UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-Q
/X/ QUARTERLY REPORT Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended March 31, 1996
Commission File No. 1-6485
________________________________________________________________
or
/ / TRANSITION REPORT Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
________________________________________________________________
ACTION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________
Pennsylvania
(State or other jurisdiction of incorporation or organization)
________________________________________________________________
25-0918682
(I.R.S. Employer Identification No.)
________________________________________________________________
460 Nixon Road, Cheswick, Pennsylvania 15024-1098
(Address of principal executive offices) (Zip Code)
________________________________________________________________
Registrant's telephone number, including area code: (412) 782-4800
_________________________________________________________________
The number of shares of the Registrant's common stock outstanding
at May 13, 1996 was 5,539,458.
_________________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
INDEX
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited) and
Independent Accountants' Review Report
Consolidated Balance Sheets -
March 31, 1996, March 25, 1995,
and June 24, 1995 3
Consolidated Statements of Operations -
Nine Months and Three Months Ended
March 31, 1996 and March 25, 1995 4
Consolidated Statements of Shareholders'
Equity - Nine Months Ended March 31,
1996 and March 25, 1995 5
Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1996
and March 25, 1995 6
Notes to Consolidated Financial Statements 7
Review by Independent Accountants 9
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I. FINANCIAL INFORMATION
<TABLE>
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands)
<CAPTION>
March March June
31, 1996 25, 1995 24, 1995
-------- -------- --------
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $59 $809 $567
Trade accounts receivable, less allowances
of $329, $714, and $478 4,440 6,707 9,908
Inventories 9,582 19,034 18,133
Other current assets 1,143 989 1,111
------- ------- -------
Total Current Assets 15,224 27,539 29,719
Property, Plant and Equipment 7,459 8,206 7,964
Other Assets 1,670 2,454 1,863
------- ------- -------
$24,353 $38,199 $39,546
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $3,337 $7,532 $10,162
Accounts payable 3,373 3,952 4,406
Restructuring and discontinued operations 113 290 926
Other accrued liabilities 1,008 1,780 1,382
------- ------- -------
Total Current Liabilities 7,831 13,554 16,876
Long-Term Liabilities
Financing obligation - sale/leaseback 7,013 7,907 7,739
Long-term debt 115 115 115
Deferred compensation 1,304 1,971 1,688
------- ------- -------
Total Long-Term Liabilities 8,432 9,993 9,542
Shareholders' Equity
Common stock, $0.10 par value;
authorized 20,000,000 shares;
issued 7,187,428 shares 719 719 719
Capital in excess of par 25,498 25,498 25,498
Retained earnings (deficit) (6,553) 9 (1,515)
------- ------- -------
19,664 26,226 24,702
Less treasury shares, at cost 11,574 11,574 11,574
------- ------- -------
Total Shareholders' Equity 8,090 14,652 13,128
------- ------- -------
$24,353 $38,199 $39,546
======= ======= =======
See notes to consolidated financial statements.
</TABLE>
<TABLE>
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands except per share amounts)
<CAPTION>
Nine Months Ended Three Months Ended
-------------------- --------------------
March March March March
31, 1996 25, 1995 31, 1996 25, 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $24,534 $33,730 $5,455 $6,201
COSTS AND EXPENSES
Cost of products sold 20,326 25,083 4,937 4,770
Operating expenses 7,836 9,516 2,438 3,006
Interest expense 1,614 1,323 416 487
------- ------- ------- -------
29,776 35,922 7,791 8,263
OTHER INCOME (EXPENSE), NET 204 355 (29) 353
------- ------- ------- -------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (5,038) (1,837) (2,365) (1,709)
PROVISION FOR INCOME TAXES - - - -
------- ------- ------- -------
LOSS FROM CONTINUING OPERATIONS (5,038) (1,837) (2,365) (1,709)
LOSS FROM DISCONTINUED OPERATIONS - (354) - (320)
------- ------- ------- -------
NET LOSS ($5,038) ($2,191) ($2,365) ($2,029)
======= ======= ======= =======
LOSS PER SHARE
Continuing operations ($0.91) ($0.33) ($0.43) ($0.31)
Discontinued operations 0.00 (0.06) 0.00 (0.06)
------- ------- ------- -------
NET LOSS PER SHARE ($0.91) ($0.39) ($0.43) ($0.37)
======= ======= ======= =======
Weighted average shares outstanding (thousands) 5,539 5,568 5,539 5,543
See notes to consolidated financial statements.
