PAGE 1
SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
ACTION INDUSTRIES, INC.
_______________________________________________________________________
Name of Registrant as Specified In Its Charter)
______________________________________________________________________
(Name of Person(s) Filing Proxy Statement if other than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(I)(1),
14a-6(I)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(I)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(I)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
______________________________________________________________________
2) Aggregate number of securities to which transaction applies:
______________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
___________________________________________________________________
[X] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
1) Amount Previously Paid: ______________________________________
2) Form, Schedule or Registration Statement No.: ________________
3) Filing Party: ________________________________________________
4) Date Filed: __________________________________________________
PAGE 3
ACTION INDUSTRIES, INC.
460 Nixon Road
Cheswick, Pennsylvania 15024-1098
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held January __, 1997
Notice is hereby given that the Annual Meeting of the Shareholders of
Action Industries, Inc. will be held at the Company's headquarters,
located at 460 Nixon Road, Cheswick, Pennsylvania, on January __, 1997,
at 10:00 A. M. Local Time, for the following purposes:
(1) To vote on the election of one director of the Company to
serve for a three-year term.
(2) To vote upon a Plan of Asset Transfer providing for the
sale of substantially all of the assets of the Company to Mazel Stores,
Inc. (successor to Mazel Company, L.P.). A copy of the Plan of Asset
Transfer is attached to the accompanying Proxy Statement as Exhibit A.
In accordance with the applicable provisions of the Pennsylvania
Business Corporation Law, shareholders will not have dissenter's
appraisal rights in connection with the vote on the Plan of Asset
Transfer.
(3) To vote upon a proposed amendment to the Company's
Restated Articles of Incorporation increasing the authorized shares
of Common Stock of the Company from 20,000,000 to 80,000,000 shares
and authorizing 20,000,000 shares of Preferred Stock of the
Company.
(4) To transact such other business as may properly come
before the meeting.
The Board of Directors has established the close of business
on November 25, 1996 as the record date for the determination of
shareholders entitled to notice of and to vote at the Annual Meeting or
any adjournments thereof.
It is important that your shares be represented at this
meeting regardless of the number of shares that you hold. PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
Your proxy can be withdrawn by you at any time before it is voted by
notice to the Secretary of the Corporation, or by appearing at the
meeting and voting in person.
By Order of the Board of Directors,
ACTION INDUSTRIES, INC.
KENNETH L. CAMPBELL
Senior Vice President, Finance,
Chief Financial Officer and Secretary
PAGE 4
January __, 1997
YOUR ATTENTION IS DIRECTED TO THE PROXY STATEMENT ACCOMPANYING
THIS NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
PAGE 5
ACTION INDUSTRIES, INC.
460 Nixon Road
Cheswick, PA 15024-1098
Telephone Number (412) 782-4800
PROXY STATEMENT
For Annual Meeting of Shareholders
January __, 1996
This Proxy Statement is being furnished to holders of
record on November 25, 1996 (the "Record Date") of common stock,
par value $0.10 per share ("Common Stock"), of Action Industries,
Inc. ("Action" or the "Company"), in connection with the
solicitation by the Board of Directors of the Company of the
accompanying Proxy for use at the Annual Meeting of Shareholders
(the "Annual Meeting") to be held on January __, 1997 and at any
adjournments thereof. This Proxy Statement and the accompanying
form of Proxy are first being mailed to shareholders of the Company
on or about January __, 1997.
At the Annual Meeting, the shareholders of the Company
will vote upon the following matters:
1. The election of one person to the Board of Directors
of the Company, to hold office for a term of three years and until
his successor is duly elected and qualified;
2. The proposed amendment to the Company's Restated Articles
of Incorporation (the "Amendment") increasing the authorized shares of
Common Stock of the Company from 20,000,000 to 80,000,000 shares and
authorizing 20,000,000 shares of Preferred Stock; and
3. The proposed sale of assets of the Company to Mazel
Stores, Inc., successor to Mazel Company, L.P. ("Mazel") pursuant to the
terms of a Plan of Asset Transfer (the "Plan"), a copy of which is
attached hereto as Exhibit A. The Plan incorporates an Asset Purchase
Agreement dated October 18, 1996 between the Company and Mazel (the
"Agreement"). A copy of the Agreement is included in Exhibit A. See
"The Sale."
The Board of Directors of the Company has unanimously approved
each of the Amendment and the Plan and recommends that the shareholders
vote to approve the Amendment and the Plan. Each of the directors of
the Company who owns Common Stock has indicated his intent to vote his
shares of in favor of the Amendment and the Plan.
The date of this Proxy Statement is January __, 1997.
PAGE 6
TABLE OF CONTENTS
Page
SUMMARY OF PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . .8
THE ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . 11
Date and Time of Meeting. . . . . . . . . . . . . . . . . . . . . 11
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Voting and Vote Required . . . . . . . . . . . . . . . . . . . . 11
Proxy Solicitation and Expenses of Transaction. . . . . . . . . . 12
PRINCIPAL HOLDERS OF THE COMPANY'S COMMON STOCK. . . . . . . . . . . 12
Security Ownership of Management. . . . . . . . . . . . . . . . . 12
Security Ownership of Certain Others. . . . . . . . . . . . . . . 14
MARKET PRICES OF AND DIVIDENDS ON COMPANY COMMON STOCK . . . . . . . 15
ELECTION OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 16
Nominee For a 3-Year Term Expiring in 1999. . . . . . . . . . . . 16
Director Completing a 3-Year Term . . . . . . . . . . . . . . . . 16
Directors Continuing in Office. . . . . . . . . . . . . . . . . . 17
Compliance With Certain Filing Requirements . . . . . . . . . . . 17
The Board of Directors and Its Committees . . . . . . . . . . . . 18
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . 19
Compensation for Directors. . . . . . . . . . . . . . . . . . . . 19
Compensation for Executive Officers . . . . . . . . . . . . . . . 21
Employment and Severance Agreements . . . . . . . . . . . . . . . 22
Compensation Committee Interlocks and Insider
Participation. . . . . . . . . . . . . . . . . . . . . . . . 22
Compensation Committee Report On Executive Compensation . . . . . 22
Company Performance . . . . . . . . . . . . . . . . . . . . . . . 23
Executive Officers of the Company . . . . . . . . . . . . . . . . 24
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION. . . . . . . . . . . 24
THE SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Background and Reasons for the Sale . . . . . . . . . . . . . . . 26
Board of Directors' Recommendation. . . . . . . . . . . . . . . . 34
Terms of the Sale . . . . . . . . . . . . . . . . . . . . . . . . 34
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 36
Business Pending the Sale . . . . . . . . . . . . . . . . . . . . 36
Noncompetition. . . . . . . . . . . . . . . . . . . . . . . . . . 36
Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . 36
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Consequences of Failure to Close. . . . . . . . . . . . . . . . . 38
Absence of Dissenter's Rights . . . . . . . . . . . . . . . . . . 38
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . 38
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . 39
Interest of Certain Persons in the Sale . . . . . . . . . . . . . 39
Changes in Shareholder Rights . . . . . . . . . . . . . . . . . 39
Status of the Company After the Sale. . . . . . . . . . . . . . . 39
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . 40
PAGE 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . 41
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . 41
Liquidity And Capital Resources . . . . . . . . . . . . . . . . . 42
Results Of Operations . . . . . . . . . . . . . . . . . . . . . . 44
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Seasonality . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Trademarks, Licenses And Franchises . . . . . . . . . . . . . . . 54
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 55
MAZEL COMPANY, L.P.. . . . . . . . . . . . . . . . . . . . . . . . . 56
INDEPENDENT AUDITORS. . . . . . . . . .. . . . . . . . . . . . . . . 56
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
1997 Shareholder Proposals. . . . . . . . . . . . . . . . . . . . 57
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 57
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 58
PROFORMA FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . 83
EXHIBIT A - PLAN OF ASSET TRANSFER. . . . . . . . . . . . . . . . . 85
PROXY CARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . .128
PAGE 8
SUMMARY OF PROXY STATEMENT
The following is a summary of certain information contained in this
Proxy Statement. This summary is provided for convenience and should
not be considered complete. It is qualified in its entirety by this
reference to the more detailed information appearing in this Proxy
Statement.
THE ANNUAL MEETING
- ------------------
Date: January __, 1997
Time and Place: 10:00 a.m. local time
460 Nixon Road
Cheswick, Pennsylvania
Record Date: November 25, 1996
Shares Outstanding:
ELECTION OF DIRECTORS
- ---------------------
A resolution will be offered at the Annual Meeting to elect Charles C.
Cohen as Director of the Company for a three-year term expiring in
1999. Mr. Cohen is presently a member of the Board of Directors of
the Company. See "Election of Directors."
Proxies received in the accompanying form will be voted for the
proposal to elect Mr. Cohen to the Board of Directors of the Company
except where authority to vote for Mr. Cohen is withheld.
Management and the Board of Directors of the Corporation unanimously
recommend that the shareholders vote FOR the election of the nominee.
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
- -----------------------------------------------
A resolution will be offered at the Annual Meeting to amend the
Company's Restated Articles of Incorporation to increase the Company's
authorized Common Stock from 20,000,000 to 80,000,000 shares and to
authorize 20,000,000 shares of preferred stock. See "Amendment to
Restated Articles of Incorporation."
Management and the Board of Directors of the Company unanimously
recommend that shareholders vote FOR approval of the proposed
Amendment to the Restated Articles of Incorporation.
THE SALE
- --------
The shareholders of the Company are being asked to vote at the Annual
Meeting on a proposal to sell substantially all of the Company's
assets to Mazel, upon the terms and conditions provided for in the
Plan (the "Sale"). The Plan provides for the sale to Mazel of all of
the Company's inventory of merchandise, goods and other products held
for sale to the Company's promotional business customers and all
PAGE 9
related point of sale inventory as well as all intellectual property
and certain intangible assets relating to the promotional business.
The purchase price for the assets will be an amount equal to $100,000
plus 63.3% of the Company's cost of the inventory sold. The proceeds
are estimated to range from $1.1 million to $1.5 million, depending on
the level of inventory remaining at the time the sale takes place.
See "The Sale-Terms of the Sale."
RECOMMENDATION
- --------------
The Board of Directors of the Company has concluded that the sale of
the assets of the Company to Mazel pursuant to the Plan is fair to the
shareholders of the Company in that it is the best available
alternative for maximizing the value of the Company's assets. The
Board of Directors unanimously recommends that the shareholders of the
Company vote to approve the Plan. See "The Sale-Background and
Reasons for the Sale."
CONSEQUENCES OF THE SALE
- ------------------------
If the Sale is consummated, the Company's only remaining assets will
be its accounts receivable, notes and other receivables relating to
prior asset dispositions and transactions and its net operating loss
tax carryforwards. The Company is actively exploring the strategic
options available to it following the Sale, including business
combinations with other operating businesses in order to continue as
an operating concern and preserve all or a portion of its net
operating loss tax carryforwards. While the Company has received
indications of interest from various third parties for a business
combination of this type, there can be no assurance that the Company
will consummate any such transaction. See "The Sale-Background and
Reasons for the Sale."
CONDITIONS TO THE SALE
- ----------------------
Consummation of the Sale pursuant to the Plan is subject to approval
by the holders of a majority of the Company's Common Stock, in
addition to the fulfillment of certain other conditions. See "The
Sale-Terms of the Sale-Conditions of the Sale."
EFFECTIVE DATE
- --------------
The effective date of the Sale will be as soon as practicable after
receipt of the necessary shareholder approval. The Company presently
expects such effective date to be on or about January __, 1997.
FEDERAL INCOME TAX CONSEQUENCES
- -------------------------------
The Sale will result in a net loss to the Company for federal income
tax purposes, thereby increasing the Company's net operating loss tax
carryforward. See "The Sale-Federal Income Tax Consequences."
PAGE 10
DISSENTERS' RIGHTS
- ------------------
Shareholders of the Company will not have dissenters' rights in
connection with the Sale. See "The Sale-Absence of Dissenters'
Rights."
MARKET FOR COMMON STOCK
- -----------------------
The Company's Common Stock is listed on the American Stock Exchange
("AMEX") under the trading symbol "ACZ." AMEX halted trading in the
Company's Common Stock on October 21, 1996 because of its failure to
timely file its Annual Report for fiscal 1996 and because of the
pending Sale. If the Plan is approved by the shareholders and the
Sale is consummated, the Company will have ceased its current
operations and, unless it subsequently completes a business
combination with an operating company, it is likely that the Company
will be unable to meet the criteria for continued listing on the AMEX.
See "Market Prices of and Dividends on Company Common Stock."
CHANGES IN SHAREHOLDERS' RIGHTS AND HOLDINGS
- --------------------------------------------
Following the Sale, the shareholders of the Company will continue to
hold their currently outstanding shares of Common Stock and will
continue to enjoy the same rights as shareholders as they enjoyed
prior to consummation of the Sale. However, following the Sale, the
Company will have no operating assets or business unless and until it
completes a business combination with an operating company. See "The
Sale-Changes in Shareholder Rights" and "Status of the Company After
the Sale."
PAGE 11
THE ANNUAL MEETING
DATE AND TIME OF MEETING
The Annual Meeting will be held on January __, 1997, at 10:00 a.m.
local time at the Company's headquarters located at 460 Nixon Road,
Cheswick, Pennsylvania.
RECORD DATE
The close of business on November 25, 1996, has been fixed as
the record date for determination of shareholders entitled to notice
of and to vote at the Annual Meeting (the "Record Date"). As of the
Record Date the Company had outstanding 5,539,458 shares of Common
Stock, held of record by approximately 1,300 persons, including
brokers named on listings provided by clearing agencies. It is
estimated that these holders represent approximately 2,700 beneficial
owners of the Company's Common Stock.
VOTING AND VOTE REQUIRED
Shares of Common Stock may be voted by shareholders in person or by
proxy. Except as described below, holders of Common Stock are entitled
to one vote per share on all matters. Approval of the proposals to
approve the Amendment and the Plan each requires the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock
present in person or represented by proxy at the meeting and entitled to
vote on such matters. Shareholder abstentions and broker "non-votes"
(i.e. a broker-dealer's withholding of votes for shares held in street
name for a shareholder who has not given voting instructions) will be
counted as "no" votes.
With respect to the election of directors, shareholders have
cumulative voting rights. That is, each shareholder is entitled to
cast a number of votes equal to the number of shares of Common Stock
he or she holds multiplied by the number of directors to be elected.
Shareholder abstentions and broker "non-votes" will be counted neither
for nor against the nominee for election as director.
When the Proxy enclosed herewith is properly executed and
returned, the shares represented by it will be voted in accordance
with the directions thereon or, if no directions are indicated, the
Proxy will be voted "FOR" election of the nominee for director, "FOR"
approval of the Amendment and "FOR" approval and adoption of the Plan
and the transaction contemplated thereby. If any other matters should
be presented at the Annual Meeting upon which a vote may properly be
taken, it is intended that the shares represented by Proxies at such
meeting will be voted on such matters in accordance with the sole
discretion of the Board of Directors of the Company.
PAGE 12
If the enclosed Proxy is executed and returned, it nevertheless may be
revoked at any time prior to its exercise, either by giving written
notice of revocation to the Secretary of the Company (at Action
Industries, Inc., Attention: Secretary, 460 Nixon Road, Cheswick,
Pennsylvania 15024), or by appearing at the Annual Meeting and voting
in person. Attendance at the Annual Meeting will not in and of itself
constitute revocation of a proxy.
PROXY SOLICITATION AND EXPENSES OF TRANSACTION
Proxies are being solicited by and on behalf of the Board of Directors
of the Company. All expenses of this solicitation, including the cost
of mailing, will be borne by the Company. Directors, officers and
employees of the Company may, at no additional compensation, use
telephone and other means of communication to request the holders of
Common Stock to return proxies. The Company will not pay any
compensation for the solicitation of proxies, but may reimburse to
nominees, fiduciaries and other custodians their reasonable expenses in
sending proxy materials to their principals and obtaining their voting
instructions.
PRINCIPAL HOLDERS OF THE COMPANY'S COMMON STOCK
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows, as of the Record Date, the
beneficial ownership of the Company's Common Stock of each director,
each person who served as Chief Executive Officer or acted in a
similar capacity during the fiscal year ended June 30, 1996 ("fiscal
1996"), each executive officer of the Company during fiscal 1996 whose
total annual salary and bonus for fiscal 1996 was at least $100,000,
and all the directors and officers of the Company as a group.
PAGE 13
Amount and Nature of Beneficial Ownership
-----------------------------------------
Sole Voting Shared
and Voting and Percent of
Investment Investment Shares
Name Power Power Total Outstanding
- ---- ----------- ---------- ----- -----------
Joel M. Berez 18,014 677,937 695,951 (1) 12.6%
Kenneth L. Campbell 20,352 0 20,352 (2) *
T. Ronald Casper 10,000 2,000 12,000 (3)
Robert I. Christian (4) 0 0 0 -
Charles C. Cohen 12,750 0 12,750 (5) *
Robert P. Garrity (6) 2,200 0 2,200 *
Joel L. Gold 11,250 500 11,750 (7) *
R. Craig Kirsch (8) 0 0 0 -
James H. Knowles, Jr. 64,875 0 64,875 (9) 1.2%
David S. Shapira 7,750 28,302 36,052 (10) *
William B. Snow 4,000 0 4,000 (11) *
All directors and officers
as a group (14 persons) 172,790 714,354 887,144 (12) 15.9%
* Represents less than 1% of the outstanding shares
(1) Amount includes 667,506 shares held in twelve trusts for which
Mr. Joel Berez is co-trustee but as to which he disclaims
beneficial ownership in 336,970 shares and 10,431 shares held by
Mr. Berez jointly with his wife.
(2) Amount includes 19,000 shares which Mr. Campbell does not now
own, but has the right to acquire within 60 days under stock
option agreements.
(3) Amount includes 2,000 shares held by Mr. Casper's wife.
(4) Mr. Christian resigned as an executive officer of the Company in
May of 1996.
(5) Amount includes 7,750 shares which Mr. Cohen does not now own,
but has the right to acquire within 60 days under a stock option
agreement.
(6) Mr. Garrity resigned as an executive officer from the Company in
July of 1996.
(7) Amount includes 7,750 shares which Mr. Gold does not now own but
has the right to acquire under a stock option agreement and 500
shares held by Mr. Gold's wife.
(8) Mr. Kirsch resigned as an executive officer of the Company in
September 1995.
(9) Amount includes 5,875 shares which Mr. Knowles does not now own
PAGE 14
but has the right to acquire within 60 days under a stock option
agreement.
(10) Amount includes 7,750 shares which Mr. Shapira does not now own
but has the right to acquire within 60 days under a stock option
agreement and 28,302 shares held in various trusts for which Mr.
Shapira is co-trustee.
(11) Amount includes 4,000 shares which Mr. Snow does not now own but
has the right to acquire within 60 days under stock option
agreement.
(12) Amount includes 73,458 shares which the directors and officers do
not now own but have the right to acquire within 60 days under
stock option agreements.
SECURITY OWNERSHIP OF CERTAIN OTHERS
The following table shows the beneficial ownership of the
Company's Common Stock of those persons, other than the persons named
in
the table above, who are known by the Company to be beneficial owners
of
more than 5% of the Company's outstanding Common Stock.
Amount and Percent of
Nature of Shares
Name and Address Beneficial Ownership Outstanding
- ---------------- -------------------- -----------
Steven H. Berez 673,400 (1) 12.2%
35 Sutton Road
Needham, MA 02192
Barry W. Blank 583,500 (2) 10.5%
3 Hanover Square
New York, NY 10004
(1) Steven H. Berez's shareholdings include 5,698 shares as to which he
has sole voting and dispositive power, 196 shares as to which he
shares voting and dispositive power with his wife, and 667,506
shares held in twelve trusts as to which he shares voting and
dispositive power as co-trustee but as to which he disclaims
beneficial ownership in 336,970 shares. The shares held by Mr.
Berez as co-trustee are the same 643,506 shares as those described
with respect to Joel M. Berez in footnote 1 under "Security Ownership of Management."
(2) This amount excludes any shares which may be owned by Mr. Blank's
customers, in which he disclaims any beneficial or other interest
and over which he has no voting or dispositive power.
PAGE 15
MARKET PRICES OF AND DIVIDENDS ON COMPANY COMMON STOCK
The Company's Common Stock is listed on the American Stock Exchange
("AMEX") under the trading symbol "ACZ". On October 21, 1996, AMEX
halted trading in the Company's Common Stock because the Company did not
timely file its Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 and because of the pending sale of assets pursuant to the
Agreement. The Company had delayed the filing until it completed
negotiations of the Agreement and a new lease on its headquarters, each
of which had a significant impact on the Company's balance sheet and
statement of operations. Trading of the Company's Common Stock on AMEX
will not resume until AMEX has determined that the Company meets the
qualifications for continued AMEX listing. As of the date of this Proxy
Statement, trading of the Company's Common Stock on the AMEX had not yet
resumed.
The following table sets forth the high and low sale prices of
the Common Stock during each quarter during the fiscal years ended June
24, 1995 and June 30, 1996 and during the first quarter and second
quarter (through October 21, 1996) of the fiscal year ended June 30,
1997:
Fiscal Year Ended
----------------------------------------------------------------
June 30, 1997 June 30, 1996 June 24, 1995
High Low High Low High Low
---- --- ---- --- ---- ---
First Quarter 2-11/16 1-5/8 1-1/4 9/16 2-1/2 2
Second Quarter 1-15/16 1 3/4 7/16 2-5/16 1-5/8
Third Quarter 3/4 7/16 2-1/8 1-5/16
Fourth Quarter 2-11/16 3/8 1-1/2 5/16
The high and the low sales price per share of the Company's
Common Stock on the AMEX on August 30, 1996, the last trading day before
public announcement of the proposed Sale transaction, was $2.50. If the
Plan is approved by the shareholders and the sale of the Company's
assets is consummated on the terms described herein, the Company will
have ceased its current operations. The Company is actively pursuing
the development of a business combination with an operating company in
order to meet the AMEX listing requirements. See "The Sale-Background
and Reasons for Sale." However, there can be no assurance that the
Company will be able to complete any such business combination. It is
likely that the Company will be unable to meet the criteria for
continued listing on AMEX unless the Company completes such a business
combination.
The Company's Board of Directors has not declared cash dividends during
the last two fiscal years and has no present plans to do so.
PAGE 16
ELECTION OF DIRECTORS
Ernest S. Berez, who had been a Director of the Company since
1951 and had served as Chairman of the Board from 1987 to 1990, retired
from the Board in January 1996. With Mr. Berez s departure, the Board
of Directors is now comprised of six members divided among three
classes, as set forth below. Each class of Directors serves a
three-year term.
Name of Director Term Expires
---------------- ------------
Joel L. Gold 1996 (1)
Charles C. Cohen 1997 (2)
James H. Knowles, Jr. 1997
David S. Shapira 1997
Joel M. Berez 1998
William B. Snow 1998
(1) Mr. Gold has declined nomination for election as Director at the
Annual Meeting.
(2) At the Annual Meeting, Mr. Cohen will resign from the class of
directors, the term of which expires in 1997, and will be a nominee
for election to the class of directors, the term of which expires
in 1999.
NOMINEE FOR A 3-YEAR TERM EXPIRING IN 1999
Charles C. Cohen, 55. Mr. Cohen has served as a Director of
the Company since June 1991. He has been a Director of the law firm of
Cohen & Grigsby, P.C. since 1981 and Adjunct Professor of Securities
Regulation at the University of Pittsburgh School of Law since 1976. He
also serves on the Boards of Directors of Robroy Industries, Inc. and
several civic organizations. At the Annual Meeting, Mr. Cohen will
resign from the class of directors, the term of which expires in 1997,
in order to stand for election to the class of directors, the term of
which expires in 1999. The Board of Directors recommends that the
shareholders vote FOR the election of the nominee named above.
DIRECTOR COMPLETING A 3-YEAR TERM
Joel L. Gold, 55. Mr. Gold has served as a Director of the
Company since 1978. He has been Managing Director of Fechtor, Detwiler
& Co., Inc., an investment banking company since April 1995. Prior to
that, he had served as Managing Director for Furman Selz, Incorporated,
an investment banking company from 1992 to 1995, and as Managing
Director for Bear, Stearns & Co., Inc., also an investment banking firm,
from 1990 to 1992. He also serves on the Boards of Directors of Concord
Camera Corp., Life Medical Sciences, Inc. and Biomechanics Corporation
of America. Mr. Gold is not a nominee for election as Director at the
Annual Meeting.
