the second quarter of 1994, the Company provided for an
anticipated loss of $37,858,000 on the sale of its interest in Qualex and the
related covenant not to compete and release. No income tax expenses or benefits
were recognized due to the Company's net operating loss carryforwards and
recognition of tax benefits in prior periods.
On August 12,1994, Kodak purchased all of the Company's interest in Qualex
and obtained a covenant not to compete and related releases from the Company in
exchange for $50,000,000 in cash and a promissory note in the principal amount
of $100,000,000. The promissory note is payable in installments of $50,000,000
each, without interest, on February 13, 1995 and August 11, 1995. Because the
principal amount due under the note does not bear interest, the Company
discounted the value of the note to $92,832,000 and will record imputed interest
income of $7,168,000 over the term of the note. Approximately $3,500,000 of
imputed interest income was recorded during 1994. All amounts received in
exchange for the covenant not to compete and release were included in the
computation of the anticipated loss on the sale of Qualex. The Company received
$50,000,000 under the promissory note on February 13, 1995.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following assets and liabilities of Qualex were included in the
Company's balance sheet at December 31, 1993; however, no assets and liabilities
are included in the Company's balance sheet at December 31, 1994 due to the sale
of the Company's interest in Qualex on August 12, 1994 (in thousands).
FINANCIAL POSITION OF QUALEX
December 31,
1993
--------
Cash and short-term investments ................................. $ 4,060
Net accounts receivable ......................................... 69,015
Inventories ..................................................... 29,381
Other assets .................................................... 38,153
--------
Total current assets ..................................... 140,609
Net property, plant and equipment ............................... 202,150
Other assets .................................................... 30,413
Long-term investments ........................................... 26,611
Intangibles ..................................................... 371,106
--------
Total assets ............................................. $770,889
========
Current liabilities ............................................. $130,845
Deferred income taxes ........................................... 22,446
Long-term debt .................................................. 217,987
Stockholders' equity ............................................ 399,611
--------
Total liabilities and stockholders' equity ............... $770,889
========
The Company's statements of operations for the three years in the period
ended December 31, 1994, have been restated to reflect Qualex as a discontinued
operation. The results of Qualex for these periods through August 12, 1994, the
date of sale of Qualex, are as follows (in thousands):
[Enlarge/Download Table]
1994 1993 1992
--------- --------- ---------
Net sales ........................................... $ 333,970 $ 775,299 $ 770,853
Operating expenses .................................. 342,134 723,952 716,217
--------- --------- ---------
Operating profit (loss) ............................. (8,164) 51,347 54,636
--------- --------- ---------
Interest expense .................................... (8,582) (16,488) (12,643)
Other income (expense) .............................. (439) (1,209) 1,448
--------- --------- ---------
Income (loss) before taxes .......................... (17,185) 33,650 43,441
Income taxes (benefit) .............................. (11,514) 16,598 21,666
--------- --------- ---------
Net income (loss) from discontinued
operations before minority interest ............... (5,671) 17,052 21,775
Minority interest ................................... 2,836 (8,526) (10,888)
--------- --------- ---------
Net income (loss) from discontinued operations ...... $ (2,835) $ 8,526 $ 10,887
========= ========= =========
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
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
could 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 or additional shares
would not increase the cost of DP; any subsequent issuance would only affect the
manner in which the total purchase price was recorded for Actava. This
transaction was accounted for using the purchase method of accounting;
accordingly, the purchased assets and liabilities were recorded at their
estimated fair value at the date of the acquisition. The purchase price resulted
in an excess of costs over net assets acquired of approximately $11,417,000. The
results of operations of the acquired business were included in the
consolidated financial statements from the date of acquisition to the date the
Company transferred ownership of DP to Roadmaster Industries, Inc. See
"Investment in Roadmaster Industries, Inc."
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. (in thousands, except per share amounts):
Pro Forma Year Ended
December 31,
--------------------
1993 1992
---- ----
(Unaudited)
Sales .......................................... $ 519,477 $534,140
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 had the right to require Qualex to
purchase the remaining interest, beginning in 1997, at an amount not to exceed
$18,000,000.
These transactions were accounted for using the purchase method of
accounting, accordingly; the assets and liabilities of the purchased businesses
were 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 for 1992, in addition to $19,215,000 attributed to
customer lists. The results of operations of the businesses acquired were
included in the consolidated financial statements since the dates of
acquisition.
Accounts and Notes Receivable
Receivables from sales of Actava's lawn and garden products amounted to
$137,815,000 and $146,994,000 at December 31, 1994 and 1993, 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 customers financial condition are performed and reserves
for potential credit losses are maintained. Such losses, in the aggregate, have
not exceeded management's expectations.
During 1994, Actava sold its interest in its photofinishing business and
has reclassified the results of its operations as a discontinued operation.
Photofinishing sales in prior years included sales to national, regional and
local retailers located throughout the United States, including mass merchants,
grocery store chains and
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
drug store chains. Photofinishing receivables were $70,744,000 at December 31,
1993 and were generally unsecured and due within 20 days following the end of
each month. Accounts receivable from photofinishing sales at December 31, 1993
included $54,711,000 due from national retail chains. At December 31, 1993,
$9,812,000 was receivable from one such customer on net sales of $84,297,000.
The Company provided an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts receivable. Such
losses were consistently within management's expectations.
During 1994, Actava combined its sporting goods companies with Roadmaster
Industries, Inc. in exchange for common stock of Roadmaster which is accounted
for under the equity method. Receivables in prior years from the sale of
sporting goods were primarily from mass merchants and sporting goods retailers
located throughout the United States. The receivables, which were unsecured,
were $71,836,000 at December 31, 1993, and were generally due within 30 to 60
days. At December 31, 1993, approximately $23,362,000 was due from four
customers. The sporting goods companies maintained allowances for potential
credit losses and such losses, in the aggregate, had not exceeded management's
expectations.