</TABLE>
<TABLE>
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(In thousands except share amounts)
<CAPTION>
Nine Months Ended March 31, 1996 and March 25, 1995
-----------------------------------------------------------------------------
Capital Retained
Common Stock In Excess Earnings Treasury Stock
Shares Amount of Par (Deficit) Shares Amount Total
------ ------ --------- --------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JUNE 25, 1994 7,187,428 $719 $25,498 $2,200 1,647,970 ($11,574) $16,843
Net Loss - - - (2,191) - - (2,191)
---------------------------------------------------------------------------------
BALANCE - MARCH 25, 1995 7,187,428 $719 $25,498 $9 1,647,970 ($11,574) $14,652
=================================================================================
BALANCE - JUNE 24, 1995 7,187,428 $719 $25,498 ($1,515) 1,647,970 ($11,574) $13,128
Net Loss - - - (5,038) - - (5,038)
---------------------------------------------------------------------------------
BALANCE - MARCH 31, 1996 7,187,428 $719 $25,498 ($6,553) 1,647,970 ($11,574) $8,090
=================================================================================
See notes to consolidated financial statements.
</TABLE>
<TABLE>
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<CAPTION>
Nine Months Ended
------------------------------------
March 31, 1996 March 25, 1995
-------------- --------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($5,038) ($2,191)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 678 813
Changes in operating assets and liabilities:
Trade accounts receivable 5,468 2,155
Inventories 8,551 (1,450)
Other current assets (32) 198
Accounts payable and accrued expenses (2,220) (560)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,407 (1,035)
======= =======
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (220) (759)
------- -------
NET CASH USED IN INVESTMENT ACTIVITIES (220) (759)
======= =======
FINANCING ACTIVITIES:
Notes and acceptances payable (6,825) 2,093
Principal payments on long-term obligations (726) (465)
Other, net (144) 175
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,695) 1,803
======= =======
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (508) 9
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 567 800
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $59 $809
======= =======
See notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
A. The consolidated financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations
of the Securities and Exchange Commission. With the exception
of the consolidated balance sheet which was derived from the
audited financial statements as of June 24, 1995, such
statements have not been audited. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements
and the notes thereto included in the Company's latest Annual
Report on Form 10-K. Effective July 1995 the Company changed
its fiscal calendar from a 52-53 week year ending on the last
Saturday of each fiscal month to the last day of the calendar
month. The Company's fiscal year 1996 will end June 30, 1996.
B. The accompanying financial statements reflect all adjustments
(consisting of normal recurring accruals and estimates) which
are, in the opinion of management, necessary for a fair
presentation.
C. The results of operations for the third fiscal quarter and nine
month period ended March 31, 1996 are not necessarily
indicative of the results to be expected for the full year.
D. Inventories consist primarily of merchandise held for resale.
Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market.
E. The Company has a Credit Agreement which provides for available
credit of up to $7.5 million through June 30, 1997.
Availability under the credit line is further limited by the
level of eligible accounts receivable and inventories. At
March 31, 1996 outstanding borrowings under the Credit
Agreement were $3.3 million and outstanding letters of credit
were $180,000. The unused borrowing capacity was $1,222,000 as
of March 31, 1996. Interest is payable at 3.5% over the prime
rate of interest. The Company did not meet the required levels
of net worth and working capital under the restrictive
covenants of the Credit Agreement as of March 31, 1996. The
Company's lender has waived these covenants as of March 31,
1996. It is unlikely that the Company will meet these
covenants as of June 30, 1996, the next measurement date, and
subsequently, and there can be no assurance that the Company's
lender will agree to waive the covenants should the Company be
unable to meet them. The lender's remedies under such a default
include the right to demand repayment of the outstanding loan.