PAGE 17
DIRECTORS CONTINUING IN OFFICE
Joel M. Berez, 42. Mr. Berez has served as a Director of the
Company since 1983, and as Chairman since September 1995. He has been
a business consultant since May 1996. Prior to that he had served as
President and Chief Operating Officer of Digital Alchemy, Inc., a
producer of home education software from January 1995. He had
previously been employed by the Company from 1988 to 1995 and had served
in several executive positions, most recently Senior Vice President.
William B. Snow, 64. Mr. Snow has served as a Director of the
Company since August 1994. Since July 1994 he has served as Vice
Chairman and Chief Financial Officer of Movie Gallery, Inc., a video
cassette and retail sales and rental business. He had previously been
Director, Executive Vice President and Chief Financial Officer of
Consolidated Stores Corporation, a retailer in the close-out" consumer
goods industry since 1985.
James H. Knowles, Jr., 56. Mr. Knowles has served as a
Director of the Company since November 1993. Having over ten years of
experience in the founding and management of venture capital firms, he
is presently President and Chief Executive Officer of Dragonswood, Inc.,
a venture capital investment management company, where he has served
since 1988.
David S. Shapira, 54. Mr. Shapira has served as a Director of
the Company since 1981. He has held various executive positions with
Giant Eagle, Inc. a retail supermarket chain, including Director,
Chairman, President and Chief Executive Officer since 1980. He also
serves on the Boards of Directors of Mellon Bank, N. A., Mellon Bank
Corporation, Equitable Resources, Inc. and Bell Telephone Company of
Pennsylvania.
In August 1992, Phar-Mor, Inc. reported that it had been the
victim of a fraud and embezzlement scheme perpetrated by Phar-Mor
executives whose employment was immediately terminated. David S.
Shapira, a Director of the Company, was Director and Chief Executive
Officer of Phar-Mor at the time of discovery of the embezzlement.
Company Director, Charles C. Cohen, was also a Director of Phar-Mor at
that time. On August 17, 1992 Phar-Mor filed for protection under
Chapter 11 of the United States Bankruptcy Act. Mr. Shapira was an
executive officer of Phar-Mor at the time of filing.
COMPLIANCE WITH CERTAIN FILING REQUIREMENTS
Directors and executive officers are required under Section
16(a) of the Securities Exchange Act of 1934 to file reports concerning
their holdings and transactions in Company stock. All such reports for
fiscal year 1996 have been filed on a timely basis.
PAGE 18
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The full Board of Directors held four meetings during fiscal
1996. No member failed to attend at least 75% of the aggregate number
of meetings of the full Board and meetings of the Board committees on
which he serves.
Executive Committee. The Board has an executive committee,
the function of which is to conduct all the business of the Board of
Directors in managing the Company between meetings of the Board, subject
to any limitations imposed by the Board, and provided that matters of
importance that do not require immediate action will be referred to the
full Board. The members of the executive committee are Messrs. Cohen,
Knowles, Shapira and Berez. Mr. Kirsch was a member until his
resignation and served as the committee s chairman. The executive
committee met five times during fiscal 1996.
Audit Committee. The Board has an audit committee, the
function of which is to assist the Board of Directors in fulfilling its
obligation concerning the financial accounting and reporting practices
of the Company and the sufficiency of its auditing. In furtherance of
its function, the audit committee reviews the scope and results of the
annual audit by the Company s independent public accountants, ensures
the independence of the public accountants and makes appropriate
inquiries as to the adequacy of the Company s financial and operating
controls. The members of the audit committee are Messrs. Cohen,
Knowles, Snow and Berez, with Mr. Snow serving as chairman. The audit
committee met twice during fiscal 1996.
Nominating Committee. The Board has a nominating committee,
the functions of which are to consider and recommend candidates to fill
vacancies or new openings on the Board and to consider and recommend
successor management for the Company. The members of the nominating
committee are Messrs. Cohen and Berez, with Mr. Cohen serving as
chairman. Mr. Kirsch was a member until his resignation. The
nominating committee met informally several times during fiscal 1996.
The nominating committee will consider director candidates recommended
by shareholders who submit the candidate s resume to the nominating
committee in care of Mr. Cohen at the Company s address.
Compensation Committee. The Board has a compensation
committee, the function of which is to review and determine the
compensation of senior management. The members of the compensation
committee for fiscal 1996 were Messrs. Gold, Knowles, Shapira and Berez,
with Mr. Shapira serving as chairman. Mr. Kirsch also participated as
a nonvoting member until his resignation. The compensation committee
met twice during the past year. From time to time the committee and the
Company have retained professional benefit and compensation consultants
to advise them concerning the compensation of directors, officers and
other management.
PAGE 19
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION FOR DIRECTORS
Directors who are employees of the Company receive no
additional compensation for their services on the Board or any committee
of the Board.
During fiscal 1996, compensation for nonemployee Directors
included an annual retainer of $12,000 for Directors and $17,000 for the
Chairman plus $1,000 for each full Board meeting attended and $500 for
each committee meeting attended on a day other than the day of a full
Board meeting. In November 1996 the Board of Directors suspended the
current payment of the retainer until the Company's current secured and
unsecured creditors are satisfied in full, and reduced the per meeting
attendance fee to $250, to be paid currently.
Upon appointment to the Board, each of the present nonemployee
Directors other than Mr. Joel Berez, a former employee, was granted an
option to purchase 7,500 shares of Common Stock, pursuant to a
Nonemployee Director Stock Option Plan approved by the shareholders in
1991. In addition, each nonemployee Director received, in fiscal 1996,
options to purchase 1,000 shares of Common Stock. Pursuant to the
Nonemployee Director Stock Option Plan, new nonemployee Directors
receive an initial grant of options to purchase 4,000 shares of Common
Stock upon election to the Board. In November 1996, the Board of
Directors increased the annual grant of stock options to nonemployee
Directors to 2,000.
Ernest S. Berez, former Director, Chairman and President of
the Company, is compensated under an agreement with the Company dated
July 31, 1990 and amended July 31, 1991. Pursuant to that agreement,
Mr. Berez receives lifetime retirement benefits in the amount of
$139,200 annually. If Mr. Berez's wife should survive him, she will
receive lifetime survivor benefits of one-half Mr. Berez s benefit
amount. In November 1996, the Company suspended payment of such
benefits to Mr. Berez in an effort to preserve its liquidity. Mr. Berez
has consented to the suspension of payments pending negotiation of a
settlement of the aggregate amount due and future payment terms. The
obligation is recorded in the financial statements. Ernest Berez and
Joel Berez are father and son.
COMPENSATION FOR EXECUTIVE OFFICERS
The following tables show, for the last three fiscal years,
all compensation received by each person who served as Chief Executive
Officer during fiscal 1996, the two other executive officers of the
Company as of the end of fiscal 1996 and one other individual who served
as an executive officer of the Company during fiscal 1996 but left the
employ of the Company prior to the end of the fiscal year.
PAGE 20
SUMMARY COMPENSATION TABLE
--------------------------------
Long-term
Compensation
Annual Compensation Awards
----------------------------- ------------
Securities
Name and Underlying
Principal Fiscal Options/ All Other
Position Year Salary($) Bonus($) SARs (#) Compensation
- -------- ------ --------- -------- ---------- ------------
T. Ronald Casper (1) 1996 0 0 0 $285,000
President and Chief 1995 0 0 0 0
Executive Officer 1994 0 0 0 0
R. Craig Kirsch (2) 1996 243,437 0 0 0
Former Chairman, 1995 243,437 0 88,642 2,448
President and Chief 1994 243,437 0 0 2,875
Executive Officer
Robert I. Christian (3) 1996 125,000 15,000 0 0
Former Senior Vice 1995 125,000 30,000 175,000 340
President, Sales 1994 49,725 0 0 0
Kenneth L. Campbell 1996 118,690 0 0 0
Senior Vice President, 1995 118,690 0 20,000 522
Finance 1994 118,698 6,000 0 554
Robert P. Garrity (4) 1996 108,000 0 0 0
Senior Vice President, 1995 106,082 0 25,000 441
Operations 1994 20,000 0 20,000 0
(1) Mr. Casper is not an employee of the Company. He serves as
President and Chief Executive Officer under a contract between the
Company and Cornerstone Capital Associates, Ltd. (CCA), a merchant
banking firm of which Mr. Casper is a principal. The amount shown
for All Other Compensation represents the fees paid to Cornerstone
for the services of Mr. Casper. CCA is not an affiliate of the
Company.
(2) During fiscal 1995, Mr. Kirsch, who resigned from the Company in
September 1995, was granted options to purchase 88,462 shares of
Common Stock which have since expired and been canceled.
(3) During fiscal 1995, Mr. Christian, who resigned from the Company in
May 1996, was granted options to purchase 175,000 shares of Common
Stock which have since expired and been canceled.
(4) During fiscal years 1994 and 1995, Mr. Garrity was granted options
to purchase 20,000 shares and 25,000 shares, respectively, of
Common Stock which have since expired and been canceled.
PAGE 21
There were no Option/SAR Grants during the Company s fiscal
year ended June 30, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY End at FY End ($)
Shares Acquired Value Exercisable/ Exercisable/
on Exercise (#) Realized Unexercisable Unexercisable
--------------- -------- ------------- -------------
Kenneth L. Campbell 0 NA 18,000 $ 8,500
12,000 $12,750
Robert P. Garrity (1) 0 NA 13,000 $ 5,313
32,000 $21,250
(1) Mr. Garrity resigned from the Company on July 15, 1996. All of his
options expired October 15, 1996.
EMPLOYMENT AND SEVERANCE AGREEMENTS
R. Craig Kirsch. Until his resignation on September 7, 1995,
Mr. Kirsch served under an employment agreement dated as of March 12,
1992. The agreement provided Mr. Kirsch with employment for a term of
five years, base compensation subject to the review of the compensation
committee of the Board of Directors, participation in any incentive
compensation program implemented by the Company and customary insurance
benefits for executives of the Company. Mr. Kirsch's employment
agreement prohibits him from competing with the Company for a period of
two years following his resignation. Mr. Kirsch will receive separation
benefits in the form of salary continuation at an annual rate of
$243,437 until the earliest to occur of March 12, 1997, his employment
with another firm, or his death. In November 1996, the Company
suspended payment of such benefits to Mr. Kirsch in an effort to
preserve its liquidity. Mr. Kirsch has consented to the suspension of
payments with the understanding that the suspension is temporary and
that the Company's obligation to make the remaining payments under the
agreement remains. The obligation is recorded in the financial
statements. Mr. Kirsch had options to purchase a total of 288,462
shares of the Company's common stock which were canceled upon his
resignation.
Robert I. Christian. Until his resignation on May 26, 1996,
Mr. Christian served under an employment agreement which provided for
base compensation of $125,000 annually and minimum bonus payments,
subject to adjustment by the Company s Chief Executive Officer,
participation in the Company s stock option plan and participation in
the Company s group insurance benefits and retirement plan. Mr.
Christian had options to purchase a total of 175,000 shares of the
PAGE 22
Company s common stock; these were canceled upon his resignation.
Robert P. Garrity. Until his resignation on July 15, 1996,
Mr. Garrity served under an employment agreement dated December 1995.
The agreement provided for base compensation of $106,082 annually,
subject to adjustment by the Company s Chief Executive Officer,
participation in any bonus, incentive compensation and stock option plan
for executives of the Company and participation in the Company s group
insurance benefits and retirement plan. The agreement also prohibits
Mr. Garrity from competing with the Company for a period of two years
after his resignation. The agreement also provides that the Company
will continue to pay of Mr. Garrity s base salary and health care
benefits until January 15, 1997.
Kenneth L. Campbell. Mr. Campbell does not have an employment
contract but has a severance arrangement with the Company which
provides, in the event of termination of Mr. Campbell s employment,
other than for cause, that the Company will continue to pay
Mr. Campbell's base salary ($117,400 annually) and health care benefits
for a period of six months following termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during fiscal 1996
were Messrs. Gold, Knowles, Shapira and, until his resignation, Kirsch.
Mr. Kirsch, who was a nonvoting member of the Compensation Committee,
was President and Chief Executive Officer of the Company until his
resignation in September 1995. Mr. Shapira is a director and executive
officer of Giant Eagle, Inc. which engaged in several arms-length
business transactions with the Company during fiscal 1996. The Company
sold merchandise to Giant Eagle in the amount of $143,200 and paid Giant
Eagle $1,000 in trade show booth fees. Giant Eagle is not an affiliate
of the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
It is the policy of the compensation committee to compensate
executive officers of the Company under a pay plan with three
components: base salary, performance-based pay and equity ownership.
The compensation plan was developed in 1990 with the assistance and
recommendations of compensation consultants. Under this pay system,
base salaries for executives are set at or just below the market median
for each position, as determined from market survey information for
companies with comparable sales volume.
Performance-based compensation is paid pursuant to a plan
implemented in September 1990. The plan provides that a portion of the
compensation payable to each executive officer will be based upon the
individual s achievement of predetermined performance objectives and the
Company s attainment of overall performance objectives. The plan is a
flexible program in which performance objectives, which are individually
determined for each executive appropriate to his position, are
established each year by senior management. The aggregate amount
potentially payable to executives is determined by the Board of
PAGE 23
Directors each year, based upon a percentage of the Company s profits.
The plan has been suspended for the last three fiscal years, as
management did not expect the Company to have the financial resources to
fund it.
The equity ownership portion of executive officer compensation
is paid in the form of stock options under a Stock Option Plan approved
by the shareholders and amended in 1995. Under this plan the Company
granted, prior to fiscal 1996, options to executive officers and other
managers to purchase approximately 820,000 shares of Common Stock. The
number of options granted to each individual is based upon the
executive s position in the Company and the relative potential for that
position to affect the Company s performance. The option price for each
grant is the fair market value at the date of grant. Executives have
ten years from the date of grant to exercise their options by paying the
option price for the stock. There were no stock option grants under the
plan in fiscal 1996 as a result of the Company s performance.
The compensation committee believes that this three-component
pay system for executive officers effectively balances the employee s
need for income security and the Company s need to maximize performance.
The base salary component provides the executive a reliable but moderate
income stream. The opportunity for any additional income exists only
through the performance-based compensation plan and the stock option
plan, and is available only by virtue of individual achievement and
overall Company performance.
In September 1995, the Company engaged Cornerstone Capital
Advisors, Ltd. as consultant to the Company and its managing director,
T. Ronald Casper, as the chief executive officer of the Company for a
fee of $30,000 per month. Such fee was considered by the Board to be
reasonable compensation for such services in light of the fees charged
by comparable firms and individuals and the nature and scope of the
duties undertaken by Cornerstone and Mr. Casper.
By the Voting Members of the Compensation Committee
Joel L. Gold, James H. Knowles, Jr., and David S. Shapira.
COMPANY PERFORMANCE
The following chart is a comparison of five-year cumulative
shareholder return for the Company s Common Stock, the Standard & Poor's
Housewares Index and the Amex Market Value Index. The comparison
assumes $100 invested on June 30, 1991 in Company stock or in either
Index, including reinvestment of dividends.
PAGE 24
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG ACTION INDUSTRIES, THE AMEX MARKET VALUE INDEX
AND THE S&P HOUSEWARES INDEX
Fiscal Year Action Amex Market S&P Housewares
Ending Industries ($) Value Index ($) Index ($)
- ----------- -------------- --------------- --------------
June 1992 80 106 119
June 1993 44 121 125
June 1994 49 118 145
June 1995 23 140 167
June 1996 40 161 189
EXECUTIVE OFFICERS OF THE COMPANY
In September of 1995, R. Craig Kirsch resigned as the Company's
Chairman, President and Chief Executive Officer. T. Ronald Casper was
appointed Acting President and Chief Executive Officer and Joel M. Berez
was elected Chairman of the Board.
The names, ages, positions and business experience of the Company's
current executive officers are set forth below.
Kenneth L. Campbell, 49. Mr. Campbell has served as Senior
Vice President, Finance and Chief Financial Officer since 1989. He has
been an executive officer of the Company since his employment in 1984.
T. Ronald Casper, 53. Mr. Casper was appointed as Acting
President and Chief Executive Officer on September 7, 1995. Since 1988,
he has been Managing Director of Cornerstone Capital Advisors, Ltd., a
merchant banking organization, of which he is a co-founding principal.
Mr. Casper serves under a contract between the Company and Cornerstone,
and is not an employee of the Company. He was a consultant to the
Company, reviewing its strategic plans, for about two months prior to
his appointment.
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
The Board of Directors, on November 11, 1996, unanimously adopted
resolutions proposing an amendment to the Restated Articles of
Incorporation of the Company. The full text of the proposed Amendment
is as follows:
"Article 5 of the Restated Articles of Incorporation of the Corporation
is hereby amended to read as follows:
5. (a) The aggregate number of shares which the
Corporation shall have authority to issue is 80,000,000 shares
of common stock, par value $.10 per share, and 20,000,000 of
preferred stock, without par value."
PAGE 25
(b) The holders of common stock shall have one
vote per share. The common stock shall be subject to the
prior rights of holders of any one or more series of preferred
stock outstanding, according to the rights and preferences, if
any, of such series.
(c) The preferred stock shall be divided into
one or more series as the Board of Directors may determine as
hereinafter provided. Each series of preferred stock may have
full, limited, multiple, fractional or no voting rights, and
such designations, preferences, qualifications, privileges,
limitations, restrictions, options, conversion rights and
other special or relative rights as determined by the Board of
Directors. The division of the preferred stock into series,
the determination of the designation and the number of shares
of each such series and the determination of the voting
rights, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights and other special or
relative rights of the shares of each such series may be
accomplished by an amendment to this Article 5 solely by
action of the Board of Directors which shall have the full
authority permitted by law to make such divisions and
determinations.
(d) Unless otherwise required by law or in a
resolution or resolutions establishing any particular series
of preferred stock, the aggregate number of authorized shares
of preferred stock may be increased by an amendment to the
Articles of Incorporation approved solely by the holders of
common stock and any preferred stock entitled pursuant to its
voting rights designated by the Board to vote thereon, voting
together as a class."
The Amendment would increase the Company's authorized Common
Stock, par value $.10 per share, from 20,000,000 to 80,000,000 shares,
and would authorize 20,000,000 shares of Preferred Stock, without par
value. The authorized but unissued shares of Common Stock and Preferred
Stock could be issued at the discretion of the Board of Directors,
without further action by the shareholders, for any lawful purposes.
Furthermore, the Board of Directors would have the authority to divide
the Preferred Stock into one or more series and to establish the voting
and other rights of each such series, without further action by the
shareholders.
The Board of Directors believes that it is in the Company's
best interests to have additional shares of Common Stock and shares of
Preferred Stock available for issuance in order to give it flexibility
in raising capital or structuring a transaction which could result in
continuation of the Company as an operating entity.
The Company currently has no plans, arrangements, understandings or
agreements to issue or sell any of the Company's authorized capital
stock. The Company is currently exploring the strategic options
available to it following the sale, including potential business
combinations with other operating businesses. See "The Sale-Background
PAGE 26
and Reasons for the Sale." If any such transaction should be
consummated, it is possible that the Company would issue additional
shares of its capital stock in connection therewith.
Approval of the proposed Amendment to the Restated Articles of
Incorporation requires the affirmative vote by holders of a majority of
the shares voting on such matter. The Board of Directors recommends
that the shareholders vote FOR the proposal to amend the Company's
Restated Articles of Incorporation.
THE SALE
Shareholders of the Company are being asked to vote at the
Annual Meeting on a proposal to sell substantially all of the Company's
operating assets to Mazel, upon the terms and conditions provided for in
the Plan (the "Sale"). The following description of certain aspects of
the Sale does not purport to be complete and is qualified in its
entirety by reference to the Plan and the Agreement which are attached
to this Proxy Statement as Exhibit A. All shareholders are urged to
read the Plan and the Agreement carefully.
References to a fiscal year in this Proxy Statement are to the
Company's fiscal year ending, for the five most recent fiscal years, on
June 30, 1996, June 24, 1995, June 25, 1994, June 26, 1993, and June 27,
1992.
BACKGROUND AND REASONS FOR THE SALE
The Company has been a supplier of promotional programs to the
retail industry. The Company's products have consisted of a broad range
of consumer items such as housewares, toys, picture frames and the like.
These products have been marketed under programs that retailers use on
either a periodic or on-going basis to generate higher store traffic and
increased sales and to reduce the need for in-store labor. The
Company's promotional programs have consisted of high-value, low-priced
merchandise assortments, specially designed displays, in-store point of
sale advertising and targeted newspaper inserts. The Company also has
provided retailers with an in-store replenishment program consisting of
permanent promotional displays and merchandise that the Company provides
on an on-going basis.
The Company's core promotional business has consisted of two
distinct business-marketing units designed to meet the needs of both its
retail customers and the consumer. These two segments are the
"Promotional Business", which concentrates on the development of
innovative promotional programs designed to increase sales and
profitability for the retail industry and the "Powerhouse
(Replenishment) Business", which focuses on "store within a store"
concepts using a combination of promotional programs, themed events, and
other selected items.
The Company began to experience declining sales in its
traditional Promotional Business in 1989 and such decline has
accelerated in recent years. See "Sales Comparison-Year to Year" below.
PAGE 27
This decline in sales is the result, principally, of a changing retail
marketplace and a diminished need among retailers for out-sourced
promotional programs. See "Management's Discussion and Analysis."
SALES COMPARISON - YEAR TO YEAR
($ in millions)
Percentage Cumulative
Fiscal Year Net Sales Decrease Decrease
- ----------- --------- ---------- ----------
1989 $134.2
1990 130.6 2.7% 2.7%
1991 100.9 22.7% 24.8%
1992 84.1 16.7% 37.3%
1993 76.7 10.0% 42.8%
1994 60.0 21.8% 55.3%
1995 45.1 24.8% 66.4%
1996 30.2 33.0% 77.6%
The Company's initial response to its declining sales was to
implement a restructuring plan in 1990 which was intended to restore
stability and growth to the Company's sales and profitability. The
restructuring plan called for the Company to focus on its core
Promotional Business and to sell or eliminate those noncore business
units and assets which were not profitable or were viewed as
incompatible with the Company's overall sales and profitability
objectives.
Pursuant to the restructuring plan, the Company refinanced its
headquarters facility in fiscal 1991 through a sale/leaseback
arrangement. In fiscal 1992, the Company completed the liquidation of
Action Tungsram, Inc., an affiliated company which had manufactured and
produced light bulbs. In fiscal 1993, the Company adopted a plan to
sell substantially all of the assets of its subsidiary, Action Nicholson
Color Company, which was in the color separation business. The Company
completed such sale in the following fiscal year. Also during fiscal
1993 the Company closed two of its retail stores in Erie, Pennsylvania
and Mt. Clemens, Michigan. During fiscal 1995, the Company sold its
property in Mt. Clemens that was the site of a manufacturing operation
which was closed in 1987 and began to wind-down its plastic
manufacturing business. In fiscal 1996, the Company ceased its plastic
manufacturing operations and sold the equipment used in such operations.
Also in the first quarter of fiscal 1996, the Company sold the assets
and business of Kensington Lamp Company, its lamp assembly business, and
closed its last remaining retail store in Holland, Michigan.
The business of Action Nicholson Color Company was sold to Filmet Color
Laboratories, Inc. in April of 1994 for $600,000 cash and a percentage
of the sales in that business through April of 1997. The Company's
retail stores were closed, and no significant proceeds nor costs were
involved. Property in Mt. Clemens, Michigan, the sight of a pottery
manufacturing operation closed in 1987, was sold in June of 1995 to
Riverside Associates, a real estate developer, for $1,050,000 cash. The
PAGE 28
Company's plastic manufacturing business was closed in August of 1995.
Machinery and equipment was sold piece by piece to various parties from
mid 1995 into early 1996 for proceeds of approximately $1.2 million in
the aggregate, $360,000 of which was needed to pay off capital leases on
certain of the equipment. The lamp business was sold to its management
in September of 1995 for approximately $2.3 million in the form of the
assumption of accounts payable ($900,000) and a note in the amount of
$1.4 million payable monthly through April of 1999. The proceeds of
these transactions, after costs associated with the transactions,
including severance and other personnel costs, were used to pay down
current debt and other current obligations. None of the purchasers
involved in these transactions were affiliated parties with the Company,
other than the buyers of the lamp business, who had been employees of
that business.