Triton Group Ltd. Loan
At December 31,1994, the Company had a $22,976,000 note receivable from
Triton Group Ltd. secured by 3,690,998 shares of Actava Common Stock. At
December 31, 1993, $26,726,000 was outstanding under the loan and was secured
by 4,413,598 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 1/4% 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 in full. The Stockholder Agreement was amended to
permit Triton to designate two directors (who are not officers or employees of
Triton) on an expanded nine-member Board of Directors so long as Triton
continues to own 20% or more of Actava's outstanding Common Stock.
Triton filed a motion on July 30, 1993, with the United States Bankruptcy
Court for the Southern District of California seeking to modify Triton's
recently approved Plan of Reorganization. The modifications sought by Triton
would have amended or eliminated the collateral maintenance (margin call)
provisions that are an integral part of the Amended and Restated Loan Agreement.
On August 2, 1993, the Bankruptcy Court entered a temporary restraining order
suspending the effectiveness of the margin call provisions until the Court had
an opportunity to hear Triton's motion seeking preliminary injunction. The
motion seeking a preliminary injunction was heard on August 10, 1993, and was
denied. Triton then withdrew its motion to modify its Plan of Reorganization.
Therefore, the provisions of the Amended and Restated Loan Agreement continue to
remain in effect. On August 19, 1993, the Amended and Restated Loan agreement
was amended to allow Triton to satisfy certain margin call requirements by
making deposits to a Collateral Deposit Account in lieu of delivering
certificates of deposit. The margin call provisions for principal repayments and
transfers of shares of Company Common Stock were not amended. On December 7,
1993, the Amended and Restated Loan Agreement was amended, in connection with a
$5,000,000 prepayment of principal received on December 7, 1993, to provide for
quarterly principal payment installments of $1,250,000 due on the last day of
each quarter of each year beginning March 31, 1994, with any unpaid principal
and accrued interest due on April 1, 1997. The Agreement was also amended to
require 75,000 additional shares of Actava Common Stock to be pledged as
collateral and to modify the margin call provisions of the Agreement to provide
a $7.50 minimum per share value of Actava Common Stock for purposes of
determining the amount of any margin call mandatory payments. These
modifications limit the circumstances under which Triton must pledge additional
collateral
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
for the loan: however, 3,690,998 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 10, 1995, the pledged shares had a market value of $36,449,000 as
compared to the loan balance of $22,976,000. In the opinion of management, the
shares held as collateral are, and will continue to be, sufficient to provide
for realization of the loan.
Metromedia Company Loan
On August 31, 1994, the Company entered into letters of intent providing
for a proposed combination of the Company with Orion Pictures Corporation
("Orion"), MCEG Sterling Incorporated ("Sterling") and Metromedia International
Telecommunications Inc. ("MITI") (the "Proposed Metromedia Transaction").
Metromedia Company ("Metromedia") and its affiliates control in excess of 50% of
the voting power of both Orion and MITI. Pursuant to the letters of intent, the
Company and Metromedia entered into a Credit Agreement dated as of October 11,
1994 (the "Credit Agreement") under which the Company will make loans to
Metromedia in an amount not to exceed an aggregate of S55,000,000. Under the
terms of the Credit Agreement, Metromedia will use the proceeds of the loans to
make advances to or to pay obligations on behalf of Orion, Sterling and MITI.
All loans made by the Company to Metromedia under the Credit Agreement are
secured by shares of stock of Orion and MITI owned by Metromedia and its
affiliates. In addition, a general partner of Metromedia has personally
guaranteed the loans. The Credit Agreement provides that interest will be due on
the principal amount of all loans at an annual rate equal to the prime rate
announced from time to time by Chemical Bank. Interest will be increased to
prime plus three percent per annum if a party other than the Company terminates
discussions relating to the Proposed Metromedia Transaction. All loans are due
and payable on April 12, 1995. The outstanding balance under the Credit
Agreement as of December 31, 1994 was $32,395,000.
Inventories
Inventory balances are summarized as follows (in thousands):
December 31,
-----------------------
1994 1993
--------- ---------
Finished goods and goods purchased for resale .. $ 12,618 $ 82,559
Raw materials and supplies ..................... 15,395 46,018
--------- ---------
28,013 128,577
Reserve for LIFO cost valuation ................ (14,610) (20,138)
--------- ---------
$ 13,403 $ 108,439
========= =========
Work in process is not considered significant.
During 1994, 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 the net loss by
approximately $1,200,000 and decreased loss per share of common stock by $.07.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments
All of the Company's investments are classified as available-for-sale and
are summarized as follows (in thousands):
[Enlarge/Download Table]
Available-for-Sale Securities
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
December 31, 1994
U.S. securities .................... $ 13,261 $ -- $ 559 $ 12,702
Other debt securities .............. 1,669 -- 50 1,619
--------- --------- --------- ---------
Total debt securities ....... $ 14,930 $ -- $ 609 $ 14,321
========= ========= ========= =========
[Enlarge/Download Table]
Available-for-Sale Securities
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
December 31, 1993
Short-term:
U.S. securities ..................... $ 26,460 $ 147 $ -- $ 26,607
Other debt securities ............... 3,175 -- -- 3,175
--------- --------- --------- ---------
Total short-term debt securities $ 29,635 $ 147 $ -- $ 29,782
========= ========= ========= =========
Long-term:
Equity securities ................... $ 15,850 $ 275 $ 10 $ 16,115
U.S. securities ..................... 7,758 -- 39 7,719
Other debt securities ............... 3,003 11 17 2,997
--------- --------- --------- ---------
Total long-term debt securities $ 26,611 $ 286 $ 66 $ 26,831
========= ========= ========= =========
The gross realized gains for 1994 on sales of available-for-sale
securities totaled approximately $205,000 and the gross realized losses totaled
approximately $240,000. The net adjustment to unrealized holding losses on
available-for-sale securities included as a separate component of shareholders'
equity totaled $609,000 in 1994.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1994 by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
the issuers of the securities may have the right to prepay obligations without
prepayment penalties.