Assuming that the Company's lender will provide waivers for
future defaults under the financial covenants, the Company
believes that the credit available under its existing borrowing
arrangements, together with funds expected to be generated from
operations (including anticipated further reductions of
inventory) will be sufficient to meet its operating needs for
the remainder of its current fiscal year (which ends June 30,
1996). For the longer term (fiscal 1997 and beyond), the
Company must improve profitability through increased sales and
improved gross margins, as well as further reductions in
operating and interest expenses, to provide sufficient
liquidity to meet its operating needs while reducing reliance
on its credit arrangements. Unless these improvements are
accomplished in fiscal 1997, there can be no assurance that the
Company's capital resources will be sufficient to meet its
operating needs, in which case material adverse consequences
may result.
F. No income tax benefits were provided on the losses in the nine
month periods ended March 31, 1996 and March 25, 1995 because
realization of such benefits is not reasonably assured.
Net operating loss carryforwards available to offset future
taxable income and thereby reduce income taxes payable in
fiscal 1996 and beyond are approximately $24 million for income
tax reporting purposes.
G. In September 1995 the Company sold the principal assets and the
business of Kensington Lamp Company (KLC), its lamp assembly
operation, to KLC management. Terms of the sale included
retention of accounts receivable by the Company, assumption of
inventory-related accounts payable by the buyer, and an
interest bearing note secured by a second mortgage on
inventories and receivables, payable over a forty-two month
period beginning November 1, 1995. The note receivable from
the sale is included in other current assets and other long-term
assets in the accompanying balance sheet. The
consolidated financial statements for the prior year have been
restated to reflect KLC as a discontinued operation.
REVIEW BY INDEPENDENT ACCOUNTANTS
Ernst & Young LLP, independent auditors, have performed a limited
review of the consolidated financial statements for the quarters
ended March 31, 1996 and March 25, 1995, as indicated in their
report on the limited review included on page 10. Since they did
not perform an audit, they express no opinion on the financial
statements referred to above. Management has given effect to any
significant adjustments and disclosures proposed in the course of
the limited review.
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholders and Board of Directors
Action Industries, Inc.
We have reviewed the accompanying condensed consolidated balance
sheets of Action Industries, Inc. and Subsidiaries as of March 31,
1996 and March 25, 1995, and the related condensed consolidated
statements of operations for the thirteen and forty week periods
ended March 31, 1996 and for the thirteen and thirty-nine week
periods ended March 25, 1995, and the condensed consolidated
statements of shareholders' equity and cash flows for the forty week
period ended March 31, 1996 and the thirty-nine week period ended
March 25, 1995. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Action
Industries, Inc. for the year ended June 24, 1995, and the related
consolidated statements of operations, shareholders' equity and
cash flows for the year then ended (not presented herein) and in
our report dated September 14, 1995, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of June 24, 1995, is fairly stated,
in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
ERNST & YOUNG LLP
May 14, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE: References to a fiscal year in this Form 10-Q are to the
Company's fiscal year ended on the last Saturday of June prior to
1996, and for fiscal year 1996, ending June 30, 1996.
FINANCIAL CONDITION
The Company has experienced declining sales in its traditional
promotional business in recent years. The decline continued in the
first three quarters of fiscal 1996 principally due to decreased
sales to two of the Company's largest customers last year (a $5.9
million decrease from $7.9 million in sales last year to $2.0
million in sales in the current year). In addition, approximately
$1.6 million in sales to customers in Mexico and Canada last year
were not repeated in the current year as a result of the
instability of the Mexican peso and the continued low exchange rate
of the Canadian dollar. Also, Replenishment sales decreased $1.3
million related primarily to new store setup business last year
which was not repeated in the current year, and reduced order fill
rates related to the Company's reduction of inventory levels.