In fiscal 1996, the Company agreed in principle to terminate
the lease on its headquarters office/warehouse facility (where it has
been the sole tenant) and to enter into a new operating lease for a
significantly reduced amount of space in this facility. Since February
of 1996 the Company has housed its inventory and conducted its
distribution operations from public warehouse facilities which it
occupies under short-term leases which permit the Company to expand or
contract the amount of space leased to accommodate fluctuating inventory
and distribution volumes. The new lease, which was signed in October,
1996, eliminates the Company s substantial commitment under the prior
arrangement, and will materially reduce the Company s commitment for
future occupancy costs. In addition, the Company expects that the new
arrangements will provide the owner of the facility with the ability to
refinance or resell the property in two to five years such that the
Company could receive payment of some or all of the $2.3 million reduced
principal amount of what was originally a $3.5 million note it received
in the sale/leaseback transaction in 1991. The Company has recorded
this note at no value in its financial statements as a result of the
uncertainty of receiving payment.
In addition to taking the foregoing actions, the Company has
made continuous efforts since 1990 to reduce its merchandise
inventories, personnel and other operating costs in order to compensate
for the decline in sales. The Company has also reduced its low margin
business, including its guaranteed sale business, which has contributed
to the decline in sales. See "Management's Discussion and Analysis."
Despite the steps taken by the Company to improve sales and
profitability, sales have continued to decline since fiscal 1990 and
losses have been substantial since fiscal 1993. The Company's net sales
fell from $130.6 million in fiscal 1990 to $45.1 million in fiscal 1995
and to $30.2 million in fiscal 1996. The Company's cumulative net
losses have been substantial. See "Net Earnings (Loss) by Year" below.
The cumulative effect of these losses was to reduce shareholders' equity
to $229,000 at June 30, 1996.
PAGE 29
NET EARNINGS (LOSS) BY YEAR
(in millions)
Fiscal Year Net Earnings (Loss)
----------- -------------------
1990 $(17.0)
1991 2.5
1992 2.5
1993 (14.4)
1994 .1
1995 (3.7)
1996 (12.9)
-------
Net Loss $(42.9)
=======
The Company's liquidity was significantly impaired as a result
of the decline in sales and the resulting operating losses. The
Company's credit agreement provides for secured loans on a revolving
basis. Availability under the line of credit is limited to $1 million
during January of 1997, $500,000 during February of 1997, and is to be
paid off as of February 28, 1997. Credit is also limited by the level
of the Company's eligible accounts receivable and inventory. At June
30, 1996 outstanding borrowings under the credit agreement were $3.3
million. The Company had not met restrictive covenants in the credit
agreement as of June 30, 1996 and September 30, 1996 related to minimum
levels of net worth and working capital, current ratio, and the ratio of
liabilities to tangible net worth. The Company is not likely to meet
these in the future.
During fiscal 1996, sales continued to decline and operating
losses continued to increase. As a result, the Company aggressively
accelerated its inventory reduction plan and further downsized its
operating infrastructure. See "Management's Discussion and Analysis."
As of October 15, 1996, the Company had 40 regular employees, a
significant reduction from the 169 regular and 25 temporary employees
the Company had at October 15, 1995.
Following the third quarter of fiscal 1996, the Company
concluded that unless it made significant improvements in fiscal 1997 in
profitability through increased sales, improved gross margins, and
further reductions in operating and interest expenses, there could be no
assurance that the Company's capital resources would be sufficient to
meet its operating cash needs.
After reaching this conclusion, the Board of Directors of the
Company on March 7, 1996 engaged Parker/Hunter Incorporated
("Parker/Hunter"), an investment banking firm, to assist it in
identifying, analyzing and pursuing possible strategic alternatives for
raising additional capital or potential business combinations involving
substantially all the operating business, assets or stock of the
Company. During this time the Company continued to take steps to reduce
indebtedness and its operating and other expenses.
PAGE 30
Working with its advisors, the Company determined that given the
Company's continuing losses, there was little or no possibility of
raising additional debt and/or equity capital to finance a turnaround or
further restructuring of the Company. The Company, as a part of its
normal business routine, met frequently with Foothill Capital, the
provider of its credit line. Foothill made it clear to the Company
that, while it would continue to provide financing for the time being,
its longer term interest was an orderly conclusion of the financing
arrangement. In addition, the Company had routine discussions with
several other providers of credit arrangements about its operating
needs. While these providers generally expressed interest initially,
all concluded the discussions with the Company, indicating that they
would only be interested in providing financing at such time as the
Company could project stabilization of its declining sales and an
ability to generate profits, or at least positive cash flow. The Board
of Directors and Parker/Hunter understood that the ability to raise
additional capital was dependent on the ability of the Company to
demonstrate that it could stabilize or grow sales and attain profitable
operating results. Parker/Hunter discussed the issue of raising
additional equity capital with several possible providers of that
capital and was not able to develop interest without the ability to
project a successful turnaround.
Restructuring of the Company has been a continuing activity since 1990.
The sale or closing of peripheral operations, personnel reductions and
other cost cutting efforts, inventory reduction to the point of
adversely impacting the ability to fill customer orders have been
continuing activities, and all identified opportunities have been
exhausted. Continued restructuring has provided the Company with an
ability to survive, but has not resulted in the ability for the
Company's business to thrive or grow.
The alternative of selling or merging the Company in its entirety was
pursued for several months without success, and the Board of Directors
concluded in July 1996, and continues to believe, that this strategic
alternative is not viable. Upon engagement by the Board of Directors,
Parker/Hunter began the development of a list of possible merger
candidates from a variety of sources available to it, including the
knowledge base resident in the Company of competitors, vendors,
customers and other parties with which the Company has done business.
The primary objective was to identify candidates interested in acquiring
the Company's outstanding stock or all of its operations or assets, with
the intent of continuing the Company's operating business in some form.
Parker/Hunter, with extensive participation by management, developed
summary and detailed presentations for distribution to possible merger
candidates. After reviewing numerous industry lists from various
sources, Parker/Hunter prepared a list of approximately 80 candidates,
which Parker/Hunter thought might have an interest in the Company. Of
the 80 candidates, approximately 60 were considered industry buyers
while the remaining 20 were financial buyers or financial
intermediaries. From this list of 80, Parker/Hunter was able to contact
68 candidates. Of those contacted, only 16 requested more information,
while the remaining 52 expressed no interest. Of the 16 who signed
confidentiality agreements and were sent confidential memorandums, 13
expressed no interest. The remaining three candidates included Mazel
PAGE 31
and two others who were only interested in a business combination with
the remaining company after the operations were sold. One of the others
was subsequently rejected as unqualified, and discussions are continuing
with the other regarding a possible business combination after the Mazel
sale is completed.
As the search progressed, however, it became clear to Parker/Hunter and
to the Company, that the candidates interested in the operating business
were limited, and that it did not appear likely that the operating
business and the corporation could be merged with the same candidate.
That is to say, those candidates interested in the operating business
were not interested in acquiring the remaining assets and liabilities of
the Company, including the tax loss carryforwards as the major item of
value, and those interested in the tax loss carryforwards were not
interested in the operating business. This process was conducted over
the period from approximately April 30, 1996 until an agreement in
substance was reached with Mazel on August 30, 1996. Discussions with
candidates not interested in the operating business were put on hold
pending determination of the structure of the agreement with Mazel
regarding the operating business.
All of the contacts with candidates were initiated by Parker/Hunter.
Upon preparation of a detailed presentation, primarily by Company
personnel, direct contact with candidates by Company personnel was
limited to responding to questions and due diligence requests of
candidates. The Company (T.R Casper, President and K. L. Campbell, CFO)
and Parker/Hunter were in continuing contact, daily and often more
frequently during the process of candidate identification and selection.
Parker/Hunter was responsible for the management of the process, as a
result of their specific expertise in this area. The material issues
discussed were the results of prior operations, the prospects for future
operations, the quality of the Company's inventories and other assets,
the potential for further cost savings and other possible synergies with
the various buyers, contingencies and other potential exposures,
organization and personnel issues, facilities issues, etc.
In the course of Parker/Hunter's efforts to find a buyer or merger
partner for the Company, Mazel expressed interest in acquiring the
Company's inventory, along with certain of the Company's intangible
assets, including trademarks, trade names, customer lists, vendor lists,
displays and intellectual property, and certain other assets. Mazel was
a candidate entered onto the list based on limited prior contact as a
customer of the Company. Parker/Hunter initiated the contact at this
time on behalf of the Company. The initial meeting with Mazel was in
the offices of Parker/Hunter on June 13, 1996, attended by Mr. Mark
Hanners, Vice President of Mazel, Mr. George Egan, Senior Vice President
of Parker/Hunter, and Mr. Casper and Mr. Campbell representing the
Company. Mr. Casper and Mr. Campbell discussed the Company's recent
operating results and future prospects, the details of the various
assets and their valuation, details about the types, quantities,
salability and other valuation issues with regard to the inventories,
and a detailed discussion about the types of programs offered by the
Company to its customers, and the many issues involved in successfully
delivering these programs. After meeting and negotiating with
representatives of Mazel over the course of several months, the Board of
Directors determined that the Sale was in the best interest of the
PAGE 32
Company. Subsequent to the initial meeting with Mr. Hanners on June
13, 1996, there were numerous informal contacts between Parker/Hunter
and/or Company employees and Mazel. On July 22, 1996, Messrs. Casper,
Campbell and Egan met with Mr. Hanners and Mr. Rueven Dessler, Chief
Executive Officer of Mazel in the offices of the Company to discuss the
structure of the agreement and to provide an opportunity for the Mazel
representatives to review the Company's inventory, its merchandise
displays, and types of program offerings. Company representatives
visited Mazel's offices on July 29, 1996 for further discussions. A
conference call was held on August 6, 1996. The price to be paid for
the inventory was agreed to in this call, which was attended by Mr.
Hanners, Mr. Dessler and Ms. Susan Atkinson, CFO of Mazel. Mr. Casper,
Mr. Campbell and Mr. Egan represented Action Industries. At this time
there were no other purchase candidates remaining. During the remainder
of the month of August, further details of the purchase were discussed,
pursuant to a non-binding letter of intent dated August 30, 1996. The
Company announced the transaction on September 4, 1996. Throughout
September and into October, substantial negotiations were held,
primarily by telephone, during the course of development of the purchase
agreement. A telephone meeting of the Board of Directors was held on
October 14, 1996, at which time the Board agreed to accept the Mazel
offer, and the formal agreement was signed on October 16, 1996. On
October 18, 1996 a physical inventory of the Powerhouse merchandise was
conducted, so that the purchase price of that inventory could be
determined, and the proceeds of $386,797 were received by the Company on
October 21, 1996.
The Company is selling Mazel its inventories at a price of 63.3% of
cost, and its intellectual property associated with its promotional
programs consisting primarily of trade marks and trade names, for an
aggregate price of $100,000. Powerhouse inventories of approximately
$570,000 original cost were sold to Mazel on October 18, 1996 for
$361,000. Those trade marks related exclusively to the Powerhouse
business and license to use the remainder of the intellectual property
to be sold resulted in an additional $25,000 proceeds for the Company.
Upon approval by the shareholders, the Company will sell the assets of
its Promotional business, consisting of the remainder of its inventories
on hand at the time of sale, and the remainder of its trade marks and
trade names. Because the Company is continuing to sell inventory for
its own account while the process of soliciting shareholder approval of
the sale to Mazel is continuing, the sales price for the Promotional
assets has not been finally determined, however such proceeds are
estimated to be between $700,000 and $1.1 million, which would result in
total proceeds ranging from $1.1 million to $1.5 million.
The Board of Directors concluded that, given the Company's continuing
losses, there was little or no possibility of raising additional debt
and/or equity capital to finance a turnaround or further restructuring
of the Company. After months of pursuing sale or merger opportunities,
Mazel had been identified as the only buyer, and the Board of Directors
had to decide between the sale to Mazel and liquidation of the business.
The sale to Mazel would be done in an orderly fashion which permitted
the sale of much of the Company's inventories in the normal course of
business, at or near normal prices, The sale price of the inventory to
be sold to Mazel, while below the Company's historical cost, was in
excess of the prices normally attained when closing out merchandise.
PAGE 33
These factors would result in proceeds from the sale to Mazel and
interim operations which would be sufficiently greater than the expected
proceeds of a liquidation, to cover and exceed the additional operating
costs related to carrying on business while completing negotiations of
the sale and obtaining the necessary shareholder approval to complete
the sale. The extended period of operating for its own account also
provided the Company the opportunity to continue collecting its
receivables, sell additional tangible assets, resolve its warehouse
lease, pursue a business combination relative to the Company's activities
after the sale to Mazel, and complete other activities in an operating
mode. This was considered favorable to a liquidation mode, in terms of
the ability to maximize the net proceeds of these activities.
In early 1996, the Board of Directors instructed management to
prepare a contingency plan for disposition of the assets of the Company
in the event a buyer or partner was not found. Management's contingency
plan, which was thoroughly discussed and analyzed, but never formally
adopted by the Company's Board of Directors, contemplated a planned,
orderly liquidation of the Company's assets, coupled with orderly
personnel downsizing and other significant cost reduction measures. The
contingency plan assumed that an orderly liquidation would be pursued at
some undetermined point in the liquidation process by utilizing a
bankruptcy proceeding. That contingency plan appears to be the only
option available to the Company if the Sale is not consummated. The
Company believes that the contingency plan for disposition must be
implemented (or may be involuntarily implemented) if the proposed Sale
is not approved by the Company's shareholders or otherwise cannot be
consummated.
Pursuit of the contingency plan (whether under court supervision or
otherwise) would entail significantly higher transaction costs,
(estimated to be at least $500,000 to $750,000) than those expected to
be incurred in connection with consummation of the Sale, and almost
certainly would result in sale prices of the Company's inventory at
significantly lower levels than those contemplated by the Sale.
If the Sale is consummated, most of the Company's operating
assets would be sold for cash, which would be used largely to reduce its
secured indebtedness under its credit agreement. The Company's
remaining assets would be its accounts receivable and notes and other
receivables relating to the asset dispositions and the sale/leaseback
transaction described above and its net operating loss tax
carryforwards.
With the assistance of Parker/Hunter, the Company is actively exploring
the strategic options available to it following the Sale, including
business combinations with other operating businesses in order to
continue as an operating concern and preserve all or a portion of its
net operating loss tax carryforwards. Examples of types of business
combinations the Company is exploring would include the purchase by the
Company of operating assets from a third party in consideration of the
issuance by the Company of shares of its capital stock and/or
indebtedness in a manner that would attempt to preserve the Company's
ability to utilize its net operating loss tax carryforwards. A business
combination that is not predicated upon utilization of the Company's net
operating loss tax carryforwards could be accomplished in various ways,
PAGE 34
including a merger, consolidation or share exchange. There can be no
assurance that any such business combination will ever be consummated.
Other than the discussions referred to above, the Company currently has
no pending or current plans, arrangements or understandings with party
to undertake any such business combination. The Company has received
indications of interest from various third parties for a business
combination of this type. Specific discussions are in process with
interested third parties, but such discussions are preliminary and may
not result in an agreement relating to any such transaction.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors of the Company has unanimously
determined that the Sale pursuant to the Plan is desirable and in the
best interests of the Company and has unanimously approved the
Agreement. The Board of Directors has determined that the sale pursuant
to the Plan is fair to the shareholders of the Company in that the Sale
is the best alternative available for maximizing the value of the
Company's assets. The consummation of the Sale also preserves the
possibility that the shareholders of the Company might realize value if
a business combination of the type described above can be accomplished.
The Board of Directors unanimously recommends that the shareholders of
the Company vote "FOR" the Plan. Each member of the Board of Directors
who owns Common Stock has indicated his intent to vote his shares "FOR"
the Plan.
TERMS OF THE SALE
Under the terms of the Agreement, Mazel purchased certain
assets relating to the Company's Powerhouse Business at a closing held
on October 18, 1996 (the "First Closing") and further agreed to purchase
certain other assets, including assets relating to the Company's
Promotional Business, all as more fully described below. The Company
did not engage Parker/Hunter to provide an opinion with respect to the
fairness of the terms of the sale, since the Company has no alternative
against which to compare the sale except liquidation of the business.
Sale of Powerhouse Business. At the First Closing, Mazel
purchased substantially all of the Company's inventory of merchandise,
goods and other products held for sale to its Powerhouse Business
customers and all related point-of-sale inventory, including displays,
display headers and components thereof (the "Powerhouse Inventory")
principally located at the public warehouse utilized by the Company in
Columbus, Ohio. At the First Closing the Company also granted to Mazel
a license to use (concurrently with the Company) certain of the
Company's intellectual property including, but not limited to, the names
"DOLLAR-AMA" and "Dollar Daze" together with all designs and logos
relating to such names (the "Licensed Intellectual Property") in
connection with Mazel's conduct of the Powerhouse Business between the
First Closing and the Second Closing (as defined below). The Company
also conveyed to Mazel at the First Closing the names "Homewares",
"Impressions" and certain general intangible assets of the Company that
related exclusively to the Powerhouse Business. The Agreement provides
that if the Second Closing does not occur for any reason other than
PAGE 35
Mazel's default or breach under the Agreement, Mazel will have a right
of first refusal to purchase any of the Company's intellectual property
which was not conveyed to Mazel at the First Closing upon the same terms
and conditions as may be offered in the future by any third party
purchaser.
Under certain circumstances, Section 1932(b) of the Pennsylvania
Business Corporation law requires shareholder approval for the sale,
lease, exchange or other disposition of all, or substantially all, the
property and assets of a Pennsylvania business corporation. The Company
has determined, based upon the advice of legal counsel, that the sale of
the Powerhouse inventory and related assets at the First Closing did not
require shareholder approval under Section 1932(b). This determination
is based upon the qualitative and quantitative characteristics of the
assets sold to Mazel at the First Closing. The Powerhouse inventories
sold had an original cost of approximately $570,000 and were valued on
the books at $361,000. In fact, the Company has often sold individual
customer promotions which were in excess of this sale. The Company has
also determined, based upon the advice of legal counsel, that
shareholder approval of the sale of the Promotional Inventory and other
assets at the Second Closing is required under Section 1932(b) of the
BCL in light of the qualitative and quantitative characteristics of the
assets proposed to be sold to Mazel at the Second Closing.
Sale of Promotional Business. The Agreement also provides
that Mazel will purchase all of the Company's inventory of merchandise,
goods and other products held for sale to the Company's Promotional
Business customers and all related point of sale inventory (the
"Promotional Inventory") which is situated in the public warehouse
utilized by the Company in Mt. Vernon, Ohio at a closing to be held
following receipt of shareholder approval and satisfaction of all other
conditions (the "Second Closing"). The Agreement provides that Mazel
will not be required to purchase any item of Promotional Inventory if
there are fewer than 100 units in stock of such item at the Second
Closing. Mazel also will not be required to purchase any Promotional
Inventory which is not good and saleable, as defined in the Agreement.
At the Second Closing, Mazel also will purchase all the Licensed
Intellectual Property and certain general intangible assets of the
Company relating exclusively to the Promotional Business. Mazel is not
obligated to purchase any other assets of the Company nor will Mazel
assume or take any assets of the Company subject to any other
liabilities or obligations, whether absolute or contingent.
Purchase Price. The purchase price for the Company's assets
purchased by Mazel pursuant to the Agreement (collectively, the
"Assets") will be an amount equal to $100,000 plus 63.3% of the
Company's cost of the Powerhouse Inventory and the Promotional Inventory
(collectively the "Inventory") as determined by a physical inventory to
be conducted jointly by the Company and Mazel. At the First Closing,
$386,797 ($25,000 plus 63.3% of the cost of the Powerhouse Inventory)
was paid and the balance will be paid in cash at the Second Closing. In
addition, Mazel will pay the Company a royalty equal to 5% of Mazel's
gross sales of Powerhouse Inventory purchased from the Company, which
sales are made during the 90-day period following the First Closing, to
any of the Company's Powerhouse Business customers.
PAGE 36
Right of First Refusal on Other Assets. The Agreement grants
to Mazel the right to purchase any other assets of the Company
including, but not limited to, warehouse and office fixture equipment,
electronic and computer equipment and transferable software. In the
event the Company receives an offer for the purchase of all or any
portion of such assets during the 30-day period following the First
Closing, Mazel will have a right of first refusal to acquire such assets
upon the same terms and conditions offered by the proposed purchaser.
Conditions of the Sale. Consummation of the Sale at the Second Closing
is subject to the following conditions: (i) the continuing truth and
accuracy of the representations and warranties in the Agreement at the
Second Closing, (ii) the performance by the parties of all of their
obligations set forth in the Agreement, (iii) delivery of certain
closing certificates, (iv) no pending or threatened litigation affecting
the Agreement or consummation of the transaction, (v) delivery of
opinions of counsel for the Company and Mazel, (vi) all necessary and
material authorizations, consents and approvals having been obtained and
in full force and effect and (vii) approval of the shareholders of the
Company. Other than the approval of the shareholders of the Company,
the Company is aware of no other authorizations, consents and approvals
that are required to consummate the sale at the Second Closing.
The Company or Mazel may waive any of the conditions to their
respective obligations to close the sale at the Second Closing. No
assurance can be provided as to whether such conditions will be
satisfied, or waived by the party permitted to do so. No assurance can
be provided as to whether such conditions will be satisfied, or waived
by the party permitted to do so. Accordingly, there can be no assurance
that the Sale will be consummated. In the event that the conditions to
the Sale remain unsatisfied and the Sale has not been closed on or
before January 31, 1997, the Agreement may be terminated by either the
Company or Mazel, provided the terminating party is not in default under
the Agreement.
The Sale of the Promotional Business will occur only if the
Agreement is approved by the affirmative vote of at least a majority of
the outstanding shares of Common Stock of the Company.
INDEMNIFICATION
The Company has agreed that it will indemnify and hold
harmless Mazel and its partners, officers, employees and agents from all
liabilities, deficiencies, losses, costs or expenses arising out of any
misrepresentation in or breach of the Agreement by the Company,
liabilities of the Company not assumed by Mazel, failure by the Company
to comply with applicable law, failure by the Company to file or pay any
applicable taxes of the Company, claims under any collective bargaining
agreement to which the Company was a party at any time prior to the
Second Closing, any damages, obligation or penalty for contributions to
any employee benefit plan with respect to the Company's employees for
periods on or before the Second Closing, and certain other matters.
The Agreement provides that absent fraud on the part of the
Company, the indemnification described above will be the sole remedy of
PAGE 37
Mazel against the Company in respect of any claims under the Agreement
based on any action, fact or circumstance existing as of the date of the
Agreement. In addition, absent fraud on the part of the Company, the
indemnification obligations of the Company will not exceed the aggregate
purchase price for the Assets.
BUSINESS PENDING THE SALE
The Agreement provides that, until the Second Closing, the
Company will continue to conduct its business in the ordinary course
except that it (a) will not purchase any additional Powerhouse Inventory
or Promotional Inventory; (b) will not solicit or accept new promotional
orders, whether from existing customers or new customers, unless such
orders can be filled with Action's existing Promotional Inventory; (c)
will not conduct any liquidation sale, "going out of business" sale or
similar sales activity (or offer extraordinary price reductions); (d)
will not license any person or entity (other than Mazel) to use any of
its intellectual property; and (e) will continue its efforts to wind
down its business operations and reduce costs. The Company will use its
best efforts to preserve the goodwill of the Promotional Business and to
preserve the value of the Assets. Prior to the Second Closing, the
Company will continue to sell (without replacing) the Promotional
Inventory by filling existing customer orders and by selling merchandise
not included in the Assets.
NONCOMPETITION
For a period of five years following the Second Closing, the
Company will be prohibited from, either directly or indirectly, engaging
in, having a financial interest in or being in any way connected or
affiliated with any enterprise which engages in the purchase, sale,
marketing, import, distribution or brokerage of replenishment inventory
or promotional inventory of a format, category or product line which was
sold or offered for sale by the Company in the United States on the date
of the Agreement (the "Competitive Products"). In addition, during such
five-year period the Company has agreed not to divert or take away or
attempt to divert or take away any of Mazel's or any of Mazel's
affiliates employees or their respective customers or suppliers with
respect to the Competitive Products. Further, the Company has agreed to
refrain from directly or indirectly jeopardizing any relationship Mazel
or any Mazel affiliate has or may come to have with any such employee,
customer or supplier and from engaging in, having a financial interest
in or being in any way connected or affiliated with any enterprise which
engages in the wholesale or retail sale and distribution of close-out
merchandise.