Estimated
Amortized Fair
Cost Value
--------- ---------
Available-for-Sale
Due after one year through three years ..... $ 8,174 $ 7,872
Due after three years ...................... 6,756 6,449
--------- ---------
Total ............................ $ 14,930 $ 14,321
========= =========
All available-for-sale securities are classified as current since they are
available for use in the Company's current operations.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investment in Roadmaster Industries, Inc.
On December 6, 1994, the Company transferred ownership of its four
sporting goods subsidiaries to Roadmaster Industries, Inc. in exchange for
19,169,000 shares of Roadmaster's Common Stock. As of December 31, 1994, the
Company owned 39% of the issued and outstanding shares of Roadmaster's Common
Stock based on approximately 48,600,000 shares of Roadmaster's Common Stock
outstanding. The four Actava subsidiaries transferred to Roadmaster were
Diversified Products Corporation, Hutch Sports USA Inc., Nelson/Weather-Rite,
Inc. and Willow Hosiery Company, Inc. No gain or loss was recognized for this
nonmonetary transaction. The Company's initial investment in Roadmaster was
recorded at approximately $68,300,000 and is accounted for by the equity method.
The excess of the Company's investment in Roadmaster over its share in the
related underlying equity in net assets is being amortized on a straight-line
basis over a period of 40 years. The remaining unamortized balance at December
31, 1994 was $28,855,000.
The quoted market value of the Company's investment in Roadmaster common
stock as of December 31, 1994, was $3.625 per share or a total value of
$69,488,000 and as of March 10, 1995, was $3.00 per share or a total value of
$57,507,000.
Summarized financial information for Roadmaster is shown below (in
thousands):
Roadmaster Industries, Inc.
Year Ended December 31,
------------------------------
1994 1993 1992
---- ---- ----
Net sales ........................ $455,661 $312,160 $226,201
Gross profit ..................... 66,790 48,129 35,250
Net income ....................... 5,000 7,633 3,697
December 31,
---------------------
1994 1993
---- ----
Current assets ......................... $358,169 $223,541
Non-current assets ..................... 158,478 58,234
Current liabilities .................... 181,778 100,723
Non-current liabilities ................ 231,772 162,054
Minority interest ...................... -- 622
Redeemable common stock ................ 2,000 2,000
Total stockholders' equity ............. 101,097 16,376
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities, including $31,392,000 in
1993 due to Eastman Kodak Company, are summarized as follows (in thousands):
December 31,
----------------
1994 1993
---- ----
Accrued salaries and wages ......................... $ 1,370 $ 8,363
Accrued interest ................................... 8,176 14,471
Accrued advertising and promotion .................. 987 25,238
Deferred income .................................... -- 13,791
Self-insurance claims payable ...................... 30,442 35,070
Reserve for relocation and consolidation of
photofinishing operations ........................ -- 6,754
Other .............................................. 42,281 82,828
-------- --------
$ 83,256 $186,515
======== ========
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, recorded on a cash basis, was not
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 1994 is 12%. This
trend rate is assumed to decrease in 1% decrements to 6% in 2001 and years
thereafter. An 8% discount rate per year, compounded annually, was assumed to
measure the accumulated postretirement benefit obligation as of December 31,
1994, as compared to 7% as of December 31, 1993. A 1% increase in the assumed
health care cost trend rate would increase the accumulated postretirement
benefit obligations as of December 31, 1994, by 10% and the net periodic
postretirement benefit cost by 26%.
The following table presents the plans' funded status reconciled with
amounts recognized in the Company's consolidated balance sheet (in thousands):
December 31,
--------------------
1994 1993
-------- --------
Accumulated postretirement benefit obligation:
Retirees ...................................... $ (913) $(1,094)
Fully eligible active plan participants ....... (360) (788)
Other active plan participants ................ (609) (1,149)
------- -------
(1,882) (3,031)
Plan assets ..................................... -- --
------- -------
Accumulated postretirement benefit obligation
in excess of plan assets ...................... (1,882) (3,031)
Unrecognized prior service cost ................. (1,687) (1,995)
Unrecognized net (gain) or loss ................. (181) 544
------- -------
Accrued postretirement benefit cost ............. $(3,750) $(4,482)
======= =======
Net periodic postretirement benefit cost (benefit) includes the following
components (in thousands):
1994 1993
---- ----
Service cost ............................................... $ 89 $ 96
Interest cost .............................................. 139 296
Amortization of unrecognized prior service cost ............ (308) (154)
Amortization of unrecognized gain .......................... (30) --
----- -----
$(110) $ 238
===== =====
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Notes Payable and Long-Term Debt
Qualex had three separate line of credit agreements for working capital
needs for which $3,200,000 was outstanding at December 31, 1993. These
agreements were $5,000,000 each, for a total of $15,000,000. The Company paid a
facility fee of 1/4% per annum on the committed line of credit agreements.