Further, the Company closed its retail store in September 1995,
which accounted for $540,000 in decreased sales. The Company
experienced lost sales opportunities in both fiscal 1996 and 1995
as a result of its efforts to reduce low margin and guaranteed sale
business from the level of such business experienced in 1993 and
1994.
The historical decline in sales is the result of many factors,
including a changing retail marketplace, the increasing complexity
of the promotional business itself, and strategic decisions to exit
or downsize unprofitable, higher risk product lines.
The Company is implementing marketing plans based on providing its
customers with promotional events which combine the right PRODUCT
with the right DISPLAY vehicle, centered upon the right PROMOTION,
and utilizing the right SERVICES. The objective is to produce a
synergy with the ongoing, in-line business of the customer to both
enhance and add to that business. This combination of promotional
elements is called the "SOLUTION MATRIX (trademark)". All new promotional
offerings must meet the requirements of the SOLUTION MATRIX (trademark)
before they can be offered to customers.
The Company is assessing the feasibility of adding upscale theme-based
events to attract customers who have migrated away from
Dollar Days. Additionally the Company is implementing in-store
service for Replenishment and selected Dollar Days programs to
improve turnover and appearance, and is developing a
premerchandising approach for all promotions to improve delivery
and production planning.
The major sources of cash during the nine months ended March 31,
1996 were significantly reduced inventory levels (47%) and
collections on receivables. Operating losses and repayment of
current and long-term obligations were the primary uses of cash.
Working capital of $7.4 million at March 31, 1996 decreased from
$12.8 million at June 24, 1995, and $14.0 million at March 25,
1995, largely related to the lower level of sales in the current
year and operating losses. The current ratio at March 31, 1996 was
1.94, improved from 1.76 at June 24, 1995, and comparable to 2.03
at March 25, 1995. The long-term debt to equity ratio (including
the sale/leaseback financing obligation) of 0.88 at March 31, 1996
increased from 0.60 at June 24, 1995 and 0.55 at March 25, 1995 as
a result of operating losses.
Cash and cash equivalents were $59,000 at March 31, 1996 as
compared to $567,000 at June 24, 1995 and $809,000 at March 25,
1995. Cash balances fluctuate daily to meet operating
requirements.
Accounts receivable of $4.4 million at March 31, 1996 decreased
from $9.9 million at June 24, 1995 and $6.7 million at March 25,
1995 as a result of decreased sales and improved collections in the
current year.
Inventories of $9.6 million decreased significantly compared to
$18.1 million at June 24, 1995, and $19.0 million at March 25,
1995. Inventory levels are expected to remain lower than the prior
year, as the Company continues to pursue its plan to improve
inventory turnover.
Aggregate borrowings (long-term debt and notes payable) decreased
from $15.6 million at March 25, 1995 and $18.0 million at June 24,
1995 to $10.5 million at March 31, 1996. This decrease was
primarily the result of the repayment of borrowings with cash
generated from the reduction of inventories and receivables, net of
cash used to fund operating losses incurred. Letters of credit
outstanding were $180,000 at March 31, 1996, significantly below
the $1.3 million outstanding at March 25, 1995 and $909,000 at June
24, 1995 reflecting reductions in the Company's level of overseas
purchases of inventory.
The Company's Credit Agreement provides for available credit of up
to $7.5 million through June 30, 1997. Availability under the line
is further limited by the level of eligible accounts receivable and
inventories. At March 31, 1996 outstanding borrowings under the
Credit Agreement were $3.3 million and outstanding letters of
credit were $180,000. The unused borrowing capacity was $1,222,000
as of March 31, 1996.
The Company did not meet the required levels of net worth and
working capital under the restrictive covenants of the Credit
Agreement as of March 31, 1996. The Company's lender has waived
these covenants as of March 31, 1996. It is unlikely that the
Company will meet these covenants as of June 30, 1996, the next
measurement date, and subsequently, and there can be no assurance
that the Company's lender will agree to waive the covenants should
the Company be unable to meet them. The lender's remedies under
such a default include the right to demand repayment of the
outstanding loan.