ACQUISITION PROPOSALS
Pursuant to the Agreement, the Company has agreed that, except
as required by law or to the extent necessary to discharge its or their
fiduciary obligations, neither the Company nor its directors, officers,
employees or agents will, directly or indirectly, solicit or initiate
discussions or engage in negotiations with any person other than Mazel
PAGE 38
with respect to the possible acquisition of the Assets or any portion
thereof other than in the ordinary course of business or provide any
information with respect with the Company's business to any person other
than Mazel relating to the possible acquisition of the Assets or any
portion thereof.
EMPLOYEES
The Agreement provides that Mazel will not assume any
employment contract, collective bargaining agreement, obligation for
pension funding, retirement or other ongoing employee benefit programs
of the Company nor will it be obligated to offer employment to any of
the Company's employees. Mazel may, but is under no obligation to,
offer full-time or part-time employment or enter into independent
contractor or consulting agreements with such of the Company's sales
personnel upon such terms and conditions as Mazel may determine in its
sole discretion, other than certain sales personnel identified by the
Company. Mazel and the Company have agreed to reasonably cooperate with
each other as to any such personnel whom Mazel desires to engage.
CONSEQUENCES OF FAILURE TO CLOSE
In the event that the Sale is not approved by the shareholders
of the Company or the Company is unable to obtain any other required
consent or approval or if the Second Closing does not occur by reason of
the Company's default or breach under the Agreement, the Company will be
required to pay to Mazel, as liquidated damages, the amount of $150,000.
If the Second Closing does not occur solely by reason of
Mazel's default or breach under the Agreement, Mazel will pay to the
Company, as liquidated damages, the amount of $100,000.
The Company is not aware of any other consent or approval which is
required to close the Sale other than the approval by the shareholders
of the Company.
ABSENCE OF DISSENTER'S RIGHTS
Under the Pennsylvania Business Corporation Law, if the Sale
is approved, objecting Company shareholders will have no dissenters'
appraisal rights or other similar rights (i.e., the right to seek a
judicial determination of the "fair value" of the Common Stock and to
compel the Company to purchase shares for cash in that amount) in
connection with the Sale.
ACCOUNTING TREATMENT
The Sale will be accounted for as a sale of specific assets.
PAGE 39
FEDERAL INCOME TAX CONSEQUENCES
The Sale will result in a net loss to the Company for federal
income tax purposes. Such loss will increase the Company's net
operating loss carry forward, which may be available to offset future
taxable income (if any) of the Company.
INTEREST OF CERTAIN PERSONS IN THE SALE
No director or executive officer of Action or any of their
affiliates has any substantial interest, direct or indirect, in the
Sale, other than as a shareholder of the Company.
CHANGES IN SHAREHOLDER RIGHTS
Following consummation of the Sale, shareholders of the Company will
continue to hold the shares of Common Stock held by them prior to the
Sale. Such shareholders will enjoy the same rights with respect to such
shares as they did prior to the Sale.
STATUS OF THE COMPANY AFTER THE SALE
After the Sale of Assets is completed, the legal entity, Action
Industries, Inc. will remain, but all of its operating assets will have
been sold. Employment levels will have been reduced to two to three
people, and the Company's facilities will have been reduced to limited
office space. The Company will have no operations. Its activities
will be confined to managing its remaining assets by collecting
receivables and selling miscellaneous equipment, and resolving
liabilities through settlements and payments as cash is available. In
addition, the Company is pursuing opportunities for the preservation of
some of the value of its income tax net operating losses for the benefit
of its shareholders and creditors, through an appropriate business
combination. Assets remaining after the sale will be trade accounts
receivable, a note due from the prior sale/leaseback of the Company's
headquarters facility and receivables from the sales of the businesses
of its Kensington Lamp Company and Action Nicholson Color Company
subsidiaries.
PAGE 40
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
Fiscal Year Ended
-----------------------------------------------------------
June 30, June 24, June 25, June 27, June 28,
OPERATING RESULTS 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Net Sales $ 30,212 $ 45,088 $ 60,049 $ 76,684 $ 84,059
Cost of Products Sold 26,385 34,374 44,527 62,725 58,360
-----------------------------------------------------------
Gross Margin $ 3,827 $ 10,714 $ 15,522 $ 13,959 $ 25,699
Earnings (Loss) from Continuing Operations (a)(b) $ (12,899) $ (2,907) $ 128 $ (10,390) $ 5,557
-----------------------------------------------------------
Earnings (Loss) Per Share from Continuing
Operations (a) $ (2.33) $ (0.52) $ 0.02 $ (1.88) $ 0.97
Cash Dividends - - - - -
Weighted Average Shares Outstanding 5,539 5,539 5,561 5,539 5,738
===========================================================
As of
-----------------------------------------------------------
June 30, June 24, June 25, June 27, June 28,
BALANCE SHEET DATA 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Total Assets $ 8,908 $ 39,546 $ 39,363 $ 56,873 $ 66,137
Long-Term Debt $ 115 $ 7,854 $ 8,487 $ 9,022 $ 9,427
===========================================================
(a) Losses for 1996 include $4,226,000 in costs and expenses due to the sale of assets and closing of a
warehouse. Losses for 1993 include $5,123,000 of restructuring costs. Net earnings for 1992 include
deferred income tax credits of $500,000.
(b) Excludes losses from discontinued operations in 1995 of $808,000 ($0.15 per share), in 1994 of $3,000,
in 1993 of $3,990,000 ($0.72 per share), and in 1992 of $1,697,000 ($0.30 per share).
Quarter Ended
----------------------
Sept 30, Sept 30,
OPERATING RESULTS 1996 1995
-------- --------
Net Sales $ 3,668 $ 9,180
Cost of Products Sold 2,272 7,165
----------------------
Gross Margin $ 1,396 $ 2,015
Earnings (Loss) from Continuing Operations $ (733) $ (1,203)
----------------------
Earnings (Loss) Per Share from Continuing
Operations $ (0.13) $ (0.22)
Cash Dividends - -
Weighted Average Shares Outstanding 5,539 5,539
======================
PAGE 41
As of
----------------------
Sept 30, Sept 30,
BALANCE SHEET DATA 1996 1995
-------- --------
Total Assets $ 6,607 $ 37,525
Long-Term Debt $ 115 $ 7,621
======================
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.
SALES COMPARISON - YEAR TO YEAR
($ in millions)
Percentage Cumulative
Fiscal Year Net Sales Decrease Decrease
- ----------- --------- ---------- ----------
1989 $134.2
1990 130.6 2.7% 2.7%
1991 100.9 22.7% 24.8%
1992 84.1 16.7% 37.3%
1993 76.7 10.0% 42.8%
1994 60.0 21.8% 55.3%
1995 45.1 24.8% 66.4%
1996 30.2 33.0% 77.6%
The decline in sales continued in fiscal 1996, principally due to a $6.1
million decrease in sales to two of the Company s largest customers,
American Stores and Payless Drug, from $8.8 million in fiscal 1995 to
$2.7 million in fiscal 1996. Sales to three other customers, Bradlees,
Jamesway and F & M Distributors, decreased $1.8 in fiscal 1996 as a
result of those customers discontinuing business. In addition,
approximately $1.5 million in sales to customers in Mexico and Canada in
fiscal 1995 were not repeated in fiscal 1996 as a result of the impact
of unfavorable currency exchange rates. Sales in the Company's
Powerhouse (Replenishment) Business decreased $2.8 million in fiscal
1996 due to new store setup business in fiscal 1995 which was not
repeated or replaced in fiscal 1996, and reduced order fill rates
related to the Company's significant reduction in inventory levels in
fiscal 1996, from $18.1 million at June 24, 1995 to $3.9 million at June
30, 1996. New store setup sales in the Company's Replenishment
(Powerhouse) business involve initiating the Replenishment program for
a new customer or for additional stores for an existing customer. In a
setup, the entire Replenishment program area is shipped to initially
stock the customers' stores, resulting in a one-time increase in sales,
as compared to ongoing reorders to replace merchandise sold to the
PAGE 42
consumer by the Company's customers. In general, the Company's reduced
inventory levels and capital constraints limited its ability to purchase
inventory and resulted in reduced order fill rates and an inability to
introduce new programs. Further, the Company closed its last retail
store in September 1995, which accounted for $600,000 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 in fiscal 1993
and 1994.
The Company's 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's business
has been the sale of comprehensive promotional programs and merchandise
to the retail trade, principally discount mass merchants, supermarkets
and drug chains. This is a vast market, including such programs
developed internally by the retailers themselves, and those outsourced
to suppliers such as the Company and others, including large
manufacturers and distributors. The Company has historically believed
it was the leading independent marketer of comprehensive houseware and
giftware promotional programs. However, it has held only a minor share
of the overall market for promotional programs. In recent years the
Company has continued to call on the majority of the major retailers in
the market segments it has historically served. The Company has not
been able to maintain its position in the market, as evidenced by the
continuation of the decline in sales in fiscal 1996. Many of the
reasons for the continuation in the decline in sales in fiscal 1996 are
symptomatic of the inability of the Company to maintain its past market
position. See "The Sale - Background and Reasons for the Sale."
These issues have led to management s decision to sell the
inventory and other assets of its Replenishment Business and, subject
to shareholder approval of the Plan, the inventory and other assets of
its Promotional Business. The proceeds of the sales will be used to pay
existing obligations and, if an appropriate opportunity presents itself,
to explore its other strategic options, including possible business
combinations with other operating businesses. Substantial doubt exists
as to the ability of the Company to continue to exist as a going
concern, unless a business combination can be accomplished which
provides additional capital.
LIQUIDITY AND CAPITAL RESOURCES
The Company's major sources of cash during fiscal 1996 were
significantly reduced inventory levels (a 78% reduction from fiscal
1995) and collections on receivables. Cash was used primarily to fund
operating losses and repay current and long-term obligations. The
Company's working capital decreased from $12.8 million at June 24, 1995
to $436,000 at June 30, 1996, largely because of the Company's decline
in sales and increase in operating and other losses in fiscal 1996. The
Company will be required to continue to manage the timing of payment of
its obligations to deal with this impaired liquidity.
PAGE 43
The Company's cash and cash equivalents were $78,000 at June
30, 1996 as compared to $567,000 at June 24, 1995. Cash balances
fluctuate daily as they are used to meet the Company's operating
requirements. Accounts receivable decreased from $9.9 million at June
24, 1995 to $2.8 million at June 30, 1996, as a result of decreased
sales, particularly in the month of June, and improved collections in
fiscal 1996.
The Company's inventories decreased significantly from $18.1
million at June 24, 1995 to $3.9 million at June 30, 1996, due to
decreased sales and the Company s aggressive inventory reduction efforts
in light of its capital constraints, and inventory adjustments related
to the sales of the inventories and writeoffs associated with the
termination of the Company's operating business.
Aggregate borrowings (long-term debt and notes payable)
decreased from $18.0 million at June 24, 1995 to $3.2 million at June
30, 1996. This decrease was primarily the result of elimination of the
sale/leaseback obligation and the repayment of borrowings with cash
generated from the reduction of inventories and collection of
receivables, net of cash used to fund operating losses. Letters of
credit outstanding decreased from $909,000 at June 24, 1995 to $82,000
at June 30, 1996, reflecting reductions in the Company s level of
overseas purchases of inventory.
The Company's Credit Agreement with its lender, Foothill Capital
(Foothill) provided for available credit of up to $10 million through
June 30, 1997. The amount of such available credit is limited to $1
million during January of 1997, $500,000 during February of 1997, and is
to be paid off as of February 28, 1997. Credit is also limited by the
level of the Company's eligible accounts receivable and inventories. As
of June 30, 1996, the Company's outstanding borrowings under the Credit
Agreement were $3.0 million and outstanding letters of credit were
$82,000. Borrowings under the Credit Agreement bear interest at a rate
of 12% per annum as of June 30, 1996.
The Company did not satisfy the net worth and working capital
requirements under the Credit Agreement as of June 30, 1996 and as of
September 30, 1996. Foothill has waived the Company's non-compliance
with these covenants. Foothill has continued to provide the Company
with advances within the borrowing formula and the limitations described
above. There can be no assurance that Foothill will agree to waive the
Company's non-compliance as of December 31, 1996. Foothill's remedies
for non-compliance include the right to demand immediate repayment of
all outstanding borrowings, including interest to date.
Assuming that Foothill will continue to provide credit, given the
Company's failure to meet the financial covenants, the Company believes
that the credit available under its existing Credit Agreement, together
with funds expected to be generated from the sale of its inventories and
other operating assets to Mazel pursuant to the Agreement and from its
operations in the period prior to the completion of the sale, will be
sufficient to meet most or all of its operating needs until the sale is
complete. For the longer term, if the Company is to benefit from the
use of its tax net operating losses it must reduce its cost structure to
a bare minimum to maintain sufficient liquidity and to provide enough
PAGE 44
time to identify and close a transaction to acquire a profitable
operating business. Unless a business combination is made and/or a
source of additional capital is obtained in the next few months, 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. Such consequences may include liquidation of
the Company.
The Company's capital expenditures were $220,000 in fiscal
1996, all under a project initiated in 1994 to replace its core
information systems computer hardware and software. The Company is not
planning to make further capital expenditures.
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1997 COMPARED WITH FIRST QUARTER FISCAL 1996
Net Sales. The Company's aggregate net sales for the first
quarter of fiscal 1997 (ended September 30, 1996) were $3,668,000, a
decrease of $5,512,000 or 60.0% from $9,180,000 in the first quarter of
fiscal 1996. The decline in sales is primarily the result of the plan
to sell the Powerhouse and Promotional businesses, and the inability to
purchase additional merchandise for sale as a result of the Company's
constrained capital resources. Promotional sales decreased $4.0
million, or 66%, and Replenishment (Powerhouse) sales decreased
$751,000, or 36%, in the quarter ended September 30, 1996 as compared to
the first quarter of prior year.
The following sets forth the Company's net sales by type of
program:
NET SALES
First Quarter Ended
---------------------------
September September Increase
30, 1996 30, 1995 (Decrease)
--------- --------- ----------
Dollar Days $2,040,000 $6,069,000 $(4,029,000)
Replenishment 1,307,000 2,058,000 (751,000)
---------- ---------- ------------
Core Promotional Business 3,347,000 8,127,000 (4,780,000)
Gift and Other 321,000 1,053,000 (732,000)
---------- ---------- ------------
$3,668,000 $9,180,000 $(5,512,000)
========== ========== ============
Cost of Products Sold and Gross Profit Margins. The Company's
gross profit margins (as a percentage of sales) increased from 22% in
the first quarter of fiscal 1996 to 38% in first quarter of fiscal 1997.
The increase was principally due to the sale in the first quarter of
fiscal 1997 of inventories which had been written down or written off as
PAGE 45
of June 30, 1996, and lower levels of guaranteed sales and returns on
such guaranteed sales in the first quarter.
Operating Expenses. The Company's operating expenses
decreased from $2,719,000, or 30% of sales, in the first quarter of
fiscal 1996 to $1,975,000, or 54% of sales, in the first quarter of
fiscal 1997. The decrease in costs was primarily the result of the
Company's continuing cost reduction efforts. The increase in costs as
a percentage of net sales is due to the greater impact of fixed and
indirect costs on the lower level of sales. These include legal and
other corporate costs, as well as the cost of the Company's
merchandising and distribution operations.
Interest Expense. The Company's interest expense decreased
$471,000, or 72%, due to elimination of the sale/leaseback obligation
and lower current borrowing levels, net of the impact of higher
effective interest rates and other borrowing costs in the current year.
Other Income (Expense), Net. Other income of $29,000 in the
first quarter of fiscal 1997 represented miscellaneous items. Other
income in the first quarter of fiscal 1996 of $155,000 was also
comprised of miscellaneous items.
Loss Before income Taxes. The Company's loss decreased from
$1,203,000 in the first quarter of fiscal 1996 to $733,000 in the first
quarter of fiscal 1997. The improvement of $470,000 reflects the
combined effects of all the above.
Provision for Income Taxes. No income tax benefits were
provided on the losses in the first quarters of fiscal 1997 and 1996
because realization of such benefits cannot be reasonably assured. Net
operating loss carryforwards available to offset future taxable income
and thereby reduce future income taxes payable are approximately $35
million for income tax reporting purposes.
Net Loss. The decrease of $470,000 in the Company's net loss
from the first quarter of fiscal 1996 to the first quarter of fiscal
1997 reflects the combined effect of all of the above.
FISCAL 1996 COMPARED WITH FISCAL 1995
Net Sales. The Company's net sales for fiscal 1996 were
$30,212,000, a decrease of $14,876,000 or 33.0% from $45,088,000 in
fiscal 1995. The decline in sales in fiscal 1996 was principally due to
a $6.1 million decrease in sales to two of the Company s largest
customers, American Stores and Payless Drug, from $8.8 million in fiscal
1995 to $2.7 million in fiscal 1996. Sales to three other customers,
Bradlees, Jamesway and F & M Distributors, decreased $1.8 in fiscal 1996
as a result of those customers discontinuing business. In addition,
approximately $1.5 million in sales to customers in Mexico and Canada in
fiscal 1995 were not repeated in fiscal 1996 as a result of the impact
of unfavorable currency exchange rates. Sales in the Company's
Powerhouse (Replenishment) Business decreased $2.8 million due to new
store setup business in fiscal 1995 which was not repeated or replaced
in fiscal 1996, and reduced order fill rates related to the Company s
PAGE 46
significant reduction in inventory levels in fiscal 1996. The closing of
the Company s last retail store in September 1995 accounted for $600,000
in decreased sales. In general, the Company s reduced inventory levels
and capital constraints limited inventory purchasing and resulted in
reduced order fill rates and an inability to introduce new programs as
planned.
The following table sets forth the Company's net sales by type
of program:
NET SALES
Fiscal Year Ended
------------------------------ Increase
June 30, 1996 June 24, 1995 (Decrease)
------------- ------------- ----------
Dollar Days $21,047,000 $31,933,000 $(10,886,000)
Replenishment 6,778,000 9,560,000 (2,782,000)
----------- ----------- -------------
Core Promotional Business 27,825,000 41,493,000 (13,668,000)
Gift 2,302,000 2,122,000 180,000
Other 85,000 1,473,000 (1,388,000)
----------- ----------- -------------
$30,212,000 $45,088,000 $(14,876,000)
=========== =========== =============
Cost of Products Sold and Gross Profit Margin. The Company's
gross profit margins (as a percentage of sales) decreased from 23.8% in
fiscal 1995 to 12.7% in fiscal 1996, principally due to higher than
anticipated returns on prior period guaranteed sales, including
increased provisions for returns on guaranteed sales outstanding at June
30, 1996. 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 display and other costs as
a percentage of sales due to a decrease in the value of the merchandise
included per display fixture.
Operating Expenses. The Company's operating expenses
decreased from $12,461,000, or 27.6% of sales, in fiscal 1995 to
$10,462,000, or 34.6% of sales, in fiscal 1996. The decrease in
operating expenses was the result of the Company s continuing cost
reduction efforts. The increase in operating expenses as a percentage
of net sales is due to the greater impact of fixed and indirect costs on
the lower level of sales, including executive search, legal, and other
corporate costs, as well as costs of the Company's merchandise
acquisition operations normally allocated to purchases, which were not
fully absorbed in fiscal 1996 due to the limited purchasing during the
year.
PAGE 47
Interest Expense. The Company's interest expense increased
$146,000 in fiscal 1996 due to higher effective interest rates and other
borrowing costs and higher average borrowing levels in fiscal 1996
resulting from increased borrowings in the first half of fiscal 1996.
Other Income (Expense), Net. The Company's other expense of
$58,000 in fiscal 1996 represented miscellaneous items. The other
income amount of $674,000 in fiscal 1995 included a $950,000 gain on the
sale of property in Mt. Clemens, Michigan, the site of a previously
discontinued operation, gains of $296,600 from sales of plastic
production equipment, net of a $518,000 writedown of the estimated value
of remaining amounts due from the prior sale of Action Nicholson Color
Company and other miscellaneous items.
Costs and Expenses Due to Sale of Assets and Closing of Warehouse. As
a result of the sale of its operating assets and the resultant
termination of its operating business, the Company has taken charges in
fiscal 1996 for the estimated loss on the sale of its inventories and
intellectual property ($600,000), other adjustments to reflect the net
realizable value of inventory ($2.1 million)and other assets and
liabilities($1.4 million).
Loss From Continuing Operations Before Income Taxes. The
Company's loss from continuing operations before income taxes increased
from $2,907,000 in fiscal 1995 to $12,899,000 in fiscal 1996. The
increase of $9,992,000 reflects the combined effect of all the above.
Provision for Income Taxes. The Company recorded no income
tax benefits from its losses in fiscal 1996 and 1995 because realization
of such benefits cannot be reasonably assured. The Company has
approximately $34.0 million in net operating loss carryforwards for
income tax purposes which are available to offset future taxable income
and thereby reduce income taxes payable in fiscal 1997 and beyond.
Loss From Continuing Operations. The Company's loss from
continuing operations increased from $2,907,000 in fiscal 1995 to
$12,899,000 in fiscal 1996. The increase of $9,992,000 reflects the
combined effect of all 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 $808,000 for fiscal 1995 were
reclassified as losses from discontinued operation.
Net Loss. The increase of $9,184,000 in the Company's net
loss from fiscal 1995 to fiscal 1996 reflects the combined effect of all
the above.
FISCAL 1995 COMPARED WITH FISCAL 1994
Net Sales. The Company's net sales for fiscal 1995 were
$45,088,000, a decrease of $14,961,000, or 24.9%, from $60,049,000 in
fiscal 1994. Sales to Walmart, the Company's largest customer in fiscal
1994 decreased $9.5 million in fiscal 1995 as a result of Walmart's
decision to use the Company's programs in a limited manner in
PAGE 48
fiscal 1995. In addition, gift program sales decreased $6.4 million as
a result of the Company s decision to reduce the offering of this
program in order to reduce guaranteed sales. The Company's sales volume
has declined materially in each of the last several years. The Company
believes 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.
The following table sets forth the Company's net sales by type
of program:
NET SALES
Fiscal Year Ended
------------------------------- Increase
June 24, 1995 June 25, 1994 (Decrease)
------------- ------------- ----------
Dollar Days $31,933,000 $41,257,000 $ (9,324,000)
Replenishment 9,560,000 8,224,000 1,336,000
----------- ----------- -------------
Core Promotional Business 41,493,000 49,481,000 (7,988,000)
Gift 2,122,000 8,521,000 (6,399,000)
Other Specialty Products 1,473,000 2,047,000 (574,000)
----------- ----------- -------------
$45,088,000 $60,049,000 $(14,961,000)
=========== =========== =============
Cost of Products Sold and Gross Profit Margins. The Company's
gross profit margin as a percentage of sales decreased from 25.8% in
fiscal 1994 to 23.8% in fiscal 1995, principally due to the increased
cost of merchandise sold in the Company's core business programs,
related primarily to the mix of programs sold and increased plastic
manufacturing costs related to the lower level of plastic production in
fiscal 1995.
Operating Expenses. The Company's operating expenses
decreased from $13,245,000, or 22.1% of sales, in fiscal 1994 to
$12,461,000, or 27.6% of sales, in fiscal 1995. The increase in
operating expenses as a percentage of sales was primarily the result of
increased sales and merchandising costs related to the development of
programs for the future, and the lower level of sales in fiscal 1995.
Interest Expense. The Company's interest expense decreased
$238,000 in fiscal 1995, due to lower average borrowing levels net of
increased interest rates and other borrowing costs.
Other Income (Expense), Net. The Company's other income of
$674,000 in fiscal 1995 included a $950,000 gain on the sale of property
in Mt. Clemens, Michigan, the site of a previously discontinued
operation, gains of $296,000 from sales of plastic production equipment,
net of a $518,000 writedown of the estimated value of remaining amounts
PAGE 49
due from the prior sale of Action Nicholson Color Company, and other
miscellaneous items. The fiscal 1994 other income amount of $77,000 was
comprised of miscellaneous items.
Provision for Income Taxes. The Company recorded no income
tax benefits from its loss in fiscal 1995 because realization of such
benefits cannot be reasonably assured. No income tax expense was
provided on earnings in fiscal 1994 because previously unrecognized
deferred income tax benefits and net operating loss deductions from
prior years were available to offset income taxes on current earnings.
Earnings (Loss) From Continuing Operations. The Company's
earnings (loss) from continuing operations decreased from earnings of
$128,000 in fiscal 1994 to a loss of $2,907,000 in fiscal 1995. The
decrease of $3,035,000 in net income reflects the combined effect of all
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 $808,000 for 1995 and $3,000 for
1994 were reclassified as losses from discontinued operations.