Included in Notes Payable at December 31, 1994 and 1993 is $63,302,000 and
$87,359,000, 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 as defined in the credit agreement; however, the assets potentially
available as collateral are, in the aggregate, $143,343,000. Also included in
notes payable at December 31, 1994 and 1993 is $1,271,000 and $3,890,000,
respectively, under a short-term credit facility with a bank for the Company's
foreign subsidiaries. See Commitments and Contingencies. The interest rate on
the note varied between 5.9% and 7.0% during 1994.
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. The Agreement was transferred in the Roadmaster
business transaction. Interest was payable at the prime rate plus 1 1/4%. The
Agreement provided for a facility fee of $350,000. At December 31, 1994, no
amount is reflected in the balance sheet while $1,846,000 was outstanding at
December 31, 1993.
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. The Agreement was transferred in the Roadmaster
business transaction. Interest was payable at the prime rate of the financial
institution. At December 31, 1994, no amount is reflected in the balance sheet
while $2,700,000 was outstanding at December 31, 1993.
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. The Agreement was transferred in the Roadmaster business
transaction. Interest was payable at the prime rate plus 1%. The Agreement
provided for a facility fee of $25,000. At December 31, 1994 no amount is
reflected in the balance sheet and at December 31, 1993 no amount was
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
was transferred in the Roadmaster business transaction. Interest was payable at
the prime rate plus 1 1/4%. The Agreement provided for an annual facility fee of
$375,000. At December 31, 1994, no amount is reflected in the balance sheet and
at December 31,1993, $36,178,000 was outstanding under the Agreement.
The weighted average interest rate on short-term borrowings was 8.24% and
7.82% for the years ended December 31, 1994 and 1993, respectively.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-term debt is summarized as follows (in thousands):
December 31,
-------------------
1994 1993
-------- --------
Senior notes -- Qualex ................................... $ -- $200,000
Revolving credit agreement -- Qualex ..................... -- 10,000
Capitalized lease obligations ............................ 452 545
Other long-term debt:
Secured (4-9% notes due at various dates to 2002) ....... 1,095 1,900
Unsecured (4-8% notes due at various dates to 2001) .... 1,000 8,442
-------- --------
$ 2,547 $220,887
======== ========
Qualex issued through a private placement $200,000,000 of Senior Notes in
1992 with interest rates ranging from 7.99% to 8.84%.
During 1992, Qualex entered into an unsecured $115,000,000 Revolving
Credit Agreement with eight financial institutions with an expiration date in
May 1995. Interest was payable under three rate options which were determined by
reference to the prime rate, the London interbank offered rate plus 1/2% to
3/4%, and competitive bids. The Agreement provided for a participation fee of
1/8% and an annual facility fee of 1/4%. At December 31, 1994 no amount was
reflected in the balance sheet and at December 31, 1993, $10,000,000 was
outstanding under the agreement.
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 $4,057,000 in 1996, $15,733,000 in 1997,
$59,472,000 in 1998, $4,478,000 in 1999 and $76,000,000 in 2000 and years
thereafter.
The fair value of Actava's long-term and subordinated debt, including the
current portion, at December 31, 1994 is estimated to be approximately
$163,000,000 and was estimated at $436,000,000 at December 31, 1993. These
estimates are 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.
Subordinated Debt
Subordinated debt is summarized as follows (in thousands):
[Enlarge/Download Table]
December 31,
------------------
1994 1993
-------- --------
6% Senior Swiss Franc Bonds due 1996
[redeemed February 17, 1995] ........................................... $ 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 $1,023 in 1994
and $1,308 in 1993 ..................................................... 58,461 58,176
9 7/8% Senior Debentures due 1997, net of unamortized discount of $296 in
1994 and $468 in 1993 .................................................. 20,704 23,532
10% Debentures due 1999 ................................................. 6,703 7,441
-------- --------
191,020 194,301
Less current portion .................................................... 33,827 3,750
-------- --------
$157,193 $190,551
======== ========
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, in effect, made its
interest and principal bond repayments in U.S. dollars without regard to changes
in the currency exchange rate. A default by the counterparty to the swap
agreement would have exposed Actava to potential currency exchange risk on the
remaining bond interest and principal payments in that Actava would have been
required to purchase Swiss francs at current exchange rates rather than at the
swap agreement exchange rate. At December 31, 1994, the swap agreement had an
effective exchange rate over its remaining term of .5255 Swiss francs per U.S.
dollar while the U.S. dollar equivalent market exchange rate was .7644. After
considering the stated interest rate, the cost of the currency swap agreement,
taxes and underwriting commissions, the effective cost of the bonds was
approximately 11.3%. The fair value of the currency swap as of December 31, 1994
and 1993, was $15,820,000 and $10,795,000, respectively; however, domestic
interest rates and foreign currency markets affect this value.
In December, 1994, Actava entered into an agreement to redeem the
outstanding Swiss Franc Bonds at par plus accrued interest and to terminate the
currency swap agreement on February 17, 1995. The Company recorded an
extraordinary loss of $1,601,000 in 1994 related to this early extinguishment of
debt.
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 $4l 3/4 per share. At
Actava's option the Debentures may be redeemed at 100% plus accrued interest
until maturity.
The 9 7/8% Senior Subordinated Debentures are redeemable at the option of
Actava at 101.035% of the principal amount plus accrued interest if redeemed
prior to March 15, 1995, 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. See "Acquisitions." These shares were
redeemed for $12,000,000 on February 17, 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, 1994.
