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 September 30, 1995
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 November 11, 1995 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 -
September 30, 1995, September 24, 1994,
and June 24, 1995 3
Consolidated Statements of Operations -
Quarters Ended September 30, 1995 and
September 24, 1994 4
Consolidated Statements of Shareholders'
Equity - Quarters Ended September 30, 1995
and September 24, 1994 5
Consolidated Statements of Cash Flows -
Quarters Ended September 30, 1995 and
and September 24, 1994 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 16
Signatures 17
PART I. FINANCIAL INFORMATION
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands)
September September June
30, 1995 24, 1994 24, 1995
-------- -------- --------
ASSETS
Current Assets
Cash and cash equivalents $1,096 $313 $567
Trade accounts receivable, less allowances
of $478, $868, and $478 7,510 9,529 9,908
Inventories 18,414 16,757 18,133
Other current assets 1,130 1,235 1,111
------- ------- -------
Total Current Assets 28,150 27,834 29,719
Property, Plant and Equipment 7,687 8,112 7,964
Other Assets 1,688 2,473 1,863
------- ------- -------
$37,525 $38,419 $39,546
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes and acceptances payable $10,278 $5,112 $10,162
Accounts payable 4,217 4,561 4,406
Restructuring and discontinued operations 999 470 926
Other accrued liabilities 1,069 1,321 1,382
------- ------- -------
Total Current Liabilities 16,563 11,464 16,876
Long-Term Liabilities
Financing obligation - sale/leaseback 7,506 8,223 7,739
Long-term debt 115 115 115
Deferred compensation 1,416 2,126 1,688
------- ------- -------
Total Long-Term Liabilities 9,037 10,464 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) (2,718) 1,848 (1,515)
------- ------- -------
23,499 28,065 24,702
Less treasury shares, at cost 11,574 11,574 11,574
------- ------- -------
Total Shareholders' Equity 11,925 16,491 13,128
------- ------- -------
$37,525 $38,419 $39,546
======= ======= =======
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands except per share data)
First Quarter Ended
-------------------------
September September
30, 1995 24, 1994
-------- --------
NET SALES $9,180 $11,035
COSTS AND EXPENSES
Cost of products sold 7,165 7,846
Operating expenses 2,719 2,932
Interest expense 654 380
------- -------
10,538 11,158
OTHER INCOME, NET 155 4
------- -------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,203) (119)
PROVISION FOR INCOME TAXES - -
------- -------
LOSS FROM CONTINUING OPERATIONS (1,203) (119)
LOSS FROM DISCONTINUED OPERATIONS
Operating loss - (233)
Provision for loss on disposal - -
------- -------
Total Loss from Discontinued Operations 0 (233)
------- -------
NET LOSS ($1,203) ($352)
======= =======
LOSS PER SHARE
Continuing operations ($0.22) ($0.02)
Discontinued operations 0.00 (0.04)
------- -------
NET LOSS PER SHARE ($0.22) ($0.06)
======= =======
Weighted average shares outstanding 5,539 5,566
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(In thousands except share amounts)
First Quarter Ended September 30, 1995 and September 24, 1994
-----------------------------------------------------------------------------------
Capital Retained
Common Stock In Excess Earnings Treasury Stock
Shares Amount of Par (Deficit) Shares Amount Total
------ ------ ------ --------- ------ ------ -----
BALANCE - JUNE 25, 1994 7,187,428 $719 $25,498 $2,200 1,647,970 ($11,574) $16,843
Net Loss - - - (352) - - (352)
-----------------------------------------------------------------------------------
BALANCE - SEPTEMBER 24, 1994 7,187,428 $719 $25,498 $1,848 1,647,970 ($11,574) $16,491
===================================================================================
BALANCE - JUNE 24, 1995 7,187,428 $719 $25,498 ($1,515) 1,647,970 ($11,574) $13,128
Net Loss - - - (1,203) - - (1,203)
-----------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 1995 7,187,428 $719 $25,498 ($2,718) 1,647,970 ($11,574) $11,925
===================================================================================
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
First Quarter Ended
------------------------------
September September
30, 1995 24, 1994
-------- --------
OPERATING ACTIVITIES:
Net loss ($1,203) ($119)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 238 286
Provision for doubtful accounts - (266)
Cash used in discontinued operation - (250)
Changes in operating assets and liabilities:
Trade accounts receivable 2,398 (401)
Inventories (281) 827
Other current assets (19) (48)
Accounts payable and accrued expenses (429) (230)
------ ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 704 (201)
====== ======
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment - (142)
------ ------
NET CASH USED IN INVESTMENT ACTIVITIES 0 (142)
====== ======
FINANCING ACTIVITIES:
Notes and acceptances payable 116 (327)
Principal payments on long-term obligations (233) (149)
Other, net (58) 332
------ ------
NET CASH USED IN FINANCING ACTIVITIES (175) (144)
====== ======
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 529 (487)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 567 800
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,096 $313
====== ======
See notes to consolidated financial statements.