Net Earnings (Loss). The decrease of $3,840,000 in the
Company's net earnings in fiscal 1995 reflects the combined effect of
all the above.
BUSINESS
The business of the Company, as described below, will be
discontinued if the Plan is approved by the shareholders and the Sale to
Mazel is consummated.
GENERAL
The Company is the successor to a business which was founded
in 1917 and incorporated in 1946. In 1969 the Company first sold its
common stock in the public market. For more than thirty years the
Company's principal business has been the sale of comprehensive
promotional programs to retailers, including DOLLAR-AMA (registered
trademark) and others. More recently, the Company introduced ACTION
EXPRESS (registered trademark) and POWER PALLET (trademark) and other
similar programs designed to provide a broad range of value-oriented
products, programs, displays and services to meet the traditional
promotional objectives of the retailer and reduce the need for in-store
labor. The Company s focus has been on its core promotional business
consisting of two distinct business-marketing units designed to meet the
needs of both its retail customers and the consumer.
The Company's Core Promotional Business consists of its Promotional
Business and its Powerhouse Business. The Promotional Business is the
sale of comprehensive promotional programs such as DOLLAR-AMA
(registered trademark), Dollar Days and others to retailers. The
objectives of the promotional programs are to enhance sales volume and
store traffic as compared to the results which might be attained by the
retailer independent of such programs, while reducing the need for
PAGE 50
in-store labor. The Company provides selected assortments of
merchandise, and generally furnishes promotional advertising and display
materials, often packing the merchandise in pre-packed displays ready to
be placed on the selling floor. The Company sells the assortments of
merchandise to its customers at fixed percentage discounts from the even
dollar retail prices at which the merchandise is offered for sale to the
consumer. Promotional programs are sold periodically, and are not
maintained in the customers' retail stores at all times, only during the
promotional period of two to four weeks. Promotional program
merchandise is generally not restocked when sold. Promotional programs
may be stocked on the customers permanent shelves or may be set up in
aisles or other open, temporary spaces using the Company's cardboard
display fixtures.
The Company's Powerhouse Business focuses on "store within a store"
concepts using a combination of promotional programs and themed events.
Powerhouse merchandise and program concepts or themes are generally the
same or similar to the Promotional Business. The primary difference is
that Powerhouse customers generally stock the Company's merchandise in
permanent display areas enhanced with the Company's display materials,
and merchandise is reordered and restocked to replace merchandise sold.
Powerhouse merchandise is expected to be maintained in the customers'
stores indefinitely, as opposed to a limited promotional period.
The sale of the Company s lamp business in September of 1995
substantially eliminated the Specialty Products business, which had been
the Company's "Item" business, wherein proprietary branded lines of
merchandise were sold independent of any promotional programs.
The principal product categories sold by the Company have been
housewares (kitchenware, cleaning aids and food storage), plastic
products for the home, picture frames, toys, stationery, closet
accessories, health and beauty aids and the like.
In fiscal 1996, one of the Company s customers accounted for
18.2% of consolidated net sales as a result of the merger of what had
been two separate customers, American Stores and Lucky Stores, which
individually accounted for 9.2% and 9% of consolidated net sales,
respectively. In fiscal 1995 American Stores accounted for 11.6% of
consolidated net sales. In fiscal 1994 Walmart accounted for 15.3% of
consolidated net sales. Business with Walmart decreased significantly
in fiscal 1995, as a result of Walmart directing its business with the
Company to smaller and older stores as compared to a much broader
scope of stores in fiscal 1994.
The Company currently has several large customers which are
significant to its business. In fiscal 1996, the Company sold in excess
of $1 million to each of six customers who, in the aggregate, accounted
for 42% of consolidated net sales. In fiscal 1995, the Company sold
in excess of $1 million to each of 11 customers who, in the aggregate,
accounted for 48% of consolidated net sales. In fiscal 1994, the
Company sold in excess of $1 million to each of 19 customers who, in the
aggregate, accounted for 57% of consolidated net sales. The loss of
large customers has had an adverse effect on the Company.
PAGE 51
There are no long-term arrangements or contracts which
obligate any customer to purchase goods from the Company. The Company
generally receives firm orders from its customers only a short time
before shipment and consequently has no significant backlog of firm
orders.
In the retail marketing programs of its Promotional Business,
which include DOLLAR-AMA (registered trademark), deep discount Gift
promotions, ACTION EXPRESS (registered trademark) and others, the
Company sells selected assortments of its products to retailing chains
in various market areas at different times throughout the year, and
generally furnishes promotional advertising and display materials,
sometimes including related newspaper circulars and inserts for
advertising the merchandise. While newspaper circulars were a major
part of the Company's programs in the past, this activity has been
decreasing for the last several years, to the point where it has been
utilized in only a small part of the Company's business in recent years.
The Company sells these assortments of merchandise to its
customers at fixed percentage discounts from the retail prices at which
the merchandise is advertised for sale to the consumer, resulting in
uniform overall profitability to the Company's customers. The overall
profitability to the Company of the promotional programs depends upon
the aggregate costs of the various items included in the assortments.
Items have been added to or discontinued in the assortments from time to
time, based upon customer demand, retail sell-through and overall
profitability to the Company.
Promotional programs, which are designed to enhance sales
volume and store traffic, are the Company's primary area of expertise
and the principal marketing vehicle for the Company's products. The
Company believes all of the items in its merchandise line are marketable
independent of its promotional programs.
The Company's Gift program business has been seasonal to the
Christmas selling season. In recent years, including fiscal 1996,
approximately 50% to 70% of the Company's annual Gift volume has been
sold in the Company's second quarter (October, November and December).
As a result, commitments to purchase Gift inventories have been made
early, in advance of the selling season, and inventory levels have been
more difficult to adjust as sales volume fluctuates.
In addition, as the Company's mix of customers has changed in
recent years to include proportionately more major drug store and
grocery store chains, customer demand for guaranteed sales has
increased. Historically the Company's customer base has included
proportionately more mass merchandisers, which have not required
guaranteed sales terms as often as drug and grocery chains. In fiscal
1995 and 1996, drug and grocery chains accounted for nearly 70% of the
Company's core promotional sales, compared to just under 50% in fiscal
1990. Guaranteed sales are sales whereby the customer retains the right
to return goods which remain unsold at the close of the promotional
period. The Company prices its programs based on the merchandise and
services provided, including, where applicable, the assumption of the
risk of return on guaranteed sales. In general, the Company expects
returns of 30% or less on its guaranteed sale programs, and at that
PAGE 52
level, expects to realize acceptable gross margins after accounting for
customer returns. Business in certain types of programs and with
certain customers has historically resulted in greater levels of
customer returns. The Company has historically taken this into account
in its pricing, accounting, and gross margin expectations. Excessive
returns are actual returns in excess of the level expected when the
pricing of the program was determined and agreed to with the customer.
This level may vary with the type of program and the customer, and the
Company does not use a specific return rate in all cases. In fiscal
1993 and 1994, approximately 50% of the Gift program was sold under
guaranteed sales terms. Significant execution problems and excessive
returns in fiscal 1993 resulted in planned reduction of the Gift program
business in 1994. The Company's fiscal 1994 Gift program did not meet
sales and profitability expectations. As a result, the Company
purchased limited gift merchandise, reduced its sales expectations and
offered a significantly reduced Gift program principally on a
non-guaranteed basis in fiscal 1995 and 1996. Actual Gift program sales
were $2.3 million in 1996 and $2.1 million in 1995 as compared to $8.5
million in 1994 and $15.1 million in 1993.
PRODUCTS
The products sold by the Company consist of imported products,
Company-manufactured products, and products purchased from other United
States manufacturers and suppliers.
The breakdown of consolidated net sales by source is as follows:
Fiscal Year
1996 1995 1994
---- ---- ----
Imported Products 82% 72% 75%
Company-Manufactured Plastics 7% 15% 17%
Domestic Products 11% 13% 8%
---- ---- ----
100% 100% 100%
==== ==== ====
Imported Products. Imported products consist of approximately 600
merchandise items. These include cleaning products such as sponges,
rubber gloves and cleaning and scouring pads; kitchen utensils, toys,
tools, grooming products and picture frames and a wide variety of other
housewares and gift items. Most of these items have been manufactured
and packaged to the Company's specifications under the Company's brand
names. Imported products have been purchased from various manufacturers
in 20 countries, primarily in the Far East and Europe.
PAGE 53
The Company's importing activities have been subject to the
effects of inflation and fluctuations in the value of the U.S. dollar in
relation to other currencies, as well as various other economic and
political risks. It has been the Company's practice to purchase in U.S.
dollars wherever possible, and to evaluate these risks, as well as the
cost and availability of merchandise from all of its product sources,
and to change suppliers and countries of origin as necessary to meet its
purchasing objectives. While the Company considers its recent sources
of supply adequate for its operations and has generally been successful
at developing alternative sources of supply, there can be no assurance
that suitable merchandise from foreign countries would continue to be
available at satisfactory U.S. dollar prices.
Company-manufactured Plastics. Until August of 1995, the
Company manufactured more than 100 plastic housewares items, such as
wastebaskets, laundry baskets, pails, food storage containers, tumblers,
storage bins, and the like. As a result of declining sales volume and
53
a decreasing proportionate use of plastics in its existing business, the
Company closed its manufacturing facility, and made arrangements to meet
its needs for plastic products through outside purchases from both
domestic and import sources.
Products Purchased from Other United States Manufacturers and
Suppliers. Domestically manufactured products purchased from others
have consisted of approximately 100 items sold in the Company's
promotional programs. As with its imported products, while the Company
considers its recent sources of supply adequate for its operations,
there have been no assurances that suitable merchandise from domestic
manufacturers would continue to be available to the Company at
satisfactory prices.
Products sold in the Powerhouse Business are all sold in the Promotional
Program Business as well. Cleaning and kitchen items have historically
been popular sellers, as have stationery items, picture frames,
children's activity books and other toys, and closet and storage items.
COMPETITION
The Company sells assortments of housewares including kitchen and
cleaning items, tabletop and serving pieces, health and beauty items,
picture frames, gift items, toys, tools, books and a wide variety of
other low priced items.
The business of importing and marketing the type of merchandise sold to
the retail trade by the Company is highly competitive. While the
Company has experienced some competition from certain importers in terms
of "direct import" promotional programs, no competitor has been known to
provide the breadth of program selection and services which the Company
has provided. However, the Company has experienced competition from a
large number of firms, many of which have greater financial resources
than the Company. These competitors include large manufacturers which
sell branded promotional items, retailers which develop their own
promotional programs, wholesalers and importers.
PAGE 54
The Company's promotional programs, including its Powerhouse
(Replenishment) Business, which in fiscal 1996 accounted for
approximately 99.7% of net sales, have been the Company's principal
method of competing with other suppliers of like merchandise to retail
chains. The Company has endeavored to provide a broad range of
value-oriented products and programs, as well as merchandising,
point-of-sale displays and other promotional support materials and
services, in a unique fashion, responsive to the retailers' needs.
Competitive pricing has been an important factor in meeting the needs of
the Company's customers. The success of the promotional programs has
been dependent on achieving the goal of increasing sales and enhancing
gross margin contribution in the stores of the Company's customers.
The Company believes it has been the leading independent
marketer of promotional programs to the retail trade. The Company's
principal competition in providing these programs often has come from
its own customers, most of whom have the capabilities to conduct
promotional programs internally. Building in-store sales and traffic
and providing the retailer with comprehensive, turnkey programs,
including promotional merchandise with consistent, reasonable profit
margins for the retailer, have been the Company's basis for competition
with the internally created promotional programs of its customers.
SEASONALITY
Fluctuations in sales of the Company's DOLLAR-AMA (registered
trademark) and similar promotions from quarter to quarter reflect the
cumulative result of individual decisions made by various customers with
regard to the timing and placement of orders. Sales of the Company's
Gift programs have been seasonally highest in the Company's second
fiscal quarter. The December quarter has accounted for approximately
50% to 70% of the annual volume for Gift sales during the last three
fiscal years.
TRADEMARKS, LICENSES AND FRANCHISES
The Company's trademarks are recognized by consumers throughout the
United States, and represent the basic concepts under which the
Company's promotional programs have been sold. DOLLAR-AMA (registered
trademark), DOLLAR POWER (registered trademark) and other trademarks are
easily recognized program concepts which indicate high value, low cost
merchandise for sale. The Company's program merchandise is priced at
even dollar (generally $1, $2 or $3) retail price points which represent
perceived high value to the consumer. The objectives of the promotional
programs are to enhance sales volume and store traffic as compared to
the results which might be attained by the retailer independent of such
programs, while reducing the need for in-store labor. The Company
provides selected assortments of merchandise, and generally furnishes
promotional advertising and display materials, often packing the
merchandise in pre-packed displays ready to be placed on the selling
floor. The Company sells the assortments of merchandise to its
customers at fixed percentage discounts from the even dollar retail
prices. Trademarks are considered to be an integral part of the ability
to market promotional programs. Trademark rights endure as long as the
PAGE 55
Company continues to properly use them in the conduct of its business.
All of the Company's trademarks are to be sold in conjunction with the
sale of assets of its Replenishment and Promotional businesses.
In connection with the Company's promotional program sales,
licenses to use DOLLAR-AMA (registered trademark) and other trademarks
have been granted to customers' stores. The licenses have been granted
at no additional cost to the customer (the Company charges only for the
merchandise provided) for limited periods of time, usually one to two
weeks, during which the licensed stores advertise their sales of the
Company's merchandise.
EMPLOYEES
At October 15, 1996, the Company employed 40 regular employees
and no temporary employees. At October 15, 1995, the Company employed
169 regular (including 70 represented by a labor union) and 25 temporary
employees. The decrease is due to the downsizing and outsourcing of
distribution operations and other work force reductions related to these
and other downsizing activities during the year.
PROPERTIES
The Company occupies the following facilities:
Headquarters. The Company s corporate headquarters are
located in a 580,000-square foot building on a 43-acre tract of land in
Harmar Township, Pennsylvania (near Pittsburgh). The facility is leased
from Allegheny Capital Growth Limited Partnership. During the third
quarter of fiscal 1996, the Company moved all of its inventory and
distribution activities from this location to lower cost public
warehouse facilities described below. A substantial part of the
facility is subleased to a third party under a short-term arrangement.
In October 1996 the Company finalized the negotiation of and signed a
new lease wherein the Company will lease only 58,000 square feet of
office space in the facility.
Other Distribution Facilities. The Company has occupied
330,000 square feet at a public warehouse facility in Mt. Vernon Ohio,
and 55,000 square feet at an additional distribution facility in
Columbus, Ohio. The facilities are occupied under short-term lease
arrangements permitting the Company to expand or contract its space to
accommodate the Company's fluctuating inventory and distribution volume.
The obligations under these leases are expected to be terminated in
conjunction with the sale of the Company's inventory located at such
facilities.
LEGAL PROCEEDINGS
An action was filed against the Company and approximately 50
other defendants on August 16, 1994 by the Official Committee of
Unsecured Creditors of Phar-Mor, Inc. in the United States Bankruptcy
PAGE 56
Court, Northern District of Ohio. The case was subsequently transferred
to the United States District Court for the Western District of
Pennsylvania. The Official Committee sought the recovery of
approximately $75 million (about $2.6 million in the case of the
Company) paid to the defendants for Phar-Mor shares tendered by them in
a July 1991 tender offer. The claim was based upon allegations that at
the time of the tender offer Phar-Mor was insolvent or had unreasonably
small capital, and, therefore, the transfers pursuant to the tender
offer constituted fraudulent conveyances. On August 22, 1995, summary
judgment was entered in favor of the Company and the other defendants.
In September 1995, the Official Committee filed an appeal of this
decision. In October 1996 the U.S. Court of Appeals for the Third
Circuit affirmed the judgment of the District Court in favor of the
Company and the other defendants.
MAZEL STORES, INC.
(the successor to MAZEL COMPANY, L.P.)
Mazel Stores, Inc. consists of two complementary operations:
(i) a major regional closeout retail business; and (ii) one of the
nation's largest closeout wholesale businesses. Mazel was founded in
1975 as a wholesaler of closeout merchandise. In its wholesale
operations, Mazel sells merchandise, including nationally recognized
brand-name products, at a substantial discount to their original retail
or wholesale prices. Mazel's Odd Job retail stores offer substantial
savings on a large assortment of quality consumer items, which are
frequently brand-name. Merchandise categories include housewares,
stationery, books, party supplies, health and beauty aids, food, toys,
hardware, electronics and garden supplies.
Mazel does not intend to solicit proxies to approve the Sale, therefore
such approval is not a condition of the Sale.
Mazel's principal executive offices are located at 31000
Aurora Road, Solon, Ohio 44139 and its telephone number is (216)
248-5200. Mazel is not an affiliate of the Company.
Mazel's common stock is listed on the NASDAQ national over the counter
market under the trading symbol "MAZL." Mazel completed an initial
public offering of its common stock on November 20, 1996. The assets of
Mazel Company, L.P. were transferred to Mazel Stores, Inc. immediately
prior to completion of the initial public offering.
INDEPENDENT AUDITORS
The financial statements of the Company as of June 30, 1996 and
June 24, 1995 and for each of the three years in the period ended June
30, 1996, included in this Proxy Statement, have been audited by Ernst
& Young, LLP, independent auditors, as stated in their report herein.
PAGE 57
Representatives of Ernst & Young, LLP are expected to be
present at the Annual Meeting and, while they are not expected to make
a statement, they will have the opportunity to do so if they desire.
Such representatives will be available to respond to appropriate
questions from the shareholders.
OTHER MATTERS
The Board of Directors does not know of any matters to be
presented at the Annual Meeting other than the election of one director
and the proposals to approve the Amendment and the Plan. If any other
matters should properly come before the Annual Meeting, however, it is
the intention of the persons named in the enclosed proxy to vote thereon
in accordance with their best judgment.
1997 SHAREHOLDER PROPOSALS
To be eligible for presentation at the Company's next annual
meeting, shareholder proposals must be received by the Secretary of the
Corporation at its main office not later than August 4, 1997.
AVAILABLE INFORMATION
The Corporation is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and in accordance therewith files reports, proxy and information
statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's Regional Offices located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60621-2511 and 75 Park
Place, Room 1228, New York, New York 10007. Copies of such material can
be obtained by mail from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
YOUR VOTE IS IMPORTANT.
THE ENCLOSED PROXY SHOULD BE COMPLETED, DATED, SIGNED AND
RETURNED IN THE ENCLOSED ENVELOPE FOR WHICH POSTAGE HAS BEEN PAID.
PROMPT MAILING OF THE PROXY WILL BE APPRECIATED.
BY ORDER OF THE BOARD OF DIRECTORS,
T. Ronald Casper
President and CEO
Date: January __, 1997
PAGE 58
- ---------------------------------------------------------------------
QUARTERLY FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
September September June
30, 1996 30, 1995 30, 1996
--------- --------- ---------
ASSETS
Current Assets
Cash and cash equivalents $5 $1,096 $78
Trade accounts receivable, less allowances
of $377, $478, and $353 2,218 7,510 2,769
Inventories 2,539 18,414 3,928
Other current assets 591 1,130 671
------- ------- -------
Total Current Assets 5,353 28,150 7,446
Property, Plant and Equipment 307 7,687 385
Other Assets
Note Receivable 754 1,200 850
Other 193 488 227
------- ------- -------
$6,607 $37,525 $8,908
======= ======= =======
PAGE 59
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current Liabilities
Notes payable $1,858 $10,278 $3,039
Accounts payable 2,592 4,217 2,628
Accrued compensation 604 999 607
Other accrued liabilities 589 1,069 736
------- ------- -------
Total Current Liabilities 5,643 16,563 7,010
Long-Term Liabilities
Financing obligation - sale/leaseback - 7,506 -
Long-term debt 115 115 115
Deferred compensation 1,353 1,416 1,554
------- ------- -------
Total Long-Term Liabilities 1,468 9,037 1,669
Shareholders' Equity (Capital Deficiency)
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) (15,147) (2,718) (14,414)
------- ------- -------
11,070 23,499 11,803
Less treasury shares, at cost 11,574 11,574 11,574
------- ------- -------
Total Shareholders' Equity (Capital Deficiency) (504) 11,925 229
------- ------- -------
$6,607 $37,525 $8,908
======= ======= =======
See notes to consolidated financial statements.
PAGE 60
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands except per share data)
First Quarter Ended
-------------------------
September September
30, 1996 30, 1995
-------- --------
NET SALES $3,668 $9,180
COSTS AND EXPENSES
Cost of products sold 2,272 7,165
Operating expenses 1,975 2,719
Interest expense 183 654
-------- --------
4,430 10,538
OTHER INCOME, NET 29 155
-------- --------
LOSS BEFORE INCOME TAXES (733) (1,203)
PROVISION FOR INCOME TAXES - -
-------- --------
NET LOSS ($733) ($1,203)
======== ========
NET LOSS PER SHARE ($0.13) ($0.22)
======== ========
Weighted average shares outstanding 5,539 5,539
======== ========
See notes to consolidated financial statements.
PAGE 61
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
UNAUDITED
(In thousands except share amounts)
First Quarter Ended September 30, 1996 and September 30, 1995
---------------------------------------------------------------------------------
Capital Retained
Common Stock In Excess Earnings Treasury Stock
Shares Amount of Par (Deficit) Shares Amount Total
------ ------ --------- --------- ------ ------ -----
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
=================================================================================
BALANCE - JUNE 30, 1996 7,187,428 $719 $25,498 ($14,414) 1,647,970 ($11,574) $229
Net Loss - - - (733) - - (733)
---------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 1996 7,187,428 $719 $25,498 ($15,147) 1,647,970 ($11,574) ($504)
=================================================================================
See notes to consolidated financial statements.
PAGE 62
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
First Quarter Ended
-----------------------------
September September
30, 1996 30, 1995
--------- ---------
OPERATING ACTIVITIES:
Net loss ($733) ($1,203)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 78 238
Changes in operating assets and liabilities:
Trade accounts receivable 551 2,398
Inventories 1,389 (281)
Other current assets 80 181
Accounts payable and accrued expenses (387) (702)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 978 631
======== ========
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment - -
Payments received on notes receivable 96 -
-------- --------
NET CASH PROVIDED BY INVESTMENT ACTIVITIES 96 0
======== ========
FINANCING ACTIVITIES:
Notes and acceptances payable (1,181) 116
Principal payments on long-term obligations - (233)
Other, net 34 15
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,147) (102)
======== ========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (73) 529
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 78 567
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5 $1,096
======== ========
See notes to consolidated financial statements.
PAGE 63
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 30, 1996, 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.
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. In October 1996 the Company entered into an agreement to sell
its inventory and related intellectual property associated with
its Replenishment (Powerhouse) business and Promotional
business. The Powerhouse-related assets were sold October 18,
1996. The Company's Promotional-related assets have been sold
subject to the approval of the Company's shareholders. The
assets to be sold represent substantially all of the operating
assets employed in the Company's business. Trade accounts
receivable are to be retained, as well as non-operating notes
and other receivables from prior sales of the Company's
headquarters facility and certain business units. Upon
completion of the sales described above, all of the Company's
current operations will have been sold.
Also in October 1996 the Company finalized negotiations and
signed a new lease arrangement for its headquarters facility.
The new lease obligates the Company for rent of approximately
$100,000 per year for a five year period under an operating
lease. This lease agreement, in conjunction with the physical
departure from the warehouse space in the facility, resulted in
the elimination as of June 30, 1996 of the previously reported
capital lease obligation for the facility.
The accompanying financial statements include the historical
results of operations of the Company's Promotional and
Replenishment businesses. Valuation adjustments were made as
of June 30, 1996 to the historical cost basis of the Company's
PAGE 64
inventories, property and equipment and any other assets
impacted by the sale of the Company's current operations, to
value these assets at estimated net realizable value and to
reflect the abandonment or sale of certain fixed assets no
longer used to support operations.
D. The results of operations for the quarter ended September 30,
1996 are not necessarily indicative of the results to be
expected for the full year.
E. Inventories consist primarily of merchandise held for resale.
Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market.
F. The Company has a credit agreement which provides for up to $10
million in committed credit lines through June 30, 1997.
Availability under the credit line is further limited by the
level of eligible accounts receivable and inventories.
Interest is payable at 3.5% over the prime rate of interest.
At September 30, 1996 outstanding borrowings under the credit
agreement were $1.9 million and the unused borrowing capacity
was $992,000.
The Company did not meet the requirements under the restrictive
covenants of the Credit Agreement as of September 30, 1996, and
will not be able to meet these covenants subsequently. The
lender's remedies under such a default include the right to
demand repayment of the outstanding loan.