Common Stock
There are 100,000,000 authorized shares of Common Stock, $1 par value. At
December 31, 1994, 1993 and 1992 there were 18,368,067, 17,635,186 and
16,544,277 shares issued and outstanding, respectively, after
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
deducting 5,490,327, 6,223,467 and 6,223,467 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,
-----------------------
1994 1993
--------- ---------
Stock options ...................................... 1,049,750 761,000
6 1/2% Convertible Subordinated Debentures ......... 1,801,802 1,801,802
Restricted stock plan .............................. 102,800 102,800
--------- ---------
2,954,352 2,665,602
========= =========
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, 1992 ............ 55,250 $12 - 28
Exercised ....................................... (250) 12
Canceled ........................................ (17,125) 12 - 28
------- --------
Options outstanding at December 31, 1992 .......... 37,875 12 - 28
Granted ......................................... 20,000 9 - 12
Canceled ........................................ (1,125) 12 - 28
------- --------
Options outstanding at December 31, 1993 .......... 56,750 9 - 28
Granted .......................................... 228,223 8 - 9
Canceled ......................................... (13,750) 12 - 28
------- --------
Options outstanding at December 31, 1994 .......... 271,223 $ 8 - 28
======= ========
During 1994 nonqualified options for 486,777 shares at price ranges of
approximately $6.37 to $9.00 per share were granted.
At December 31, 1994, incentive stock options totaling 124,538 shares were
exercisable at prices ranging from $8.31 to $12.19 and nonqualified options
totaling 569,712 shares were exercisable at prices ranging from $6.37 to $14.50.
There were 209,050 and 591,550 shares under Actava's stock option plans at
December 31, 1994 and 1993, respectively, which were available for the granting
of additional stock options.
Provisions for Plant Closure Costs
In 1994 loss from discontinued operations includes a provision of
$311,600, ($930,000 before income taxes and minority interest for discontinued
operations) or $.02 per share for plant closure costs. The 1993 income from
discontinued operations includes $1,038,000, ($4,096,000 before income taxes and
minority interest for discontinued operations) or $.06 per share for the costs
of closing three of Qualex's photofinishing plants. The provision for plant
closure costs for Qualex included in income from discontinued operations
includes lease termination costs and fixed asset and facility closure costs
which may be incurred over several years based on the remaining terms of the
leases and employee severance and termination costs.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
included in costs of sales in 1992 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. No plant closure costs were provided for in 1994.
During 1993 and 1992, costs of approximately $3,400,000 and $2,100,000,
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 closure costs included
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 included $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.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Changes in the reserve for plant closure costs are as follows (in
thousands):
[Enlarge/Download Table]
Recorded
Charged Through
Charged to Income Purchase
to Provision (Loss) Accounting in
for Plant from the
Closure Discontinued Year of
Costs Operations Acquisition Total
------------ ------------ ------------- --------
Balance at January 1, 1992 ............. $ 7,946 $ 32,482 $ 15,418 $ 55,846
Additions for:
Fixed asset and facility closure costs -- -- 1,244 1,244
Reductions in reserves ............... (1,132) (374) -- (1,506)
------- -------- -------- --------
Total additions (reductions) .... (1,132) (374) (1,244) (262)
------- -------- -------- --------
Costs incurred(b) ...................... (2,360) (23,713) (11,755) (37,828)
------- -------- -------- --------
Balance at December 31, 1992 ........... 4,454 8,395 4,907 17,756
Additions for:
Lease termination costs(a) ........... -- 1,475 -- 1,475
Employee severance & termination of
benefits(a) ......................... -- 1,294 -- 1,294
Fixed asset and facility closure costs -- 1,327 906 2,233
Reduction in reserves ................ (865) -- -- (865)
------- -------- -------- --------
Total additions (reductions) net (865) 4,096 906 4,137
------- -------- -------- --------
Costs incurred(b) ...................... (3,589) (7,437) (4,432) (15,458)
------- -------- -------- --------
Balance at December 31, 1993 ........... -- 5,054 1,381 6,435
Additions for:
Employee severance & termination of
benefits(a) ........................ -- 430 -- 430
Fixed asset and facility closure costs -- 500 -- 500
------- -------- -------- --------
Total additions (reductions) net . -- 930 -- 930
------- -------- -------- --------
Costs incurred(b) ...................... -- (2,628) (670) (3,298)
Disposal of discontinued operations .... -- (3,356) (711) (4,067)
------- -------- -------- --------
Balance at December 31, 1994 ........... $ -- $ -- $ -- $ --
======= ======== ======== ========
----------
(a) Substantially all amounts accrued require future cash expenditures.
(b) Costs were generally incurred in accordance with line item categories as
presented above.