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 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 fiscal year end remains at the end of the month of
June. 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 quarter ended September 30,
1995 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 up to $15
million in committed credit lines through December 31, 1995 and
up to $10 million through June 30, 1997. Availability under
the credit line is further limited by the level of eligible
accounts receivable and inventories. At September 30, 1995
outstanding borrowings under the credit agreement were $10.3
million and outstanding letters of credit were $1.5 million.
The unused borrowing capacity was $1.0 million as of September
30, 1995. Subsequent to September 30, 1995, availability under
the credit agreement decreased as a result of decreased
accounts receivable related to the low level of sales in the
first quarter. The Company has amended the credit agreement to
provide a temporary increase in available credit which is
believed to be sufficient to meet operating needs until
sufficient sales are made to develop adequate credit
availability under the borrowing formula. Interest is payable
at 3.5% over the prime rate of interest. The Company has met
all of the restrictive covenants under the credit agreement as
of September 30, 1995.
F. No income tax benefits were provided on the losses in the
fiscal quarters ended September 30, 1995 and September 24, 1994
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 $20 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 its managers. Terms of the sale include
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 September 30, 1995 and September 24, 1994, 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 September
30, 1995 and September 24, 1994, and the related condensed
consolidated statements of operations, shareholders' equity, and
cash flows for the fourteen-week and thirteen-week periods ended
September 30, 1995 and September 24, 1994, 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 25, 1994, 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
Pittsburgh, Pennsylvania
November 10, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company has experienced declining sales in its traditional
promotional business in recent years. The decline continued in the
first quarter of fiscal 1996 principally due to continuing reduced
business ($600,000) with the Company's largest customer of fiscal
year 1994, with whom a significant decrease in sales was
experienced last year. Also, Replenishment sales decreased
$400,000 related to new store setup business last year which was
not repeated in the current year. Further, the Company closed its
retail store in September 1995, which accounted for $200,000 in
decreased sales. The Company experienced additional 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 product lines.
The Company is implementing marketing plans for 1996 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 ". All new promotional offerings must meet the requirements
of the SOLUTION MATRIX before they can be offered to customers.
The Company is adding $4 and $5 items to its Dollar Days
merchandise mix to improve return for the customer and the Company,
and is also assessing the feasibility of adding new licensed, well-known
brand names of merchandise and 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 source of cash during the first fiscal quarter ended
September 30, 1995 was collections on receivables. Operating
losses and repayment of current and long-term obligations were the
primary uses of cash. Working capital of $11.6 million at
September 30, 1995 decreased from $12.8 million at June 24, 1995,
and $16.4 million at September 24, 1994. As a result, the current
ratio at September 30, 1995 was 1.70, decreased from 1.76 at June
24, 1995, and 2.43 at September 24, 1994. The long-term debt to
equity ratio (including the sale/leaseback financing obligation) of
0.64 at September 30, 1995 increased from 0.60 at June 24, 1995 and
0.51 at September 24, 1994.
Cash and cash equivalents were $1,096,000 at September 30, 1995 as
compared to $567,000 at June 24, 1995 and $313,000 at September 24,
1994. Cash balances fluctuate daily to meet operating
requirements.
Accounts receivable of $7.5 million at September 30, 1995 decreased
from $9.5 million at September 24, 1994 as a result of decreased
sales in the first quarter in the current year and improved
collections. Receivables decreased seasonally from $9.9 million at
June 24, 1995.
Inventories of $18.4 million were comparable to $18.1 million at
June 24, 1995, and increased from $16.7 million at September 24,
1994. Lower than anticipated sales in the current year and earlier
arrival of merchandise have resulted in inventory levels higher
than originally planned at September 30, 1995. Inventory
reductions are planned for the second quarter of the 1996 fiscal
year, such that inventory levels at the end of December and
subsequent months are expected to be lower than the prior year, as
the Company continues to pursue its inventory reduction plan.
Aggregate borrowings (long-term debt and notes payable) increased
from $13.5 million at September 24, 1994 to $18.0 million at June
24, 1995 and $17.9 million at September 30, 1995, primarily as a
result of operating losses incurred. Letters of credit outstanding
were $1.5 million at September 30, 1995, $1.9 million at September
24, 1994 and $909,000 at June 24, 1995.