Assuming that the Company's lender will provide waivers for future
default(s) under the financial covenants, the Company believes that
the credit available under its existing borrowing arrangements,
together with funds expected to be generated from operations
(including anticipated further reductions of inventory) will be
sufficient to meet its operating needs for the
remainder of its current fiscal year (which ends June 30, 1996).
For the longer term (fiscal 1997 and beyond), the Company must
improve profitability through increased sales and improved gross
margins, as well as further reductions in operating and interest
expenses, to provide sufficient liquidity to meet its operating
needs while reducing reliance on its credit arrangements. Unless
these improvements are accomplished in fiscal 1997, there can be no
assurance that the Company's capital resources will be sufficient
to meet its operating needs, in which case material adverse
consequences may result.
The Company's capital expenditures in the nine month period ended
March 31, 1996 were $220,000, all under a project initiated in 1994
to replace its core information systems computer hardware and
software. Future expenditures of $100,000 will be made in the
remainder of fiscal 1996 in connection with this project.
Inflation
The Company periodically discontinues or replaces in its
promotional programs items for which costs increase. In addition,
the Company strives to continually add new items to replace others
in its product offerings for the benefit of its customers. These
practices serve as offsets to the effects of inflation. The
Company believes its FIFO cost method of valuing inventories
provides for appropriate matching of current costs with current
revenues, and that the Company's buying practices and improving
inventory turnover reduce the appreciation in inventory values due
to inflation and other price increases.
Inflationary increases in the Company's costs of acquiring
merchandise may adversely affect the Company's operating margins,
since there is no assurance that the Company will be able to pass
such increases along to its customers.
RESULTS OF OPERATIONS
Third Quarter Fiscal 1996 Compared with Third Quarter Fiscal 1995
Net Sales. Aggregate net sales for the fiscal 1996 third quarter
were $5,455,000, a decrease of $746,000 (12.0%) compared to
$6,201,000 in the prior year third quarter.
Sales to the Company's largest customer last year decreased $710,000
in the current year quarter.
The Company's sales volume has declined materially in each of the
last several years. It is the Company's belief that economic
conditions and other changes in the retail marketplace, along with
increased ability on the part of the Company's customers to create
their own promotional programs and a shifting customer base, have
contributed to the decline in sales volume. While the Company is
implementing marketing plans designed to refocus its business and
take advantage of this changing retail marketplace, there can be no
assurance that further sales declines will not occur for these or
other reasons. In addition, the decisions to further reduce the
Gift program business and to reduce the level of guaranteed sale
business will likely have a continuing adverse impact on the
Company's core promotional sales volume.
Following is a comparison of net sales by type of program:
<TABLE>
<CAPTION>
NET SALES
Third Quarter Ended
--------------------------
March March Increase
31, 1996 25, 1995 (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
Dollar Days $3,944,000 $3,965,000 $ (21,000)
Replenishment 1,465,000 2,018,000 (553,000)
---------- ---------- ----------
Core Promotional Business 5,409,000 5,983,000 (574,000)
Gift 33,000 - 33,000
Other 13,000 218,000 (205,000)
---------- ---------- ----------
$5,455,000 $6,201,000 $(746,000)
========== ========== ==========
</TABLE>
Cost of Products Sold and Gross Profit Margins. Gross profit
margins (as a percentage of sales) decreased from 23.1% in fiscal
1995 to 9.5% in the current year third quarter, principally due to
higher than anticipated returns on prior period guaranteed sales.
The Company has also experienced lower gross margins related to its
inventory reduction program, as a result of the sale of certain
merchandise at reduced prices, and increased (as a percentage of
sales) display costs due to a decrease in the value of the merchandise
included per display fixture.
Operating Expenses. Operating expenses decreased from $3,006,000
(48.5% of sales) in the fiscal 1995 third quarter to $2,438,000
(44.7% of sales) in fiscal 1996. The decrease in costs was the
result of the Company's continuing cost reduction efforts.