Other Income - Net
Other income net of other (expenses) from continuing operations is
summarized as follows (in thousands):
Years Ended December 31,
---------------------------------
1994 1993 1992
------- ------- -------
Interest and investment income .......... $ 8,415 $ 6,167 $ 5,831
Miscellaneous income (expense) .......... (3,481) (7,873) (1,180)
------- ------- -------
$ 4,934 $(1,706) $ 4,651
======= ======= =======
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 $4,729,000 for 1994, $4,322,000 for 1993 and $2,522,000 for 1992.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes
Income tax expense (benefit) is composed of the following (in thousands):
Years Ended December 31,
-------------------------------
Liability Deferred
Method Method
------------------- --------
1994 1993 1992
-------- -------- --------
Continuing operations:
Current Federal ............................ $ -- $ (1,674) $ (1,316)
Current state .............................. -- 239 156
Deferred federal and state ................. -- -- 2,822
-------- -------- --------
$ -- $ (1,435) $ 1,662
======== ======== ========
Discontinued operations ..................... $ -- $ 16,598 $ 21,666
======== ======== ========
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 (in thousands):
[Enlarge/Download Table]
Years Ended December 31,
------------------------------
Liability Deferred
Method Method
------------------- --------
1994 1993 1992
-------- -------- --------
Continuing operations:
Computed tax at statutory rates ...................... $ (8,210) $(18,603) $ 457
State tax, net of Federal benefit .................... -- 155 103
Effect of tax rate changes on realization of timing
differences ........................................ -- 414 153
Amortization of goodwill ............................. -- 52 51
Undistributed earnings of majority-owned subsidiary .. -- 603 812
Deferred tax valuation allowance ..................... 7,398 16,227 --
Other ................................................ 812 (283) 86
-------- -------- --------
$ -- $ (1,435) $ 1,662
======== ======== ========
Discontinued operations:
Computed tax at statutory rates ...................... $(14,243) $ 11,778 $ 14,769
State tax, net of Federal benefit .................... -- 2,088 3,000
Amortization of goodwill ............................. -- 3,071 3,184
Effect of non-tax basis adjustments in connection with
acquisitions ....................................... -- -- 914
Tax-exempt interest .................................. -- (26) (80)
Dividends received deduction ......................... -- (290) --
Deferred tax valuation allowance ..................... 4,124 -- --
Change due to Qualex sale ............................ 10,119 -- --
Other ................................................ -- (23) (121)
-------- -------- --------
$ -- $ 16,598 $ 21,666
======== ======== ========
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Significant components of deferred tax assets and liabilities at December
31, 1994 and 1993, are as follows (in thousands):
[Enlarge/Download Table]
1994 1993
-------------------------- --------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Net operating loss carryforward ................ $10,873 $30,383
Reserves for losses and write-down of certain
assets ....................................... 11,306 14,885
Reserves for self-insurance .................... 10,059 11,781
Alternative minimum tax credit ................. 10,005 8,805
Provisions for loss on loans and receivables ... 2,280 3,509
Tax amortizable intangible ..................... -- 3,145
State tax accruals ............................. 551 2,676
Gain on hedge transaction ...................... -- 2,609
Obligation for postretirement benefits ......... 1,313 1,966
Reserves for plant relocations and
consolidations ................................ -- 1,541
Charitable contribution carryforward ........... -- 1,053
Imputed interest on interest-free note ......... 1,272
Investment in equity investee .................. 7,805
Other .......................................... 3,567 $ 1,553 9,726 $ 6,670
Investment in less than 80% owned
subsidiary ................................... -- -- -- 28,832
Basis differences in fixed assets .............. -- 5,438 -- 29,387
Purchase of safe harbor lease investment ....... -- 9,472 -- 9,783
Undistributed earnings of majority-owned
subsidiary ................................... -- -- -- 1,282
------- ------- ------- -------
Subtotal ....................................... 59,031 16,463 92,079 75,954
Valuation allowance ............................ 42,568 -- 31,611 --
------- ------- ------- -------
Total deferred taxes ........................... $16,463 $16,463 $60,468 $75,954
======= ======= ======= =======
Net deferred taxes ............................. $ -- $15,486
======= =======
The components of deferred income tax expense (benefit) for the year ended
December 31, 1992 is as follows (in thousands):
Year Ended December 31,
1992
-----------------------
Accelerated depreciation ................................ $ 643
Provision for loss on loans and receivables ............. (281)
Reserves for losses and write-down of certain assets .... 1,030
Plant closure costs ..................................... 1,077
Undistributed earnings of majority-owned subsidiary ..... 547
Other ................................................... (194)
-------
$ 2,822
=======
Actava has a net operating loss carryforward for Federal income tax
purposes of approximately $31,000,000 at December 31, 1994, which will expire in
the year 2008. Actava has an alternative minimum tax
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
credit carryforward of approximately $10,000,000, which may be carried forward
indefinitely, available to offset regular tax in certain circumstances.
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 (in
thousands):
Years Ended December 31,
-------------------------
1994 1993 1992
------- ----- -------
Service cost -- benefits earned during the period .. $ 536 $ 374 $ 705
Interest cost on projected benefit obligation ...... 1,074 961 1,015
Actual return on plan assets ....................... (209) (996) (992)
Net amortization and deferral ...................... (753) 76 (31)
------- ----- -------
$ 648 $ 415 $ 697
======= ===== =======
Assumptions used in the accounting for the defined benefit plans are as
follows:
Years Ended
December 31,
------------------------
1994 1993 1992
---- ---- ----
Weighted-average discount rates .................. 7.1% 7.2% 8.4%
Rates of increase in compensation levels ......... 5.0% 4.7% 6.1%
Expected long-term rate of return on assets ...... 7.2% 7.6% 8.3%
The following tables set forth the funded status and amount recognized in
the Consolidated Balance Sheets for Actava's defined benefit pension plans (in
thousands):
[Enlarge/Download Table]
December 31,
-----------------
1994 1993
------- -------
Plans Whose Assets Exceed Accumulated Benefits
Actuarial present value of benefit obligations:
Vested benefit obligations ........................................... $(3,972) $(4,652)
======= =======
Accumulated benefit obligation ....................................... $(4,360) $(5,232)
======= =======
Projected benefit obligations ........................................ $(4,360) $(5,232)
Plan assets at fair value ............................................ 5,958 6,296
------- -------
Funded status -- plan assets in excess of projected benefit obligation $ 1,598 $ 1,064
======= =======
Comprised of:
Prepaid pension cost ................................................. $ 394 $ 415
Unrecognized net gain (loss) ......................................... 130 (523)
Unrecognized prior service cost ...................................... 172 187
Unrecognized net assets at January 1, 1987, net of amortization ...... 902 985
------- -------
$ 1,598 $ 1,064
======= =======
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
[Enlarge/Download Table]
December 31,
-------------------
1994 1993
-------- --------
Plans Whose Accumulated Benefits Exceed Assets
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $(10,602) $(21,174)
======== ========
Accumulated benefit obligation ....................................... $(10,711) $(22,224)
======== ========
Projected benefit obligation ......................................... $(11,421) $(25,320)
Plan assets at fair value ............................................ 6,287 18,615
-------- --------
Funded status -- projected benefit obligation in excess of plan assets $ (5,134) $ (6,705)
======== ========
Comprised of:
Accrued pension cost ................................................. $ (3,388) $ (4,637)
Unrecognized net (loss) .............................................. (1,824) (2,157)
Unrecognized prior service cost ...................................... (199) (215)
Unrecognized net obligation at January 1, 1987, net of amortization .. 277 304
-------- --------
$ (5,134) $ (6,705)
======== ========
Substantially all of the plan assets at December 31, 1994 and 1993 are
invested in governmental bonds, mutual funds and temporary investments.