G. No income tax benefits were provided on the losses in the
fiscal quarters ended September 30, 1996 and September 30, 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 the
future are approximately $35 million for income tax reporting
purposes.
PAGE 65
YEAR END FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Action Industries, Inc.
We have audited the accompanying consolidated balance sheets of Action
Industries, Inc. and Subsidiaries as of June 30, 1996 and June 24, 1995,
and the consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended June 30,
1996, as listed in the accompanying index to financial statements Item
14(a). Our audits also included the financial statement schedule listed
in the index at 14(a). These financial statements and the 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 Action Industries, Inc. and Subsidiaries at June 30, 1996
and June 24, 1995, and the consolidated results of its operations and
cash flows for each of the three years in the period ended June 30, 1996
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 more fully described in Note A to the consolidated financial
statements, the Company has entered into an agreement to sell all its
inventory and related intellectual property subject to the approval of
the Company's shareholders. Additionally, as described in Note D, the
Company has experienced recurring losses and is currently in violation
of its debt agreement with its lender. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans regarding these matters are also described
in Note A. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of the assets or the amounts and classification of the
liabilities that may result from the outcome of this uncertainty.
ERNEST & YOUNG LLP
Pittsburgh, PA
October 14, 1996
PAGE 66
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, June 24,
1996 1995
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $78 $567
Trade accounts receivable, less allowances of $353 and $478 2,769 9,908
Inventories 3,928 18,133
Other current assets 671 1,111
------- -------
TOTAL CURRENT ASSETS 7,446 29,719
PROPERTY, PLANT AND EQUIPMENT 385 7,964
OTHER ASSETS
Note Receivable 850 1,200
Other 227 663
------- -------
$8,908 $39,546
======= =======
PAGE 67
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and acceptances payable $3,039 $10,162
Accounts payable 2,628 4,406
Accrued compensation 607 926
Other accrued liabilities 736 1,382
------- -------
TOTAL CURRENT LIABILITIES 7,010 16,876
LONG-TERM LIABILITIES
Financing obligation - sale/leaseback - 7,739
Long-term debt 115 115
Deferred compensation 1,554 1,688
------- -------
TOTAL LONG-TERM LIABILITIES 1,669 9,542
SHAREHOLDERS' EQUITY
Common stock, $0.10 par value;
authorized 20,000,000 shares; issued 7,187,428 shares 719 719
Capital in excess of par 25,498 25,498
Retained earnings (deficit) (14,414) (1,515)
------- -------
11,803 24,702
Less treasury shares, at cost 11,574 11,574
------- -------
TOTAL SHAREHOLDERS' EQUITY 229 13,128
------- -------
$8,908 $39,546
======= =======
See notes to consolidated financial statements.
PAGE 68
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Year Ended
----------------------------------
June 30, June 24, June 25,
1996 1995 1994
-------- -------- --------
NET SALES $30,212 $45,088 $60,049
COSTS AND EXPENSES
Cost of products sold 26,385 34,374 44,527
Operating expenses 10,462 12,461 13,245
Costs and expenses due to sale of
assets and closing of warehouse 4,226 - -
Interest expense 1,980 1,834 2,072
--------- --------- ---------
43,053 48,669 59,844
OTHER INCOME (EXPENSE), NET (58) 674 (77)
--------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (12,899) (2,907) 128
PROVISION FOR INCOME TAXES - - -
--------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (12,899) (2,907) 128
LOSS FROM DISCONTINUED OPERATIONS - (808) (3)
--------- --------- ---------
NET EARNINGS (LOSS) ($12,899) ($3,715) $125
========= ========= =========
EARNINGS (LOSS) PER SHARE
Continuing operations ($2.33) ($0.52) $0.02
Discontinued operations - (0.15) 0.00
--------- --------- ---------
NET EARNINGS (LOSS) PER SHARE ($2.33) ($0.67) $0.02
========= ========= =========
Weighted average shares outstanding 5,539 5,539 5,561
See notes to consolidated financial statements.
PAGE 69
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share amounts)
For the Years Ended June 30, 1996, June 24, 1995, and June 25, 1994
--------------------------------------------------------------------------------
Capital Retained
Common Stock In Excess Earnings Treasury Stock
Shares Amount of Par (Deficit) Shares Amount Total
--------------------------------------------------------------------------------
BALANCE - JUNE 26, 1993 7,187 $719 $25,498 $2,075 1,648 ($11,574) $16,718
Net Earnings - - - 125 - - 125
--------------------------------------------------------------------------------
BALANCE - JUNE 25, 1994 7,187 719 25,498 2,200 1,648 (11,574) 16,843
Net Loss - - - (3,715) - - (3,715)
--------------------------------------------------------------------------------
BALANCE - JUNE 24, 1995 7,187 719 25,498 (1,515) 1,648 (11,574) 13,128
Net Loss - - - (12,899) - - (12,899)
--------------------------------------------------------------------------------
BALANCE - JUNE 30, 1996 7,187 $719 $25,498 ($14,414) 1,648 ($11,574) $229
================================================================================
See notes to consolidated financial statements.
PAGE 70
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
----------------------------------
June 30, June 24, June 25,
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations ($12,899) ($3,715) $125
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 762 1,055 1,248
Provision (credit) for doubtful accounts (125) (138) 873
Non-cash provision for inventory losses 1,851 - -
Non-cash charge related to vacating warehouse facility 84 - -
Changes in operating assets and liabilities:
Trade accounts receivable 7,264 (390) 7,178
Inventories 12,354 (549) 6,203
Other current assets 890 76 1,953
Accounts payable and accrued expenses (2,743) 132 (5,193)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,438 (3,529) 12,387
========= ========= =========
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (220) (759) (127)
Payments received on notes receivable 100 297 -
--------- --------- ---------
NET CASH USED IN INVESTMENT ACTIVITIES (120) (462) (127)
========= ========= =========
FINANCING ACTIVITIES:
Notes and acceptances payable (7,123) 4,723 (11,001)
Payment of deferred compensation (134) (324) (602)
Principal payments on long-term obligations (786) (633) (535)
Other, net 236 (8) (52)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,807) 3,758 (12,190)
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (489) (233) 70
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 567 800 730
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $78 $567 $800
========= ========= =========
The completion of new lease on the Company's headquarters facility resulted in a noncash credit for the elimination of
the sale/leaseback obligation of $6.9 million and non-cash charges of $6.2 million for the net book value of the
leased property including land, building and certain equipment, $600,000 for other property and equipment abandoned
and $200,000 net book value of equipment disposed of during the year.
See notes to consolidated financial statements.
PAGE 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
_______________________________________________________________________
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year: References to a fiscal year in these financial statements
are to the Company's fiscal year ending for the three most recent fiscal
years on June 30, 1996, June 24, 1995 and June 25, 1994.
Basis of Presentation: In October 1996 the Company entered into an
agreement to sell its inventory and related intellectual property
associated with its Replenishment (Powerhouse) business and Promotional
business. The Powerhouse-related assets are to be sold promptly.
Powerhouse inventories were approximately $570,000 at the date the
agreement was signed. The Company's Promotional-related assets have
been sold subject to the approval of the Company's shareholders. The
assets to be sold represent substantially all of the operating assets
currently employed in the Company's business. Trade accounts receivable
are to be retained, as well as non-operating notes and other receivables
from prior sales of the Company's headquarters facility and certain
business units. Upon completion of the sales described above, all of
the Company's current operations will have been sold.
Also in October 1996 the Company finalized negotiations and signed a new
lease arrangement for its headquarters facility. The new lease
obligates the Company for rent of approximately $100,000 per year for a
five year period under an operating lease. This lease agreement, in
conjunction with the physical departure from the warehouse space in the
facility, results in the elimination of the previously reported capital
lease obligation for the facility.
The accompanying financial statements include the historical results of
operations of the Company's Promotional and Replenishment businesses.
Valuation adjustments have been made to the historical cost basis of the
Company's inventories, property and equipment and any other assets
impacted by the sale of the Company's current operations, to value these
assets at estimated net realizable value and to reflect the abandonment
or sale of certain fixed assets no longer used to support operations.
The valuation of the assets and liabilities are based on management
estimates and assumptions as of the date of issuance of the financial
statements. Actual realization of the assets and settlement of the
liabilities could be higher or lower than the estimated amounts.
The financial statements have been prepared on a going concern basis
because the disposition of the Company's inventories and other operating
assets to be sold is subject to approval by the shareholder vote
described above. The asset adjustments described above are the result
of recognition of the market value of the inventories and the
abandonment of property and equipment formerly utilized in warehouse
space which has been vacated.
Principles of Consolidation: The consolidated financial statements
include the accounts of Action Industries, Inc. and its wholly-owned
subsidiaries (the Company). All significant intercompany accounts and
PAGE 72
transactions have been eliminated. Until September of 1995, the Company
operated a lamp business as Kensington Lamp Company, a wholly-owned
subsidiary (KLC). The business and certain assets of KLC were sold in
September of 1995, a fiscal 1995 event for financial reporting purposes.
The lamp business has been reported as a discontinued operation. Action
Nicholson Color Company (ANC), a wholly-owned subsidiary, was sold in
April of 1994. ANC was held for sale as of June 26, 1993, and has been
reported as a discontinued operation.
Financial Instruments: Cash and cash equivalents, accounts and notes
receivable, and accounts and notes payable are carried at cost, which
approximated their fair value at June 30, 1996 and June 24, 1995.
Inventories: Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market. Market valuation is based on known or estimated
sales value.
Property, Plant and Equipment: Property, plant and equipment is carried
at cost. Elimination of the capitalized lease on the Company's
headquarters facility and the sale of the Company's operations have
resulted in the sale or devaluation of substantially all of the
Company's property, plant and equipment as of June 30, 1996. The
remaining book value is comprised of computer equipment and office
furniture and fixtures in continuing use.
Historically, the Company has provided for depreciation (including
amortization of assets held under capital leases) over the estimated
useful lives or lease terms of the assets, principally on the
straight-line method. Estimated useful lives used in providing for
depreciation have been 20-40 years for buildings and 3-15 years for
machinery and equipment.
Property, plant and equipment is comprised of the following (in
thousands):
1996 1995
---- ----
Land $ - $ 521
Buildings - 7,965
Machinery and equipment 5,981 21,833
-------- ---------
5,981 30,319
(Less allowances) (5,596) (22,355)
-------- ---------
$ 385 $ 7,964
======== =========
Income Taxes: The Company accounts for income tax expense and
liabilities under the liability method. Deferred income taxes are
provided for temporary differences between financial and income tax
reporting, relating principally to restructuring charges, reserves for
losses on investments and other assets, depreciation and deferred
compensation.
PAGE 73
Employees' Retirement Plans: The Company has defined contribution
retirement plans covering substantially all of its employees. The plans
provide for defined contributions based on eligible employees'
compensation. It is the policy to fund retirement plan costs accrued.
Revenue Recognition: The Company recognizes revenue from the sale of
merchandise at the time of shipment to its customers. In the case of
sales where the customer has the right to return unsold goods
(guaranteed sales), revenue recognized is reduced for estimated
returns, based on historical experience.
Interest Allocation: The Company has allocated interest to discontinued
operations based on the receivables and inventories used in such
operations.
Impact of Recently Issued Accounting Standards: The Company has not
adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of" (SFAS No.
121). Management does not believe that the adoption of SFAS No. 121
will have a material impact on the Company's financial position or
results of operations. The ultimate recovery of the carrying value of
the remaining long-lived assets will depend on the results of the
Company's efforts to accomplish a business combination with an operating
business.
The Company has not adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS
No. 123 establishes financial accounting and reporting standards for
stock-based compensation plans. This Standard is optional, and the
Company is permitted to continue to account for its plans under previous
accounting standards. The Company does not expect to adopt the
recognition provisions of the new accounting standard, and consequently,
the future adoption of SFAS No. 123 will not have an impact on the
Company's results of operations.
NOTE B -- SALE OF OPERATING ASSETS
The purchase price for the sale of the Company's Promotional inventory
and related intellectual property will not be determined until after the
process of obtaining shareholder approval is completed, which is
expected to be in December of 1996. The purchase price will equal 63.3%
of the cost of the inventory sold plus a cash payment of $100,000. The
proceeds of the sale are estimated at approximately $1.1 million to $1.5
million, and will be used to repay debt under the Company's credit
arrangements and trade payables. The estimated loss on the sale
(approximately $600,000) has been recorded in the accompanying financial
statements. In addition, the Company has incurred additional inventory
losses of approximately $1.8 million related to the sales of all current
operations, including excess quantities and other obsolete inventories,
primarily display materials; unabsorbed acquisition costs related to the
Company's low level of purchasing in 1996 and the writeoff of
unamortized display costs. These losses have been recorded as a
reduction in the value of inventory in the accompanying financial
statements.
PAGE 74
The Company, with the help of its advisors, is actively exploring other
strategic options available to it, including business combinations with
other operating businesses in order to continue as an operating concern
and preserve all or a portion of its income tax net operating loss
carryforwards. The Company has received indications of interest from
third parties, and has been engaged in specific discussions relating to
such a transaction with interested parties. Such discussions are
preliminary and may not result in an agreement relating to any such
transaction, and the Company may not be able to maintain sufficient
capital to continue the pursuit of such transactions. The issues
discussed above and those discussed in Note D regarding the status of
the Company's credit facilities raise substantial doubt about the
ability of the Company to continue as a going concern.
NOTE C -- DISCONTINUED OPERATIONS
Kensington Lamp Company: The Company owns 100% of the common stock of
Kensington Lamp Company (KLC), now inactive, but formerly an assembler
of lead crystal and other table lamps. The Company sold certain of the
assets and the business to KLC management in September of 1995. 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 42 month period which began November 1,
1995. As of June 30, 1996 the amount receivable under the note was
$1,299,900.
The estimated realizable value from the sale was included in other
current assets and other long-term assets in the accompanying balance
sheet as of June 24, 1995 as if the sale had taken place in the year
ended June 24, 1995. The statement of operations for 1994 was restated
to reflect KLC as a discontinued operation. Total sales for KLC were
$10.1 million for 1995 and $9.3 million for 1994.
Interest allocated to KLC in the accompanying statement of operations
was $334,000 in fiscal 1995 and $283,000 in fiscal 1994.
Action Nicholson Color Company: The Company owns 100% of the common
stock of Action Nicholson Color Company (ANC), now inactive, but
formerly a producer of color separations. The Company sold the assets
and the business of ANC in April of 1994. Terms of the sale included a
cash payment at closing and future payments based on sales of the
business over the three years subsequent to April 1994. The estimated
net realizable value of the future payments ($125,000 as of June 30,
1996) is included in the accompanying balance sheet.
NOTE D -- LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt outstanding at June 30, 1996 and June 24, 1995 consisted
of $115,000 in 9% Convertible Subordinated Debentures, due in 1998.
There are no current maturities of long-term debt.
Convertible Subordinated Debentures: The Debentures may be converted
into common stock at a price of $9.87 per share at any time prior to
PAGE 75
maturity. If conversion does not occur, the Company is required to
redeem the Debentures on the maturity date, April 1, 1998. The
Debentures may be redeemed early, at the Company's option, upon payment
of a premium. The sale of substantially all of the Company's operating
assets in a transaction requiring shareholder approval may require
redemption of the Debentures at the time the sale is completed.
Credit Facilities: The Company's Credit Agreement provides for
available credit of 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. Interest is payable at
3.5% over the prime rate of interest.
Borrowings are used for short-term financing under notes payable and to
back up letters of credit issued against purchases of imported
merchandise. Borrowings are secured by substantially all of the
Company's assets, including its cash balances, accounts receivable,
inventories, and property, plant and equipment.
Short-term borrowings against the credit lines ranged from a high of
$12.4 million to a low of $2.5 million during the 1996 fiscal year. At
June 30, 1996 the unused borrowing capacity based on the borrowing
formula in the agreement was $1.5 million. During the year ended June
24, 1995, borrowings ranged from a high of $14.6 million to a low of
$4.6 million.
The Company did not meet the required levels of net worth and working
capital under the restrictive covenants of its Credit Agreement as of
June 30, 1996, and will not be able to meet these covenants
subsequently. The lender's remedies under such a default include the
right to demand repayment of the outstanding loan.
Maturities of Debt: There are no maturities of long-term debt for the
five fiscal years subsequent to 1996, with the exception of the
Convertible Subordinated Debentures due April 1, 1998 ($115,000).
Interest paid was $2,067,000 during the year ended June 30, 1996,
$2,098,000 in 1995, and $2,585,000 in 1994.
NOTE E -- SALE/LEASEBACK
In 1991 the Company refinanced its headquarters facility under a
sale/leaseback arrangement. The facility was sold for $14 million, $3.5
million of which was in the form of an interest bearing note receivable.
$10.5 million was received in cash. The transaction was accounted for
as a financing, wherein the property remained on the books and continued
to be depreciated. A financing obligation representing the proceeds was
recorded, and was reduced based on payments under the lease.
The sale/leaseback financing obligation was eliminated in October of
1996 when the Company completed negotiations and agreed to an operating
lease on the office space in the facility (which space represents
approximately 10% of the total space in the facility). In connection
with the settlement of the sale/leaseback obligation, the note
receivable was reduced to $2.3 million from the original $3.5 million,
PAGE 76
and the note will not bear interest until 1999. An unrelated third
party has leased the entire warehouse portion of the space from the
Company's landlord. As a result of the Company's vacating the warehouse
facilities during March and April of 1996 and the signing of a new
operating lease, the capitalized lease obligation was eliminated from
the financial statements as of June 30, 1996. The note receivable has
been recorded in the financial statements as follows:
Note receivable $2,300,000
Valuation allowance 2,300,000
----------
Net recoverable amount $ 0
==========
The valuation allowance has been provided to reduce the estimated net
recoverable amount of the note to zero because the note does not bear
interest until 1999 and because the Company's ability to realize some or
all of the value of the note is dependent on whether or not the owner of
the facility can sell or refinance the property in sufficient amount to
satisfy the first mortgage to a third party, which has priority over the
Company's note receivable.
The original sale/leaseback (under which the Company has been the sole
tenant) had a lease term of twelve years for the office and eight years
for the warehouse (beginning in April 1991) and required minimum annual
rental payments of approximately $1.9 million per year through 1999 and
lesser payments thereafter.
The new lease requires minimum annual rental payments of $100,000 per
year for the five year period beginning November 1, 1996. The Company's
office space requirements are currently less than the space rented under
the new lease. The Company and its landlord are actively seeking
prospective tenants to relieve the Company of some or all of its
obligations under the lease. The note resumes the accrual of interest
in March of 1999, at which time the Company will receive $138,000
interest per year, which may be offset against the rental obligation.
Termination of the original sale/leaseback lease resulted in elimination
of the capitalized lease obligation ($6.9 million at June 30, 1996) from
the balance sheet, offset by the elimination of the land, building and
certain equipment directly related to the facility with an aggregate net
book value of approximately $6.2 million. In addition, the Company
incurred significant costs associated with vacating the facility.
PAGE 77
The income statement effect of the capital lease termination was as
follows income (expense):
Termination of capital lease obligation $6,953,000
Property, plant and equipment eliminated 6,206,000
Severance, facilities costs, transfer freight 622,000
----------
6,828,000
----------
Net income from lease termination $ 125,000
==========
The Company also incurred other costs in connection with the capital
lease termination which have not been quantified, including moving
expenses, inventory transfer costs other than freight, and inventory
losses.
PAGE 78
NOTE F -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying value of assets and liabilities for
financial reporting purposes and the amounts reported for income tax
purposes. Significant components of the Company's deferred income tax
liabilities and assets are as follows:
1996 1995
---- ----
Deferred Tax Assets:
Deferred tax benefits associated
with losses provided for
restructuring, discontinued
operations and other asset
valuation allowances $ 6,093,200 $ 4,085,000
Deferred gain on sale/leaseback - 1,865,000
Net operating loss carryforwards 13,869,000 7,480,000
Alternative minimum tax credit 805,000 805,000
----------- -----------
20,767,200 14,235,000
Deferred Tax Liabilities:
Excess tax depreciation over book 567,600 1,454,000
Change from LIFO to FIFO 513,600 1,027,000
----------- -----------
1,081,200 2,481,000
----------- -----------
Net deferred tax asset 19,686,000 11,754,000
Valuation allowance 19,686,000 11,754,000
----------- -----------
NET DEFERRED TAX ASSET REPORTED $ 0 $ 0
=========== ===========
PAGE 79
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
1996 1995 1994
---- ---- ----
Federal income tax rate (34.0)% (34.0)% 34.0 %
Deferred tax charge (credit) - - -
Effect of net operating loss carry-
forward and valuation allowance 34.0 % 34.0 % (34.0)%
State income tax, net of
Federal benefit - - -
Other - - -
------- ------- -------
Effective income tax rate 0.0 % 0.0 % 0.0 %
======= ======= =======
The Company has net operating loss carryforwards available for income
tax reporting purposes of approximately $34 million expiring in 2008
through 2011 which, upon recognition, based on current tax rates, could
result in future tax benefits of approximately $13.8 million.
The Company made no tax payments during the years ended June 30, 1996,
June 24, 1995 and June 25, 1994.
NOTE G -- EMPLOYEES' RETIREMENT PLANS
Contributions under the Company's retirement plans were $75,000 in 1996,
$123,000 in 1995 and $133,000 in 1994. Contributions were for
employees subject to a collective bargaining agreement, which provides
for such contributions at a rate of 6% of eligible compensation. All
employees eligible for contributions under the collective bargaining
agreement were terminated prior to June 30, 1996.
NOTE H -- OTHER INCOME (EXPENSE), NET
Other income (expense) consists of the following (in thousands):
1996 1995 1994
---- ---- ----
Gain on sale of equipment $ - $ 296 $ -
Gain on sale of property - 950 -
Writedown of remaining estimated
realizable of Action Nicholson (200) (518) -
Interest income - - -
Gain on sale of other assets 208 - -
Other income (expense), net (66) (54) (77)
------ ------ -----
$ (58) $ 674 $(77)
====== ====== =====
PAGE 80
NOTE I -- LEASES
The Company leases office space and equipment under noncancelable
operating leases. Future minimum lease payments under operating leases
(including the new facility leases referred to in Note E above are
$338,000 in 1997; $287,000 in 1998; $215,000 in 1999; $100,000 in 2000
and $100,000 in 2001. Currently there are no leases with payments due
beyond 2001. Rent expense under operating leases (excluding the
sale/leaseback transaction which was a capital lease) amounted to
$280,000 in 1996, $855,000 in 1995, and $905,000 in 1994.
NOTE J -- COMMITMENTS AND CONTINGENCIES
Commitments as of June 30, 1996 for outstanding letters of credit for
merchandise purchases were $82,000.
The Company owned property located in Mt. Clemens, Michigan, the book
value of which was previously written off. The Company sold the
property in June of 1995. The Company retains an environmental
obligation with respect to the Mt. Clemens property but understands that
the obligation has been fulfilled by the buyer's completion of the
environmental cleanup procedures referred to in the Proxy Statement.
Creditors of Phar-Mor, Inc. previously filed a claim against the Company
(and other shareholders and former shareholders of Phar-Mor) to recover
certain proceeds (approximately $2.6 million) received by the Company in
connection with a Phar-Mor tender offer in fiscal 1992 for part of the
Company's investment in the common stock of Phar-Mor. The claim has
been denied by summary judgment, with no repayment required of the
Company. An appeal of the denial was filed by the Creditors in
September 1995. In October of 1996 the summary judgment was affirmed by
the appeals court.
NOTE K -- SEGMENT INFORMATION AND CREDIT CONCENTRATION
The Company has operated in one market segment - sales to retailers.
Substantially all of the Company's accounts receivable are from
retailers. The Company's credit arrangements with its customers are
generally unsecured. Credit loss experience has been in line with the
expectations of management.
Substantially all operations have been located in the United States.
Export sales were less than 10% of net sales.
During fiscal 1996 one entity accounted for 18.2% of the Company's
consolidated net sales, as a result of the merger of two customers which
accounted for 9.2% and 9% respectively. One customer accounted for
11.6% of consolidated net sales in 1995 and one customer accounted for
15.3% of consolidated net sales in 1994.
The Company has had several large customers which have been significant
to its business. In the fiscal year ended June 30, 1996 the Company
sold in excess of $1 million to each of six customers who, in the
aggregate, accounted for 42% of net sales. In the fiscal year ended
PAGE 81
June 24, 1995 the Company sold in excess of $1 million to each of eleven
customers who, in the aggregate accounted for 48% of net sales. The
loss of large customers has had an adverse effect on the Company.