Interest Expense. The decrease of $71,000 was due to reduced average
borrowing levels in the current year offset in part by higher
effective interest rates and other borrowing costs.
Other Income (Expense), Net. Other expense of $29,000 in the third
quarter of fiscal 1996 represented miscellaneous items. The prior
year other income amount of $353,000 was related to the sale of
surplus equipment.
Loss From Continuing Operations Before Income Taxes. The loss
increased from $1,709,000 in the third quarter of fiscal 1995 to
$2,365,000 in the third quarter of fiscal 1996. The increase of
$656,000 reflects the combined effect of all the above.
Provision for Income Taxes. No income tax benefits were provided
on the losses in the third quarter of fiscal 1996 and 1995 because
realization of such benefits is not reasonably assured. Net
operating loss carryforwards available to offset future taxable
income and thereby reduce future income taxes payable in fiscal
1996 and beyond are approximately $24 million for income tax
reporting purposes.
Loss From Continuing Operations. The increase of $656,000 reflects
the combined effect of all of the above.
Loss From Discontinued Operation. In fiscal 1995 the Company
adopted a plan to sell its lamp business, and completed the sale in
September of 1995. Operating losses of $320,000 for the third
quarter of fiscal 1995 were reclassified as discontinued.
Net Loss. The increased loss of $336,000 reflects the combined
effect of all the above.
Nine Month Period of Fiscal 1996 Compared with Nine Month Period of
Fiscal 1995
Net Sales. Aggregate net sales for the fiscal 1996 nine month
year-to-date period were $24,534,000, a decrease of $9,196,000
(27.3%) compared to $33,730,000 in the prior year-to-date period.
Sales to two of the Company's major customers of $5.9 million were
not repeated in the current year. In addition, approximately $1.6
million in sales to customers in Mexico and Canada last year were
not repeated in the current year as a result of the instability of
the Mexican peso and the continued low exchange rate of the
Canadian dollar. Further, Replenishment sales decreased $1.3
million as a result of new store setup business last year which did
not repeat in the current year and reduced order fill rates related
to the Company's reduction of inventory. The Company closed its
retail store in September 1995, resulting in decreased sales of
$540,000 for the six month period.
Following is a comparison of net sales by type of program:
<TABLE>
<CAPTION>
NET SALES
Nine Month Period Ended
-----------------------------
March March Increase
31, 1996 25, 1995 (Decrease)
----------- ----------- ------------
<S> <C> <C> <C>
Dollar Days $16,875,000 $23,698,000 $(6,823,000)
Replenishment 5,326,000 6,626,000 (1,300,000)
----------- ----------- ------------
Core Promotional Business 22,201,000 30,324,000 (8,123,000)
Gift 2,248,000 2,085,000 163,000
Other 85,000 1,321,000 (1,236,000)
----------- ----------- ------------
$24,534,000 $33,730,000 $(9,196,000)
=========== =========== ============
</TABLE>
Cost of Products Sold and Gross Profit Margins. Gross profit
margins (as a percentage of sales) decreased from 25.6% in fiscal
1995 to 17.2% in the current year, principally due to higher than
anticipated returns on prior period guaranteed sales and increased
cost of merchandise sold in core business programs, related
primarily to the mix of programs sold. In addition, the Company
experienced decreased gross margins related to its inventory
reduction program, as a result of the sale of certain merchandise
at reduced prices, and increased (as a percentage of sales) display
costs due to a decrease in the value of the merchandise included
per display fixture.
Operating Expenses. Operating expenses decreased from $9,516,000
(28.2% of sales) in the first nine months of fiscal 1995 to
$7,836,000 (32.0% of sales) in the same period of fiscal 1996. The
decrease in costs was primarily the result of the Company's
continuing cost reduction efforts and the lower level of sales in
1996.
Interest Expense. The increase of $291,000 was due to increased
effective interest rates and other borrowing costs.