The 1993 amounts for plans whose accumulated benefits exceed assets
includes a Qualex retirement plan, which is not included in 1994 due to the sale
of Qualex.
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
$186,000 in 1994, $400,000 in 1993 and $800,000 in 1992 were made to these
plans.
Leases
Actava and its subsidiaries are lessees of warehouses, manufacturing
facilities and other properties under numerous noncancelable leases.
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 (in thousands):
Years Ending Operating Capital
December 31, Leases Leases
------------ --------- -------
1995 ................................................... $ 828 $ 151
1996 ................................................... 291 151
1997 ................................................... 243 151
1998 ................................................... 125 151
1999 ................................................... -- 100
Thereafter ............................................. -- --
------- -----
Total minimum lease payments ........................... $ 1,487 704
=======
Less amounts representing interest ..................... (157)
-----
Present value of net minimum lease payments ............ $ 547
=====
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Rental expense charged to continuing operations for all operating leases
was $5,849,000, $4,641,000 and $3,454,000 for the years ended December 31, 1994,
1993 and 1992, 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.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards Number 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
settlements using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Statement 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used in estimating the fair
value disclosures for financial instruments:
Cash and Cash Equivalents, Receivables, Notes Receivable and Accounts Payable
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, notes receivable and accounts payable approximate
fair values.
Short-term Investments
For short-term investments, fair values are based on quoted market prices.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities or dealer quotes. See "Investments" for
fair values on investment securities.
Long-term and Subordinated Debt
For long-term and subordinated debt, fair values are based on quoted
market prices, if available. If the debt is not traded, fair value is estimated
based on the present value of expected cash flows. See "Notes Payable and
Long-term Debt" for fair values of long-term and subordinated debt.
Litigation
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
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 or
acquisition
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
candidate. These three suits were consolidated on May 1, 1991 into a lawsuit
captioned In re Fuqua Industries, Inc. Shareholders litigation, Civil Action No.
11974. While these actions are in their discovery 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 have not agreed on a
disposition of the case. A trial, if necessary, has been scheduled for June
1995. The DOJ has asserted damages of approximately $3.5 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.
On September 23, 1994, a stockholder of the Company filed a class action
lawsuit against the Company and each of its directors seeking to block the
Proposed Metromedia Transaction. The lawsuit was filed in the Chancery Court for
New Castle County, Delaware and is styled James F. Sweeney, Trustee of Frank
Sweeney Defined Benefit Pension Plan Trust v. John D. Phillips, et. al., Civil
Action No. 13765. The Company and its directors were served with this lawsuit on
September 28, 1994. The complaint alleges that the terms of the Proposed
Metromedia Transaction constitute an overpayment for the assets being acquired
and as a result would result in a waste of the Company's assets. The complaint
further alleges that the directors of the Company would be breaching their
fiduciary duties to the Company's stockholders by approving the Proposed
Metromedia Transaction and that the transaction would result in a change of
voting control without giving stockholders an opportunity to maximize their
investment and the current stockholders of the Company would suffer a dramatic
dilution of their voting rights. The Company and its directors have filed a
motion to dismiss this lawsuit. The stockholder who filed the lawsuit has not
responded to the motion to dismiss. Management believes that the allegations
contained in the complaint are without merit for a variety of reasons, including
the fact that the Company has not entered into a definitive agreement with
respect to the Proposed Metromedia Transaction and the Proposed Metromedia
Transaction has not been approved by the Board of Directors of the Company.
Actava is a defendant in various other legal proceedings. Except as noted
above, 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
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 1994 and 1993,
there were approximately $29,449,000 and $23,000,000, respectively, outstanding
under these floor plan financing arrangements.
Actava is contingently liable under various guarantees of debt totaling
approximately $6,000,000. The debt is primarily Industrial Revenue Bonds which
were issued to finance the manufacturing facilities and equipment of
subsidiaries disposed of prior to 1994, 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
subsidiaries sold prior to 1994. The total future payments under these leases,
including real estate taxes, is estimated to be approximately $3,400,000. The
leased properties generally have financially sound subleases.
In January 1992, Qualex entered into an agreement whereby it sold an
undivided interest in a designated pool of trade accounts receivable on an
ongoing basis. The maximum allowable amount of receivables to be sold, initially
set at $50,00,000, was increased to $75,000,000 in August 1992. As collections
reduced the pool of sold accounts receivable, Qualex sold participating
interests in new receivables to bring the amount sold up to the desired level.