NOTE L -- STOCK OPTION PLANS
The Company has adopted Stock Option Plans which provide for the
granting of stock options to certain key employees and directors. The
Plans reserve 1,055,300 shares of common stock. Options are granted at
no less than fair market value of the shares at the date of grant.
Option activity for 1996, 1995 and 1994 was as follows:
1996 1995 1994
---- ---- ----
Options outstanding at
beginning of year 863,731 739,600 597,075
Granted - 332,900 204,500
Exercised - - -
Canceled (670,531) (208,769) (61,975)
--------- --------- --------
Outstanding at end of year 193,200 863,731 739,600
========= ========= ========
Option price range $1.00 $1.00 $1.63
at end of year to to to
$5.38 $6.25 $6.25
Exercisable at end of year 117,300 378,800 295,000
======= ======= =======
NOTE M -- UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following table summarizes the reported results of continuing
operations for each quarterly period in fiscal 1996 and 1995. The
quarterly results for 1995 were restated from the amounts previously
reported to reflect the discontinuance of the Company's lamp assembly
business. Amounts shown are stated in thousands of dollars, except per
share data.
PAGE 82
CONTINUING OPERATIONS
------------------------------------------
Cost of Earnings
Net Products Earnings (Loss)
Quarter Ended Sales Sold (Loss) Per Share
- ------------- ----- -------- -------- ---------
1996
September 30, 1995 $ 9,180 $ 7,165 $ (1,203) $(0.22)
December 31, 1995 9,899 8,225 (1,471) (0.27)
March 31, 1996 5,455 4,937 (2,365) (0.43)
June 30, 1996 5,678 6,058 (7,860) (1.42)
------- ------- ---------
$30,212 $26,385 $(12,899) $(2.33)
======= ======= ========= =======
1995
September 24, 1994 $11,035 $ 7,846 $ (119) $(0.02)
December 24, 1994 16,494 12,467 ( 9) 0.00
March 25, 1995 6,201 4,770 (1,709) (0.31)
June 24, 1995 11,358 9,291 (1,070) (0.19)
------- ------- ---------
$45,088 $34,374 $ (2,907) $(0.52)
======= ======= ========= =======
The fourth quarter of the fiscal year ended June 30, 1996 includes
accounting adjustments to reflect the loss on the sale of the Company's
inventories and intellectual property ($600,000), inventory adjustments
of approximately $2 million related to the sales of all current
operations, including excess quantities and other obsolete inventories,
primarily display materials; unabsorbed acquisition costs related to the
Company's low level of purchasing in 1996 and the writeoff of
unamortized display costs. Other assets were written down $400,000.
PAGE 83
- --------------------------------------------------------------------
PROFORMA BALANCE SHEET
- --------------------------------------------------------------------
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands)
September 30, 1996
-----------------------------------
Historical Pro Forma Pro Forma
Cost Basis Adjustments Basis
---------- ----------- ---------
ASSETS
Current Assets
Cash and cash equivalents $5 $ 0 $ 5
Trade accounts receivable, less allowances 2,218 2,218
Inventories 2,539 (1,500) 1,039
Other current assets 591 591
-------- -------- --------
Total Current Assets 5,353 (1,500) 3,853
Property, Plant and Equipment 307 307
Other Assets
Note Receivable 754 754
Other 193 193
--------- --------- ---------
$6,607 $(1,500) $5,107
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $1,858 $(1,000) $ 858
Accounts payable 2,592 (500) 2,092
Accrued compensation 604 604
Other accrued liabilities 589 589
--------- --------- ---------
Total Current Liabilities 5,643 (1,500) 4,143
Long-Term Liabilities 1,468 1,468
Shareholders' Equity (504) (504)
--------- --------- ---------
$6,607 $(1,500) $5,107
========= ========= =========
PAGE 84
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
____________________________________________________________________
As discussed in this Proxy Statement, the Company has sold the
inventory and intellectual property related to its Powerhouse
(Replenishment) business, and has agreed, subject to shareholder
approval, to sell the inventory and intellectual property related
to its Promotional business. Upon completion of the sale of the
Promotional business, all of the Company's current operations
will have been sold.
The accompanying pro forma balance sheet as of September 30, 1996
has been prepared based on the historical cost basis balance
sheet, adjusted as if the sale of all of the Company's current
operations had occurred as of September 30, 1996.
Since the impact of the sale transaction was reflected in the
historical cost statements of operations, no pro forma operating
information is included.
The Company's is exploring other strategic options available to
it, including business combinations with other operating
businesses, in order to continue as an operating concern and
preserve all or a portion of its income tax net operating loss
carryforwards. While preliminary discussions are continuing, no
specific transaction has been identified, and therefore no pro
forma information related to such a transaction has been
included. Clearly, the Company must acquire access to additional
capital or a source of revenue in order to sustain its existence.
Unless a business combination which provides additional capital
can be accomplished, there is substantial doubt as to the ability
of the Company to continue to exist as a going concern.
Pro forma balance sheet adjustments reflect the sale for cash of
the estimated inventory amounts to be sold.
PAGE 85
- ---------------------------------------------------------------------
EXHIBIT A
- ---------------------------------------------------------------------
PLAN OF ASSET TRANSFER
OF
ACTION INDUSTRIES, INC.
Upon the Second Closing Date, as defined in Section 2.1(b) of
the Asset Purchase Agreement dated October 18, 1996 (the "Agreement") by
and between Action Industries, Inc. (the "Corporation") and Mazel
Company, L.P. ("Mazel"), a copy of which is attached to this Plan of
Asset Transfer, the Corporation shall sell, transfer, assign, grant,
convey and deliver to Mazel the assets of the Corporation described in
Section 2.1(b) of the Agreement, subject to the terms and conditions of
the Agreement.
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
MAZEL COMPANY L.P.
and
ACTION INDUSTRIES, INC.
October 18, 1996
TABLE OF CONTENTS
SECTION 1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .1
1.1 "Applicable Closing Date". . . . . . . . . . . . . . .1
1.2 "Assets" . . . . . . . . . . . . . . . . . . . . . . .1
1.3 "Bank" . . . . . . . . . . . . . . . . . . . . . . . .1
1.4 "Bank Lien" . . . . . . . . . . . . . . . . . . . . .1
1.5 "Cheswick Facility" . . . . . . . . . . . . . . . . .2
1.6 "Claims" . . . . . . . . . . . . . . . . . . . . . . .2
1.7 "COBRA" . . . . . . . . . . . . . . . . . . . . . . .2
1.8 "Code" . . . . . . . . . . . . . . . . . . . . . . . .2
1.9 "Damages" . . . . . . . . . . . . . . . . . . . . . .2
1.10 "Employee" . . . . . . . . . . . . . . . . . . . . . .2
1.11 "ERISA" . . . . . . . . . . . . . . . . . . . . . . .2
1.12 "First Closing Date" . . . . . . . . . . . . . . . . .2
1.13 "GAAP" . . . . . . . . . . . . . . . . . . . . . . . .2
1.14 "Good and Saleable Inventory" . . . . . . . . . . . .2
1.15 "Gross Sales" . . . . . . . . . . . . . . . . . . . .2
1.16 "Intellectual Property" . . . . . . . . . . . . . . .2
1.17 "Inventory" . . . . . . . . . . . . . . . . . . . . .3
1.18 "Powerhouse Customers" . . . . . . . . . . . . . . . .3
1.19 "Powerhouse Inventory" . . . . . . . . . . . . . . . .3
PAGE 86
1.20 "Promotional Customers" . . . . . . . . . . . . . . .3
1.21 "Promotional Inventory" . . . . . . . . . . . . . . .3
1.22 "Second Closing Date" . . . . . . . . . . . . . . . .3
1.23 "Seller's Warranty Claims" . . . . . . . . . . . . . .3
1.24 "Trade Secrets" . . . . . . . . . . . . . . . . . . .3
1.25 "Warehouse Facilities" . . . . . . . . . . . . . . . .3
1.26 "WARN" . . . . . . . . . . . . . . . . . . . . . . . .4
SECTION 2 PURCHASE OF ASSETS . . . . . . . . . . . . . . . . . .4
2.1 Sale of Assets . . . . . . . . . . . . . . . . . . . .4
(a) First Closing Date. . . . . . . . . . . . . . . .4
(b) Second Closing Date . . . . . . . . . . . . . . .5
(c) Instructions of Conveyance. . . . . . . . . . . .6
(d) Right of Buyer to Exclude Certain Inventory . . .6
2.2 Excluded Assets. . . . . . . . . . . . . . . . . . . .6
2.3 Consideration. . . . . . . . . . . . . . . . . . . . .6
2.4 Inventory Taking . . . . . . . . . . . . . . . . . . .6
2.5 Purchase Price and Payment . . . . . . . . . . . . . .7
2.6 Allocation of Purchase Price . . . . . . . . . . . . .9
2.7 No Assumption of Liabilities . . . . . . . . . . . . .9
2.8 Unassumed Liabilities. . . . . . . . . . . . . . . . 10
2.9 Bulk Sale Law. . . . . . . . . . . . . . . . . . . . 11
2.10 Non-Assignable Contracts and Rights. . . . . . . . . 11
2.11 Prorations . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3 CLOSING DATE . . . . . . . . . . . . . . . . . . . . 12
SECTION 4 REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . 13
4.1 Organization, Qualification and Authority of Seller. 13
(a) Due Organization and Qualification. . . . . . . 13
(b) Power and Authority to Conduct Business . . . . 13
(c) No Defaults or Violations . . . . . . . . . . . 13
(d) Power and Authority to Enter Into Agreements. . 14
(e) Due Execution and Enforceability. . . . . . . . 14
4.2 Inventory Report . . . . . . . . . . . . . . . . . . 14
4.3 No Equity Interest . . . . . . . . . . . . . . . . . 14
4.4 Title to Assets; No Claims, Liens, Etc.; "AS-IS"
Condition of Inventory . . . . . . . . . . . . . . . 14
4.5 Contracts and Commitments. . . . . . . . . . . . . . 15
(a) Customer Purchase Orders, Sales Bids and
Proposals. . . . . . . . . . . . . . . . . . . . 15
(b) Restrictions on Conduct of Business . . . . . . 15
4.6 Intellectual Property. . . . . . . . . . . . . . . . 15
4.7 Trade Secrets and Customer Lists . . . . . . . . . . 16
4.8 Customers and Sales. . . . . . . . . . . . . . . . . 16
4.9 Customer Deposits. . . . . . . . . . . . . . . . . . 16
4.10 Suppliers. . . . . . . . . . . . . . . . . . . . . . 17
4.11 Insurance. . . . . . . . . . . . . . . . . . . . . . 17
4.12 Contracts. . . . . . . . . . . . . . . . . . . . . . 17
4.13 Inventories. . . . . . . . . . . . . . . . . . . . . 17
4.14 Product Warranties . . . . . . . . . . . . . . . . . 18
4.15 Tax Returns. . . . . . . . . . . . . . . . . . . . . 18
4.16 Pending Claims, Litigation and Governmental
Proceedings. . . . . . . . . . . . . . . . . . . . . 18
4.17 Judgments, Orders and Consent Decrees. . . . . . . . 18
4.18 Agents and Employees . . . . . . . . . . . . . . . . 19
PAGE 87
4.19 Labor Matters. . . . . . . . . . . . . . . . . . . . 19
4.20 Environmental Matters. . . . . . . . . . . . . . . . 19
4.21 Compliance with Laws . . . . . . . . . . . . . . . . 20
4.22 Evaluation of Terms of Transaction . . . . . . . . . 20
4.23 Full Disclosure. . . . . . . . . . . . . . . . . . . 20
4.24 Duty of Seller to Make Inquiry . . . . . . . . . . . 20
4.25 No Broker's or Finder's Fees . . . . . . . . . . . . 20
4.26 Survival . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 5 REPRESENTATIONS AND WARRANTIES OF BUYER. . . . . . . 21
5.1 Authority, Enforceability, Etc.. . . . . . . . . . . 21
(a) Due Organization. . . . . . . . . . . . . . . . 21
(b) Power and Authority to Conduct Business . . . . 21
(c) No Defaults or Violations . . . . . . . . . . . 21
(d) Power and Authority to Enter Into Agreements. . 22
(e) Due Execution and Enforceability. . . . . . . . 22
5.2 No Broker's or Finder's Fees . . . . . . . . . . . . 22
5.3 Judgments, Orders and Consent Decrees. . . . . . . . 22
5.4 Survival . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 6 COVENANTS OF SELLER. . . . . . . . . . . . . . . . . 23
6.1 Conduct of Business Pending Second Closing Date. . . 23
(a) Full Access . . . . . . . . . . . . . . . . . . 23
(b) Customer Purchase Orders, Product Supply Orders,
Bids and Proposals. . . . . . . . . . . . . . . 23
(c) Use of Intellectual Property. . . . . . . . . . 24
(d) Inventory Liquidation Sales . . . . . . . . . . 24
(e) Business Operations . . . . . . . . . . . . . . 24
(f) Insurance . . . . . . . . . . . . . . . . . . . 24
(g) Compliance with Laws. . . . . . . . . . . . . . 25
6.3 Conditions Precedent . . . . . . . . . . . . . . . . 25
6.4 Injunctions. . . . . . . . . . . . . . . . . . . . . 25
6.5 Taxes. . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 7 CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE. 25
7.1 Representations and Warranties True on Applicable Closing
Date . . . . . . . . . . . . . . . . . . . . . . . . 25
7.2 Compliance with Agreement. . . . . . . . . . . . . . 25
7.3 Secretary's Certificate. . . . . . . . . . . . . . . 25
7.4 Compliance Certificate . . . . . . . . . . . . . . . 26
7.5 No Litigation. . . . . . . . . . . . . . . . . . . . 26
7.6 Consents and Approvals . . . . . . . . . . . . . . . 26
7.7 Termination of Liens; Warehouseman's Waiver. . . . . 26
7.8 Damage or Destruction. . . . . . . . . . . . . . . . 26
7.9 Warehouse Arrangements . . . . . . . . . . . . . . . 26
7.10 Opinion of Counsel . . . . . . . . . . . . . . . . . 26
7.11 Injunctions. . . . . . . . . . . . . . . . . . . . . 26
SECTION 8 CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE 27
8.1 Representations and Warranties True at the Applicable
Closing Date . . . . . . . . . . . . . . . . . . . . 27
8.2 Compliance With Agreement. . . . . . . . . . . . . . 27
8.3 Secretary's Certificate. . . . . . . . . . . . . . . 27
8.4 Compliance Certificate . . . . . . . . . . . . . . . 27
8.5 No Litigation. . . . . . . . . . . . . . . . . . . . 27
8.6 Consents and Approvals . . . . . . . . . . . . . . . 27
PAGE 88
8.7 Opinion of Counsel . . . . . . . . . . . . . . . . . 27
8.8 Approval by Shareholders of Seller . . . . . . . . . 28
SECTION 9 FURTHER AGREEMENTS OF THE PARTIES. . . . . . . . . . 28
9.1 Employees. . . . . . . . . . . . . . . . . . . . . . 28
9.2 Nondisclosure. . . . . . . . . . . . . . . . . . . . 29
9.3. Restrictive Covenants. . . . . . . . . . . . . . . . 29
(a) Confidentiality . . . . . . . . . . . . . . . . 29
(b) Non-Competition . . . . . . . . . . . . . . . . 30
(c) Injunctive Relief . . . . . . . . . . . . . . . 31
9.4 Negotiation with Others. . . . . . . . . . . . . . . 31
9.5 Replenishment Sales Following First Closing Date . . 31
9.6 Approval of Shareholders of Seller . . . . . . . . . 31
9.7 Right of First Refusal with Respect to Other Assets of
Seller . . . . . . . . . . . . . . . . . . . . . . . 31
9.8 Trade Show Deposits. . . . . . . . . . . . . . . . . 32
9.9 Accounts Receivable. . . . . . . . . . . . . . . . . 32
SECTION 10 RISK OF LOSS. . . . . . . . . . . . . . . . . . . . 33
10.1 Risk of Loss . . . . . . . . . . . . . . . . . . . . 33
SECTION 11 TERMINATION AND ABANDONMENT . . . . . . . . . . . . 33
11.1 Termination. . . . . . . . . . . . . . . . . . . . . 33
11.2 Notice of Termination. . . . . . . . . . . . . . . . 33
SECTION 12 INDEMNIFICATION AND REIMBURSEMENT . . . . . . . . . 34
12.1 Indemnification by Seller. . . . . . . . . . . . . . 34
12.2 Indemnification by Buyer . . . . . . . . . . . . . . 35
12.3 Product Liability Matters. . . . . . . . . . . . . . 36
12.4 Claims for Reimbursement . . . . . . . . . . . . . . 36
12.5 Defense of Third-Party Claims. . . . . . . . . . . . 36
12.6 Indemnification as Sole Remedy; Exceptions . . . . . 37
12.7 Limitations. . . . . . . . . . . . . . . . . . . . . 37
SECTION 13 RIGHT TO PROCEED. . . . . . . . . . . . . . . . . . 38
13.1 Waiver of Conditions. . . . . . . . . . . . . . . . 38
SECTION 14 MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . 38
14.1 Costs and Expenses . . . . . . . . . . . . . . . . . 38
14.2 Amendment and Modification . . . . . . . . . . . . . 39
14.3 No Assignment. . . . . . . . . . . . . . . . . . . . 39
14.4 Notices. . . . . . . . . . . . . . . . . . . . . . . 40
14.5 Counterparts . . . . . . . . . . . . . . . . . . . . 40
14.6 Headings . . . . . . . . . . . . . . . . . . . . . . 40
14.7 Recitals, Exhibits and Schedules . . . . . . . . . . 40
14.8 Schedules and Exhibits . . . . . . . . . . . . . . . 40
14.9 Waiver; Remedies . . . . . . . . . . . . . . . . . . 40
14.10 Governing Law . . . . . . . . . . . . . . . . . . . 40
14.11 Jurisdiction and Venue. . . . . . . . . . . . . . . 41
14.12 Severability. . . . . . . . . . . . . . . . . . . . 41
14.13 Entire Agreement. . . . . . . . . . . . . . . . . . 41
14.13 Time is of the Essence. . . . . . . . . . . . . . . 41
PAGE 89
Schedules
4.1(c) No Defaults or Violations
4.1(d) Power and Authority to Enter Into Agreements
4.2 Inventory Reports
4.3 Equity Interests
4.5(a) Sales Contracts
4.6 Schedule of Trade Names, Trademarks, Service Marks, and
Copyrights
4.8 Schedule of Customers
4.10 Schedule of Suppliers
4.11 Product Liability Insurance
4.12 Contracts
4.16 Pending Claims, Litigation and Governmental Proceedings
4.18 Agents and Employees
6.1(b) Outstanding Supply Orders for Promotional Inventory
Exhibits
A General Assignment and Bill of Sale
B Assignment of Trademarks
C Assignment of Trade Names and Copyrights
D Accounting Standard and Principles/"Wall to Wall"
Inventory Procedures
E Form of Bulk Sales Notice
F Form of Bulk Sales Affidavit
G Opinion of Counsel to Seller
H Opinion of Counsel to Buyer
ASSET PURCHASE AGREEMENT
THIS AGREEMENT, made and entered into as of the 18th day of
October, 1996, by and between ACTION INDUSTRIES, INC., a
Pennsylvania corporation ("Seller") and MAZEL COMPANY L.P., a
Delaware limited partnership, or its nominee or successor
("Buyer"), is to evidence the following agreements and
understandings:
W I T N E S S E T H:
WHEREAS, Seller is engaged in the purchase, sale, import and
distribution of a wide variety of replenishment merchandise sold
under the trade name "Powerhouse" and promotional merchandise sold
under a variety of trade names; and
WHEREAS, Buyer desires to purchase from Seller, and Seller
desires to sell to Buyer, certain assets of Seller, and Buyer is
not assuming any of the liabilities or obligations of Seller
(except for those specified obligations of Seller delineated in
Section 2.7 hereof) upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises, the mutual
PAGE 90
promises made herein and the mutual benefits to be derived
therefrom, the parties hereto hereby represent, warrant, covenant,
agree and understand as follows with the intent to be legally
bound:
SECTION 1
DEFINITIONS
Capitalized terms not otherwise defined in this Agreement
shall have the meanings set forth in this Section 1.
1.1 "Applicable Closing Date" means the First Closing Date or the
Second Closing Date, as the context of this Agreement may require.
1.2 "Assets" means those assets of Seller described in Sections
2.1(a) and 2.1(b) of this Agreement, other than the Excluded
Assets, as defined in Section 2.2 of this Agreement.
1.3 "Bank" means Foothill Capital Corporation, Seller's
institutional lender.
1.4 "Bank Lien" means the lien and security interest in certain
assets of Seller granted to Bank, which lien, with respect to the
Assets, will be released on the Applicable Closing Date.
1.5 "Cheswick Facility" means the office/warehouse building
utilized by Seller as its corporate headquarters and located at 460
Nixon Road, Cheswick, Pennsylvania.
1.6 "Claims" means all liens, encumbrances, security interests,
mortgages, equities, interests, options or pledges of every kind,
nature and description.
1.7 "COBRA" means the Consolidated Omnibus Budget Reconciliation
Act of 1985.
1.8 "Code" means the Internal Revenue Code of 1986 and any
amendments, predecessor laws, or successor laws.
1.9 "Damages" means all liabilities, deficiencies, losses, costs
or expenses, including, but not limited to, reasonable attorney's
and other professional fees, costs of litigation, interest and
penalties.
1.10 "Employee" means any person employed by Seller pursuant
to either a contractual or at will relationship who works for
Seller, whether or not at the Cheswick Facility or the Warehouse
Facilities (defined below).
1.11 "ERISA" means the Employee Retirement Income Securities
Act of 1974, as amended.
1.12 "First Closing Date" means the date defined in Section 2.1(a).
1.13 "GAAP" means generally accepted accounting principles
consistently applied.
PAGE 91
1.14 "Good and Saleable Inventory" means each item of Powerhouse
Inventory and Promotional Inventory of Seller which meets each of
the following criteria: (I) it is not damaged or defective; and
(ii) it is not diminished in fair market value by reason of
factors that Buyer reasonably deems relevant applying standards
similar to those applied in connection with purchases of inventory
at closeout prices.
1.15 "Gross Sales" shall mean the gross invoice sales price, net of
freight, discounts and allowances of all Powerhouse Inventory that
Buyer purchases from Seller pursuant to this Agreement and that is
sold and shipped to Powerhouse Customers within ninety (90) days
following the First Closing Date and paid for within one hundred
eighty (180) days following the First Closing Date.
1.16 "Intellectual Property" includes, but is not limited to: all
Trade Secrets, patents, and patent applications, if any, trade
names, fictitious names, assumed names, trademarks, trade dress,
logos and service marks (whether domestic or foreign, registered or
unregistered), all copyrights (registered or unregistered) licensed
or owned by Seller or by any affiliate of Seller and now or at any
time used by Seller in connection with the sale of the Powerhouse
Inventory and/or the Promotional Inventory.
1.17 "Inventory" means, collectively, the Powerhouse Inventory or
the Promotional Inventory.
1.18 "Powerhouse Customers" means those customers of Seller
identified in Schedule 4.8 attached hereto.
1.19 "Powerhouse Inventory" means the replenishment inventory and
all related point-of-sale inventory, i.e., displays, display
headers (on pallets and dies) and components thereof ("Point-of-Sale
Inventory") of Seller sold under the name "Powerhouse" and
located at the Cheswick Facility or the Columbus Warehouse.
1.20 "Promotional Customers" means those customers of Seller
identified in Schedule 4.8 attached hereto.
1.21 "Promotional Inventory" means all inventory of merchandise,
goods and other products for sale to Seller's Promotional Customers
and all related Point-of-Sale Inventory which are sold or offered
for sale to Seller's Promotional Customers and located at the
Cheswick Facility or the Mount Vernon Warehouse.
1.22 "Second Closing Date" means the date defined in Section
2.1(b).
1.23 "Seller's Warranty Claims" means all warranty,
indemnification, or other contract claims of Seller against third
parties whether implied, express or otherwise, or refunds due to
Seller from third party manufacturers, vendors, carriers or
utilities arising from or relating to Seller's purchase of the
Powerhouse Inventory or Seller's purchase of the Promotional
Inventory.