Other Income (Expense), Net. Other income of $204,000 in the nine
month period of fiscal 1996 represented miscellaneous items. The
prior year other income amount of $355,000 was comprised of the
sale of surplus equipment and miscellaneous items.
Loss From Continuing Operations Before Income Taxes. The loss
increased from $1,837,000 in fiscal 1995 to $5,038,000 in fiscal
1996. The increase of $3,201,000 reflects the combined effect of
all the above.
Provision for Income Taxes. No income tax benefits were provided
on the losses in the first nine months of fiscal 1996 and 1995
because realization of such benefits is not reasonably assured.
Net operating loss carryforwards available to offset future taxable
income and thereby reduce future income taxes payable in fiscal
1996 and beyond are approximately $24 million for income tax
reporting purposes.
Loss From Continuing Operations. The increase of $3,201,000
reflects the combined effect of all of the above.
Loss From Discontinued Operation. In fiscal 1995 the Company
adopted a plan to sell its lamp business, and completed the sale in
September of 1995. Operating losses of $354,000 for the nine month
period of fiscal 1995 were reclassified as discontinued.
Net Loss. The increased loss of $2,847,000 reflects the combined
effect of all the above.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
Page
(a) Exhibits:
10 Amendments One and Two to the Amended and Restated
Loan and Security Agreement, dated October 30, 1995
and March 20, 1996, respectively, filed herein. 20-23
23 Acknowledgment of Independent Auditors, filed herein. 24
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the
quarter ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ACTION INDUSTRIES, INC.
(Registrant)
Date: May 14, 1996 T. RONALD CASPER
------------------------------
T. Ronald Casper
Acting President and
Chief Executive Officer
Date: May 14, 1996 KENNETH L. CAMPBELL
------------------------------
Kenneth L. Campbell
Senior Vice President, Finance
(Principal Financial and
Accounting Officer)
E X H I B I T 1 0
-------------------
AMENDMENT NO. ONE TO THE
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
ACTION INDUSTRIES, INC.
This Amendment No. One To The Amended and Restated Loan And
Security Agreement (the "Amendment") is entered into as of the 30th
day of October, 1995, by and between ACTION INDUSTRIES, INC., a
Pennsylvania corporation ("Borrower"), whose chief executive office
is located at 460 Nixon Road, Cheswick, Pennsylvania 15024 and
FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa
Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333,
in light of the following facts:
FACTS
FACT ONE: Foothill and Borrower have previously entered into
that certain Amended and Restated Loan And Security Agreement,
dated October 20, 1995 (the "Agreement").
FACT TWO: Foothill and Borrower desires to amend the Agreement
as provided herein. Terms defined in the Agreement which are used
herein shall have the same meanings as set forth in the Agreement,
unless otherwise specified.
NOW, THEREFORE, Foothill and Borrower hereby modify and amend
the Agreement as follows:
1. Notwithstanding anything to the contrary contained in
Section 2.1(a)(ii)(y) of the Agreement, Borrower's cost of Eligible
Inventory shall be three hundred seventy five percent (375%) of the
amount of credit availability created by Section 2.1(a)(i) during
the months of October 1995, November 1995, and December 1995.
Effective January 1, 1996 said percentage shall revert to the
original terms of Section 2.1(a)(ii)(y) of the Agreement.
2. Notwithstanding anything to the contrary contained in
Section 2.4 of the Agreement, Foothill agrees to provide Borrower
a temporary Overadvance facility in the amount of One Million Two
Hundred Thousand Dollars ($1,200,000) commencing October 31, 1995,
and shall be paid in full on December 22, 1995.
3. Foothill shall charge Borrower's loan account a fee in the
amount of $15,000 upon execution and delivery to Foothill of this
Amendment. Said fee shall be fully-earned, non-refundable, and due
and payable on the date Borrower's loan account is charged.
4. In the event of a conflict between the terms and
provisions of this Amendment and the terms and provisions of the
Agreement, the terms and provisions of this Amendment shall govern.
In all other respects, the Agreement, as supplemented, amended and
modified, shall remain in full force and effect.