At December 31, 1993, the uncollected balance of receivables sold amounted to
$60,000,000. The proceeds were reported as discontinued operations in the
statement of cash flows and a reduction of receivables in Qualex's balance
sheet. Total proceeds received by Qualex during the year were $519,000,000 for
1993. There has been no adjustment to the allowance for doubtful accounts
because Qualex retained substantially the same risk of credit loss as if the
receivables had not been sold. Qualex paid fees based on the purchaser's level
of investment and borrowing costs. During 1993 and 1992, Qualex recorded
$2,200,000 and $1,100,000, respectively, of these fees as other expenses in
discontinued operations.
Through the date of sale, Qualex had a supply contract with Kodak for the
purchase of sensitized photographic paper and purchased substantially all of the
chemicals used in photoprocessing from Kodak. Qualex also purchased various
other production materials and equipment from Kodak.
Former subsidiaries of the Company handled and stored various materials in
the normal course of business that have been classified as hazardous by various
Federal, state and local regulatory agencies and for which the Company may be
liable. As of December 31, 1994, the Company is continuing to participate in
testing or is conducting tests at the sites where these materials were stored
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. 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, but an estimate of costs exceeding those previously
recognized cannot be made at this time.
The Company, through a wholly owned subsidiary, presently owns real
property in Opelika, Alabama which was previously owned by DP, a former
subsidiary of the Company. DP previously stored cement, sand and mill scale
materials needed for or resulting from the manufacture of exercise weights on
the property. Although these materials have not been determined to be hazardous
by a regulatory agency, the Company is involved in a cleanup of this site. The
Company cannot predict with certainty the total cost of this cleanup; however,
based upon, among other things, past experience and preliminary site studies,
the Company presently believes total costs will be approximately $1.9 million. A
reserve of this amount has been recorded to provide for these cleanup costs. The
Company is not entitled to any recoveries for these costs from any other party.
Although this liability has been recorded currently, cleanup expenditures
generally are incurred over an extended period of time and the Company expects
the cleanup of this site to take several years. Cleanup expenditures related to
this site were approximately $10,000 for the year ended December 31, 1994.
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 1994, approximately $5,000,000 of Actava's cash was
pledged to secure a Snapper credit line and approximately $12,000,000 of cash
and short-term investments were pledged to support outstanding letters of
credit.
Snapper has entered into various long-term manufacturing and purchase
agreements with certain vendors for the purchase of manufactured products and
raw materials. At December 31, 1994, non-cancelable commitments under these
agreements amounted to approximately $16,800,000.
Segment Information
A description of Actava's segments is presented in the "Operating
Segments" section 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, 1994 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."
THE ACTAVA GROUP INC. AND SUBSIDIARIES
SUMMARY OF QUARTERLY EARNINGS AND DIVIDENDS
[Enlarge/Download Table]
Quarters Ended in 1994
---------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(In thousands except per share amounts)
Net Sales .................................................. $ 155,271 $ 123,943 $ 124,497 $ 148,117
Gross Profit ............................................... 27,200 18,526 18,786 26,141
Income (loss) from continuing operations ................... (8,090) (10,173) (5,266) 73
Income (loss) from discontinued operations ................. (4,583) (36,110) -- --
Extraordinary item ......................................... -- -- -- (1,601)
--------- --------- --------- ---------
Net (loss) (a) ............................................. $ (12,673) $ (46,283) $ (5,266) $ (1,528)
========= ========= ========= =========
Earnings (loss) per share:
Income (loss) from continuing operations ................... $ (.46) $ (.56) $ (.29) $ --
Income (loss) from discontinued operations ................. (.26) (1.98) -- --
Extraordinary item ......................................... -- -- -- (.09)
--------- --------- --------- ---------
Net (loss) ................................................. $ (.72) $ (2.54) $ (.29) $ (.09)
========= ========= ========= =========
Cash Dividends ............................................. $ -- $ -- $ -- $ --
[Enlarge/Download Table]
Quarters Ended in 1993
---------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(In thousands except per share amounts)
(Restated)
Net Sales .................................................. $ 99,701 $ 112,753 $ 113,746 $ 139,612
Gross Profit ............................................... 20,770 21,210 12,955 9,406
Income (loss) from continuing operations ................... (1,340) (3,669) (16,283) (30,424)
Income (loss) from discontinued operations ................. (1,860) 3,712 7,236 (562)
Cumulative effect of change in accounting principle ........ (4,404) -- -- --
--------- --------- --------- ---------
Net income (loss) (a) (b) (c) .............................. $ (7,604) $ 43 $ (9,047) $ (30,986)
========= ========= ========= =========
Earnings (loss) per share:
Income (loss) from continuing operations ................... $ (.08) $ (.22) $ (.92) $ (1.73)
Income (loss) from discontinued operations ................. (.11) .22 .41 (.03)
Cumulative effect of change in accounting principle ........ (.27) -- -- --
--------- --------- --------- ---------
Net income (loss) .......................................... $ (.46) $ -- $ (.51) $ (1.76)
========= ========= ========= =========
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 1994 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 decreased
in the first and third quarters by $2,205,000 and $1,315,000,
respectively, and increased in the second and fourth quarters by
$1,025,000 and $2,495,000, respectively. Sales and expenses for the year
were also different in 1993 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 quarters 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.
(b) 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.
(c) During the fourth quarter of 1993, Actava increased its valuation
allowance for an investment in a real estate development from $1,425,000
to $4,425,000, due to an accelerated plan for disposition. This change in
estimate resulted in an increase in the net loss for the fourth quarter of
approximately $3,000,000.
See Notes to Consolidated Financial Statements.
Dates Referenced Herein and Documents Incorporated by Reference
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