The Company's Credit Agreement provides for up to $15 million in
committed credit lines through December of 1995 and $10 million
through June 30, 1997, consistent with the Company's anticipated
needs. Availability under the line is further limited by the level
of eligible accounts receivable and inventories. At September 30,
1995 outstanding borrowings under the credit agreement were $10.3
million and outstanding letters of credit were $1.5 million. The
unused borrowing capacity was $1.0 million as of September 30,
1995. Subsequent to September 30, 1995, availability under the
credit agreement decreased as a result of decreased accounts
receivable related to the low level of sales in the first quarter
and subsequently. The Company has amended the credit agreement to
provide a temporary increase in available credit which is believed
to be sufficient to meet operating needs until sufficient sales are
shipped to develop adequate credit availability under the borrowing
formula.
The Company's made no capital expenditures in the first fiscal
quarter ended September 30, 1995. The Company initiated a project
in 1994 to replace all of its core information systems computer
hardware and software. Future expenditures of $700,000 to $1
million will be made in fiscal 1996 or later 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 can pass such
increases along to its customers.
RESULTS OF OPERATIONS
First Quarter Fiscal 1996 Compared with First Quarter Fiscal 1995
Net Sales. Aggregate net sales for the fiscal 1996 first quarter
were $9,180,000, a decrease of $1,855,000 (16.8%) compared to
$11,035,000 in the prior year first quarter.
Sales to the Company's largest customer from 1994 declined
materially in fiscal 1995 and accounted for $600,000 in decreased
sales in the first quarter of fiscal 1996. In addition,
Replenishment sales decreased $400,000 as a result of new store
setup business last year which did not repeat in the current year.
The Company closed its retail store in September 1995, resulting in
decreased first quarter sales of $200,000.
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:
NET SALES
First Quarter Ended
-----------------------------
September September Increase
30, 1995 24, 1994 (Decrease)
--------- --------- ----------
Dollar Days $ 6,069,000 $ 7,199,000 $ (1,130,000)
Replenishment 2,058,000 2,493,000 (435,000)
----------- ----------- -------------
Core Promotional Business 8,127,000 9,692,000 (1,565,000)
Gift 910,000 937,000 (27,000)
Other 143,000 406,000 (263,000)
----------- ----------- ------------
$ 9,180,000 $11,035,000 $(1,855,000)
=========== =========== ============
Cost of Products Sold and Gross Profit Margins. Gross profit
margins (as a percentage of sales) decreased from 28.9% in fiscal
1995 to 22.0% in the current year, principally due to increased
cost of merchandise sold in core business programs, related
primarily to the mix of programs sold and increased plastic
manufacturing costs related to lower levels of production. Also,
higher than anticipated returns on prior period guaranteed sales
contributed to decreased gross margins.
Operating Expenses. Operating expenses decreased from $2,932,000
(26.6% of sales) in the fiscal 1995 first quarter to $2,719,000
(29.6% of sales) in 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 $274,000 was due to higher
average borrowing levels in the current year and increased
effective interest rates and other borrowing costs.
Other Income (Expense), Net. Other income of $155,000 in the first
quarter of fiscal 1996 represented miscellaneous items. The prior
year other income amount of $4,000 was also comprised of
miscellaneous items.
Loss From Continuing Operations Before Income Taxes. The loss
increased from $119,000 in fiscal 1995 to $1,203,000 in fiscal
1996. The increase of $1,084,000 reflects the combined effect of
all the above.
Provision for Income Taxes. No income tax benefits were provided
on the losses in the first 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 $20 million for income tax
reporting purposes.
Loss From Continuing Operations. The increase of $1,084,000
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 $233,000 for the first
quarter of fiscal 1995 were reclassified.
Net Loss. The increased loss of $851,000 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 Amended and Restated Loan and Security Agreement
dated October 20, 1995, filed herein. 18
23 Acknowledgment of Independent Auditors, filed herein. 69
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the
thirteen weeks ended September 30, 1995:
September 7, 1995 - Report of the resignation and subsequent
replacement of the Company's Chairman, President and Chief
Executive Officer.
September 18, 1995 - Report of the sale of certain assets and
the business of the Company's subsidiary, Kensington Lamp
Collection.
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: November 13, 1995 T. Ronald Casper
-----------------------------
T. Ronald Casper
Acting President and
Chief Executive Officer
Date: November 13, 1995 Kenneth L. Campbell
------------------------------
Kenneth L. Campbell
Senior Vice President, Finance
(Principal Financial and
Accounting Officer)