IN WITNESS WHEREOF, Borrower and Foothill have executed this
Amendment as of the day and year first written above.
FOOTHILL CAPITAL CORPORATION ACTION INDUSTRIES, INC.
a California corporation a Pennsylvania corporation
By: LISA M. GONZALES By: KENNETH L. CAMPBELL
Its: Assistant Vice President Its: Senior Vice President
- ---------------------------------------------------------------
By its acceptance below this 30th day of October, 1995, the
undersigned guarantor hereby reaffirms its Continuing Guaranty
dated January 20, 1994 and consents to the above-stated terms.
ACTION INVESTMENT COMPANY
a Delaware corporation
By: KENNETH L. CAMPBELL
Its: Treasurer
__________________________________________________________________
AMENDMENT NO. TWO TO THE
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
ACTION INDUSTRIES, INC.
This Amendment No. Two To The Amended and Restated Loan And
Security Agreement (the "Amendment") is entered into as of the 20th
day of March, 1996, by and between ACTION INDUSTRIES, INC., a
Pennsylvania corporation ("Borrower"), whose chief executive office
is located at 460 Nixon Road, Cheswick, Pennsylvania 15024 and
FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa
Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333,
in light of the following facts:
FACTS
FACT ONE: Foothill and Borrower have previously entered into
that certain Amended and Restated Loan And Security Agreement,
dated October 20, 1995 (as amended and supplemented, the
"Agreement").
FACT TWO: Foothill and Borrower desires to amend the Agreement
as provided herein. Terms defined in the Agreement which are used
herein shall have the same meanings as set forth in the Agreement,
unless otherwise specified.
NOW, THEREFORE, Foothill and Borrower hereby modify and amend
the Agreement as follows:
1. Notwithstanding anything to the contrary contained in
Section 2.1 of the Agreement, Subsection (a)(ii)(y) regarding
Borrower's percentage of Eligible Inventory shall be eliminated
during the period of February 1, 1996 through March 31, 1996.
Effective April 1, 1996, said Subsection (a)(ii)(y) shall revert to
the original terms of the Agreement.
2. Foothill shall charge Borrower's loan account a fee in the
amount of $300.00. Said fee shall be fully-earned, non-refundable,
and due and payable on the date Borrower's loan account is charged.
3. In the event of a conflict between the terms and
provisions of this Amendment and the terms and provisions of the
Agreement, the terms and provisions of this Amendment shall govern.
In all other respects, the Agreement, as supplemented, amended and
modified, shall remain in full force and effect.
IN WITNESS WHEREOF, Borrower and Foothill have executed this
Amendment as of the day and year first written above.
FOOTHILL CAPITAL CORPORATION ACTION INDUSTRIES, INC.
a California corporation a Pennsylvania corporation
By: LISA M. GONZALES By: KENNETH L. CAMPBELL
Its: Assistant Vice President Its: Senior Vice President
- ---------------------------------------------------------------
By its acceptance below this 20th day of March, 1996, the
undersigned guarantor hereby reaffirms its Continuing Guaranty
dated January 20, 1994 and consents to the above-stated terms.
ACTION INVESTMENT COMPANY
a Delaware corporation
By: KENNETH L. CAMPBELL
Its: Treasurer
EXHIBIT 23
----------
Acknowledgement of Ernst & Young
The Shareholders and Board of Directors
Action Industries, Inc.
We are aware of the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-48361 and 33-48362) of Action
Industries, Inc. for the registration of 450,000 and 55,300 shares
of its common stock in connection with its Stock Option Plan and
Nonemployee Director Stock Option Plan, respectively, of our report
dated May 14, 1996 relating to the unaudited condensed
consolidated interim financial statements of Action Industries,
Inc. which are included in its Form 10-Q for the quarter ended
March 31, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933, our reports
are not a part of the registration statement prepared or certified
by accountants within the meaning of Section 7 or 11 of the
Securities Act of 1933.
ERNST & YOUNG LLP
May 14, 1996
Pittsburgh, Pennsylvania
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