PAGE 92
1.24 "Trade Secrets" includes: marketing materials; program
pricing, merchandising requirements and costs, and display
requirements; sales incentive programs including quotas, actual
performance and bonuses paid; and other information relating to the
sale of Powerhouse and Promotional Inventory that Buyer may
reasonably identify and request.
1.25 "Warehouse Facilities" means, collectively, (I) the
public warehouse located at 711 Distribution Drive, Columbus, Ohio
and owned by Transmanagement Corporation (the "Columbus
Warehouse"); and (ii) the public warehouse located at 160 Columbus
Road, Mt. Vernon, Ohio and owned by Transmanagement Corporation
(the "Mount Vernon Warehouse").
1.26 "WARN" means the Worker Adjustment Retraining
Notification Act of 1988.
SECTION 2
PURCHASE OF ASSETS
2.1 Sale of Assets.
(a) First Closing Date. On the tenth (10th) business day
following the execution and delivery of this Agreement or such
earlier date as the parties may mutually agree in writing (the
"First Closing Date"), Seller shall sell, transfer, assign, grant,
convey and deliver to Buyer, free and clear of all Claims, the
following assets:
(I) all Powerhouse Inventory which as of the First
Closing Date has not been shipped and remains
unsold, subject, however, to Paragraph 2.1(d);
(ii) all of Seller's right, title and interest in and to
the trademarks "Homewares" and "Impressions",
together with any design or logo relating to such
names;
(iii) the non-exclusive right and license to use
(concurrently with Seller) the registered
trademarks "DOLLAR-AMA" and "DOLLAR DAZE,"
together with any design or logo relating to
such names, in connection with the conduct of
business by Buyer between the First Closing
Date and the Second Closing Date; provided,
however, that if the Second Closing Date does
not occur, then such licenses shall terminate
upon the termination of this Agreement but
Buyer shall nonetheless have a first right of
refusal to acquire such Intellectual Property
pursuant to Section 9.7 hereof;
(iv) packaging and labeling material and sales
literature relating to the Powerhouse Inventory;
PAGE 93
(v) all of Seller's Warranty Claims with respect to the
Powerhouse Inventory included in the Assets;
(vi) all Intellectual Property that relates exclusively
to the Powerhouse Inventory;
(vii) all customer lists, supplier lists, import
records (including, but not limited to, "point
of origin" records), export records (if any)
and recall notices relating to or associated
with the Powerhouse Inventory ; and
(viii) to the extent (if at all) assumed by Buyer
pursuant to Section 2.7 hereof, Action's bids
and sales proposals and unfulfilled customer
purchase orders and purchase commitments
relating to the Powerhouse Inventory, and such
other contracts, obligations and commitments
of Seller in respect of the Powerhouse
Inventory as Buyer, in its sole discretion,
may elect to assume hereunder.
(b) Second Closing Date. On such date as the parties may
mutually agree in writing, which date shall in no event be later
than January 31, 1997 except as mutually agreed in writing by the
parties, (the "Second Closing Date"), Seller shall sell, transfer,
assign, grant, convey and deliver to Buyer, free and clear of all
Claims, whether tangible, intangible, personal or mixed, the
following assets:
(I) all Promotional Inventory which as of the Second
Closing Date has not been shipped and remains
unsold, subject, however, to Paragraph 2.1(d);
(ii) all of Seller's right, title and interest in and to
all Intellectual Property that has not already been
assigned and transferred to Buyer on the First
Closing Date;
(iii) packaging and labeling material and sales
literature relating to the Promotional
Inventory;
(iv) all of Seller's Warranty Claims with respect to the
Promotional Inventory included in the Assets;
(v) customer lists, supplier lists, import records
(including, but not limited to, "point of origin"
records), export records (if any), recall notices
relating to or associated with the Promotional
Inventory; and
(vi) to the extent assumed by Buyer pursuant to Section
2.7 hereof, Action's bids and sales proposals and
PAGE 94
unfulfilled customer purchase orders and purchase
commitments relating to the Promotional Inventory,
and such other contracts, obligations and
commitments of Seller in respect of the Promotional
Inventory as Buyer, in its sole discretion, may
elect to assume hereunder.
(c) Instructions of Conveyance. The assets described in
Sections 2.1(a) and (b) above are hereinafter collectively referred
to as the "Assets". The Assets constituting tangible personal
property shall be conveyed to Buyer by execution and deliver of a
General Assignment and Bill of Sale in the form attached hereto as
"Exhibit A". Intellectual Property shall be conveyed to Buyer by
execution and delivery of an Assignment of Trademarks and
Assignment of Trade Names and Copyrights in the forms attached
hereto as Exhibits "B" and "C", respectively.
(d) Right of Buyer to Exclude Certain Inventory.
Notwithstanding anything contained herein to the contrary: (I)
Buyer shall not be required to purchase any item of Powerhouse
Inventory or Promotional Inventory which is not Good and Saleable
Inventory; (ii) Buyer shall not be required to purchase any item of
Powerhouse Inventory or Promotional Inventory if the total number
of units in stock of such item on the Applicable Closing Date is
less than one hundred (100); and (iii) Buyer shall not be required
to purchase any new Inventory not presently in Seller's possession
or on order or any Inventory purchased by Seller other than as
specifically provided in or permitted under Section 6.1(b). Any
Inventory which Buyer elects not to purchase pursuant to this
Section 2.1(d) shall be deemed an Excluded Asset.
2.2 Excluded Assets. Buyer shall not purchase or acquire
hereunder any right, title or interest in or to any of the
properties, rights or assets of Seller not described in Section 2.1
hereof (collectively, the "Excluded Assets").
2.3 Consideration. Upon the terms and subject to the conditions
set forth in this Agreement and in consideration for the Assets,
Buyer shall pay and remit to Seller on the Applicable Closing Date
the Purchase Price (as defined in Section 2.5(a) hereof) in the
manner described in Section 2.4(b) hereof.
2.4 Inventory Taking.
(a) On the day immediately preceding the Applicable Closing
Date, a "wall-to-wall" physical inventory of the Inventory to be
purchased on such date will be conducted at the Warehouse
Facilities and, if applicable, at the Cheswick Facility, by Seller
and by Buyer jointly at their respective cost and expense. Such
inventory will be valued at 63.3% of actual cost of Inventory, as
reflected in Seller's books and records (as previously reviewed by
Buyer). Procedures for the taking and calculation of the Inventory
are set forth in Exhibit "D" attached hereto and made a part
hereof. The parties shall agree upon and sign the report of the
Inventory ("Inventory Report") following the completion of the
PAGE 95
physical inventory and the resolution of any disputes. In order to
facilitate the taking of the "wall-to-wall" physical inventory: (I)
all operations of Seller at the facility at which the Inventory to
be purchased is located shall cease during the taking of such
physical inventory; and (ii) no such Inventory shall be shipped and
no goods or materials shall be received during the taking of such
physical inventory. Representatives of Buyer and Seller shall be
entitled to participate at their respective cost and expense in the
observation of the physical inventory.
(b) In the event of a dispute between the parties as to the
accuracy of any items contained in the Inventory Report, then the
Buyer shall pay the undisputed amount to the Seller on the
Applicable Closing Date and Seller and Buyer shall negotiate in
order to agree upon the proper valuation. If they shall fail to
come to an agreement with respect thereto within fifteen (15) days
after such negotiation shall commence, then the amount of the
Inventory valuation shall be referred for determination to the
Cleveland, Ohio offices of Deloitte & Touche (the "Dispute
Accountants"), who shall be instructed, with respect to each item
in dispute, to choose between the position taken on that issue by
Buyer and the position taken on that issue by Seller (as opposed to
adopting either a compromise position or any position not taken by
one or the other of Buyer and Seller). The Dispute Accountants
shall have no right, authority or discretion to employ any
accounting standard or principles or valuation method except for
those reflected in "Exhibit D". The determination by the Dispute
Accountants shall be final, binding, and conclusive on the parties.
The fees and disbursements of the Dispute Accountants shall be
allocated between Buyer and Seller so that the dollar amount of
such fees and disbursements borne by each of them is in direct
proportion to that portion of the dollar amount of the items in
dispute (i.e.: the aggregate dollar spread between the positions
taken by each of Buyer and Seller) with respect to which the
Dispute Accountants find against each of Buyer and Seller,
respectively. Nothing herein contained shall be construed (I) to
authorize or permit the Dispute Accountants to arbitrate or
determine any question or matter whatsoever under or in connection
with this Agreement except the valuation of inventory, or (ii) to
require the Dispute Accountants to follow rules of the American
Arbitration Association or of any other body in making such
determination.
2.5 Purchase Price and Payment.
(a) The aggregate purchase price for the Assets (the
"Purchase Price") will be an amount equal to (I) $100,000 plus (ii)
an amount equal to 63.3% of Seller's actual cost of the Inventory
plus (iii) an amount equal to five percent (5%) of Gross Sales of
Powerhouse Inventory. It is the present intention of Buyer to sell
Powerhouse Inventory to the Powerhouse Customers from the Columbus
Warehouse.
(b) The Purchase Price will be paid as follows:
(I) On the First Closing Date, Buyer shall pay the sum
PAGE 96
of $25,000 plus an amount equal to 63.3% of
Seller's actual cost of Powerhouse Inventory;
(ii) On the Second Closing Date, Buyer shall pay the sum
of $75,000 plus an amount equal to 63.3% of
Seller's actual cost of the Promotional Inventory;
and
(iii) Within one hundred and eighty (180) days
following the First Closing Date, Buyer shall
make the payment described in subsection
2.5(a)(iii) above (such payment shall
accompanied by a sales report indicating Gross
Sales upon which such payment is based,
together with such additional documentation as
Seller may reasonably require).
Any dispute between the parties with respect to the
calculation or payment of the royalties described in subsection
2.5(a)(iii) which remains unresolved for a period of thirty (30)
days following the date on which notice of such dispute is received
by Buyer or Seller, as the case may be, shall be referred to the
Dispute Accountants for determination in accordance with Section
2.4(b), and such determination shall be final, binding and
conclusive on the parties.
(c)(I) To the extent that the Purchase Price for the
Assets paid on the First Closing Date or
Second Closing Date is greater than the
purchase price for the Assets sold on such
Applicable Closing Date, as finally
determined, such excess resulting from
breakage of or damage to perishable or fragile
container Inventory that is discovered within
thirty (30) days following the Applicable
Closing Date and which renders such Inventory
non-saleable (such excess payment being
hereinafter referred to as the "Adjustment"),
Buyer may, at its sole election and upon
notice to Seller, set off against the royalty
payments described in subparagraph 2.5(b)(iii)
an amount equal to such excess payment. Any
notice delivered by Buyer pursuant to the
preceding sentence shall set forth in
reasonable detail the type, unit quantity and
cost to Buyer of each item of Inventory in
respect of which an adjustment is being
claimed by Buyer. In the event such setoff is
insufficient to satisfy any Purchase Price
Adjustment in Buyer's favor, Seller shall pay
to Buyer by certified check or by wire
transfer in immediately available federal
funds, the amount of the deficiency plus
interest thereon from the Applicable Closing
Date at the rate of nine percent (9%) per
annum. Notwithstanding anything in this
PAGE 97
subsection to the contrary, Buyer shall not be
entitled to claim any Adjustment in its favor
unless, and solely to the extent, the total
Purchase Price paid for the damaged or broken
container Inventory in respect of which the
Adjustment is being claimed, exceeds ten
percent (10%) of the Purchase Price paid on
the Applicable Closing Date;
(ii) To the extent the Purchase Price for the Assets,
sold on the First Closing Date or Second Closing
Date, as finally determined, is greater than the
purchase price paid on the Applicable Closing Date,
Buyer shall pay to Seller, by certified check or by
wire transfer of immediately available federal
funds, an amount equal to such difference plus
interest thereon from the Applicable Closing Date
at the rate of nine percent (9%) per annum.
2.6 Allocation of Purchase Price. The Purchase Price represents
the amount agreed upon by the parties to be the fair market value
of the Assets. The Purchase Price shall be allocated for income
tax purposes among the Assets in a manner consistent with Section
1060 of the Code. Buyer shall provide to Seller, not later than
sixty (60) days after the date on which the Purchase Price is
finally determined, a written proposal for the allocation of the
Purchase Price among the Assets. Seller shall notify Buyer within
thirty (30) days of receipt of the proposal whether or not and to
what extent Seller agrees with the proposal. If Buyer and Seller
cannot agree on the allocation within forty-five (45) days of
Seller's receipt of the proposal, each of Buyer and Seller shall be
free to allocate the Purchase Price among the Assets as it may
independently deem appropriate. If, however, Buyer and Seller
agree upon the allocation, each of the parties hereby covenants and
agrees that it will not take a position on any federal, state or
local tax return before any governmental agency charged with the
collection of any tax, or in any judicial proceeding that is in any
way inconsistent with the purchase price allocation and will
cooperate with one another in the timely filing consistent with
such purchase price allocation on Form 8594 with the Internal
Revenue Service.
2.7 No Assumption of Liabilities.
(a) Buyer and Seller agree that Buyer is not purchasing,
assuming, or accepting any debts, liabilities or obligations
whatsoever of Seller, contingent or non-contingent, liquidated or
unliquidated, asserted or unasserted, all of which remain the
debts, liabilities, and obligations of Seller, except as provided
in Section 2.7(b) hereof.
(b) On the Applicable Closing Date, Buyer shall assume and
agree to pay, perform and discharge the following (and only the
following) obligations of Seller (collectively, the "Assumed
Liabilities"):
PAGE 98
(I) such customer purchase orders for Powerhouse
Inventory and Promotional Inventory accepted by
Seller in the ordinary course of business (to the
extent the same remain unfulfilled on the
Applicable Closing Date) as Buyer shall review,
approve and elect in writing to assume in its sole
and absolute discretion; and
(ii) such other contracts, obligations and commitments
of Seller in respect of the Inventory as Buyer
shall review, approve and elect in writing to
assume in its sole and absolute discretion.
2.8 Unassumed Liabilities. Buyer shall not assume or be liable to
Seller or any other person or entity for or in respect of any
debts, liabilities and obligations of Seller not specified in
Section 2.7 hereof (collectively, the "Unassumed Liabilities").
Notwithstanding the provisions of Section 2.7 hereof and without
limiting the generality of the preceding sentence, Buyer shall not
assume or be liable to Seller or any other person or entity for or
in respect of the following debts, liabilities and obligations of
Seller:
(a) Any debt, liability or obligation of Seller to taxing or
other governmental authorities for any foreign or domestic,
federal, state or local income taxes or similar taxes based upon
the income of Seller for periods ending on or prior to the Closing
Date;
(b) Any debt, liability or obligation with respect to any
event which shall have occurred on or prior to the Closing Date
whether or not such event and the liability relating thereto is
insured against under any of the coverages under the insurance
policies and/or self-insurance programs of Seller;
(c) Any debt, liability or obligation of Seller under or in
respect of any compensation or benefit plan, policy or arrangement
in favor of the Employees of Seller;
(d) Any debt, liability or obligation of Seller to any of its
shareholders, directors, officers or Employees arising out of the
transactions contemplated hereby, including, without limitation,
any liability for severance or termination pay;
(e) Any of Seller's products liability obligations or product
warranty obligations; or
(f) Any debt, liability or obligation of Seller arising from
or relating to, directly or indirectly, of Seller's employee
welfare plans or employee benefit plans.
2.9 Bulk Sale Law. The parties hereto understand and agree that
the transfer which is the subject matter of this Agreement may be
subject to the provisions of Chapter 1306 of the Ohio Revised Code,
Uniform Commercial Code (Bulk Transfers) ["Bulk Sales Law"] and
that Buyer is not assuming any debts or obligations of Seller in
PAGE 99
connection with this Agreement in its sole discretion, except for
such unfilled customer purchase orders and other agreements or
obligations as Buyer may elect to assume pursuant to subparagraphs
2.7(b)(I) and (ii).
Buyer hereby waives compliance by Seller with the Bulk Sales
Law solely with respect to the transactions to be consummated on
the First Closing Date; provided, however, that such waiver does
not as between Buyer and Seller relieve Seller of any of the
Unassumed Liabilities. Seller agrees to furnish in adequate time
to comply with the Bulk Sales Law affidavits, list of creditors
with addresses and such other instruments and documents as are
customary pursuant to the Bulk Sales Law as Buyer's counsel shall
require for Buyer to comply with the Bulk Sales Law with respect to
the transactions to be consummated on the Second Closing Date.
Forms of the Bulk Sales Notice and Bulk Sales Affidavit are
attached hereto as Exhibits "E" and "F", respectively.
2.10 Non-Assignable Contracts and Rights. To the extent that the
assignment by Seller of any property, right or asset to be assigned
to Buyer pursuant to this Agreement shall require the consent or
approval of any other party, and such consent or approval shall not
have been obtained on or prior to the Applicable Closing Date, this
Agreement shall not constitute a contract to assign the same if an
attempted assignment would constitute a breach thereof or would in
any way adversely affect the rights of Seller (or Buyer as
assignee) thereunder. In such case, the beneficial interest in or
to such property, right or asset shall in any event pass as of the
Closing Date to Buyer hereunder, and Seller covenants and agrees:
(a) From and after the Applicable Closing Date to hold and
declare that Seller holds any and all such properties, rights or
assets in trust for the benefit of Buyer and its successors and
assigns;
(b) To use their reasonable best efforts to obtain and secure
any and all consents and approvals that may be necessary to effect
the valid sale, transfer or assignment of the same to Buyer without
change in any of the material terms or conditions thereof,
including, without limitation, the formal assignment or novation of
any of the same, if so required;
(c) To make or complete such transfers as soon as reasonably
possible;
(d) To cooperate with Buyer in any other reasonable
arrangement designed to provide for Buyer the benefits of and to
such properties, rights or assets; and
(e) From and after the Applicable Closing Date to use
reasonable efforts, at the request and expense of Seller, to
enforce for the account of Buyer (and its successors and assigns)
any and all rights of Seller arising from or in respect of such
properties, rights or assets.
2.11 Prorations. The following items shall be prorated as of the
PAGE 100
Applicable Closing Date to the extent that Seller has paid such
items for any period after the Applicable Closing Date or Buyer
will be required to pay such items for any period prior to the
Applicable Closing Date:
(I) Personal property taxes and other taxes with
respect to the Assets (the parties shall cooperate
fully to avoid, to the extent legally possible, the
payment of duplicate personal property taxes); and
(ii) any other item which may be mutually agreed to by
the parties.
Any net amount owed hereunder shall be paid within thirty (30)
days following the Applicable Closing Date by the party owing such
amount or within thirty (30) days after the date of determination,
if later.
SECTION 3
CLOSING DATE
Consummation of the purchase and sale of Assets and the other
transactions provided for in this Agreement shall take place at the
offices of Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A. located at
Tower at Erieview, Suite 2600, 1301 East Ninth Street, Cleveland,
Ohio, on the Applicable Closing Date. Each Closing shall commence
at 10:00 a.m. local time on the Applicable Closing Date or such
other time as the parties hereto may mutually agree in writing; and
the purchase and sale of Assets and all other transactions provided
for herein to occur on and as of the Applicable Closing Date shall
be deemed to have occurred simultaneously and to be effective as of
the opening of business on such date.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF SELLER
In order to induce Buyer to purchase the Assets and perform
its other obligations herein, Seller hereby makes the following
representations, warranties and covenants, each of which shall be
true and correct on the execution hereof and shall be true and
correct on each Applicable Closing Date and which shall survive
such Applicable Closing Date for the period of time specified in
Section 4.26 below;
4.1 Organization, Qualification and Authority of Seller.
(a) Due Organization and Qualification. Seller is a
corporation duly organized, validly existing and in good standing
under the laws of the Commonwealth of Pennsylvania and is qualified
to transact business as a foreign corporation in the State of Ohio
and all other jurisdictions where the nature of its business or the
ownership, leasing or operation of Seller's properties or assets
requires qualification, except where the failure to be so qualified
is not likely to have a material adverse effect on the business
operations or financial condition of Seller, the value of the
Assets or the ability of Seller to convey the Assets (a "Material
PAGE 101
Adverse Effect").
(b) Power and Authority to Conduct Business. Seller has the
full power and authority to own or lease its properties and to
conduct its business in the manner and the places where such
property is owned or leased and its business is conducted. Seller
possesses all permits and licenses from state, local, or Federal
agencies or subdivisions necessary to operate its business the
failure of which to obtain would have a Material Adverse Effect,
all of which are in full force and effect.
(c) No Defaults or Violations. As of the Applicable Closing
Date, except as disclosed in Schedule 4.1(c), the execution and
delivery of this Agreement, and the performance by Seller of
obligations under this Agreement: (I) will not violate,
contravene, be in conflict with, result in a breach of or
constitute (with or without notice or lapse of time or both) a
default under: (A) any provision of law or any rule or regulation
of any governmental agency; (B) any order, rule or decree of any
court, arbitrator or other agency of government; any provision
of the Articles of Incorporation or By-Laws of Seller; or (D) any
lease, indenture, agreement or other instrument to which Seller or
any of the Assets is or may be bound (in each case, solely with
respect to clause (A) and (D), which would be likely to have a
Material Adverse Effect); and (ii) will not result in the creation
or imposition of any claim of any nature whatsoever upon the
Assets.
(d) Power and Authority to Enter Into Agreements. Seller has
the right, power and authority to enter into and perform its
obligations under this Agreement and the other agreements provided
for herein. No consent, approval or authorization of, or
registration, declaration, or filing with any court, governmental
authority (federal, state, or local), collective bargaining unit,
lending institution (other than Bank, which approval has been
obtained) or other third party is required in connection with the
execution and delivery by Seller of this Agreement or its
performance of, or compliance with, the terms, provisions, and
conditions hereof, except as disclosed in Schedule 4.1(d)
(e) Due Execution and Enforceability. The execution,
delivery and performance of this Agreement and the other agreements
provided for herein by and on behalf of Seller have been duly and
validly authorized and approved by the Board of Directors of
Seller, and if the Second Closing Date occurs, will be duly and
validly authorized and approved by the shareholders of Seller.
Seller has taken and will take all such other corporate action as
is necessary or required to enter into, execute and deliver this
Agreement and the other agreements provided for herein and to
perform their respective obligations hereunder and thereunder.
This Agreement and the other agreements provided for herein
constitute the valid and legally binding obligations of Seller,
enforceable against Seller in accordance with their respective
terms and conditions (except to the extent the same may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditor's rights generally or by general equitable
PAGE 102
principles).
4.2 Inventory Report. Attached as Schedule 4.2 is Seller's
perpetual inventory reports, which fairly and accurately describe
the type, quantity and cost to Seller of its Powerhouse Inventory
and Promotional Inventory in each case as of September 30, 1996.
4.3 No Equity Interest. Seller does not own or hold (directly or
indirectly) any equity or debt interest in any corporations, joint
venture, partnerships, business associations, trusts, or other
firms or entities which are engaged in the sale of replenishment
merchandise and/or promotional merchandise, except as set forth in
Schedule 4.3.
4.4 Title to Assets; No Claims, Liens, Etc.; "AS-IS" Condition of
Inventory.
(a) As of each Applicable Closing Date, Seller will have good
and marketable title to all of the Assets to be transferred and
sold to Buyer on such Applicable Closing Date, free and clear of
all Claims whatsoever.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT: SELLER MAKES
NO EXPRESS OR IMPLIED WARRANTIES WITH RESPECT TO THE PHYSICAL
CONDITION OF THE INVENTORY; THE WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY EXPRESSLY DISCLAIMED;
AND THE INVENTORY WILL BE TRANSFERRED AND CONVEYED "AS IS, WHERE
IS" AND WITH ALL FAULTS.
4.5 Contracts and Commitments.
(a) Customer Purchase Orders, Sales Bids and Proposals. Set
forth on Schedule 4.5(a) hereto is a true and complete list and
description of each individual written customer purchase order,
sales contract or indication of interest as is documented by
initial order processing (IOP) forms with respect to Powerhouse
Inventory, together with a list of all other contracts, obligations
and commitments of Seller with respect to the Powerhouse Inventory,
as of September 30, 1996. A similar schedule containing the
information described in the preceding sentence with respect to the
Promotional Inventory, as of a date not less than three (3) days
prior to the Second Closing Date, will be delivered by Seller to
Buyer on the Second Closing Date, and shall be deemed to be a part
of Schedule 4.5(a).
(b) Restrictions on Conduct of Business. Seller is not
restricted by commitment (including, without limitation, any
non-competition agreement or covenant) from carrying on the sale of
Inventory as carried on at the date hereof.
4.6 Intellectual Property.
(a) Set forth on Schedule 4.6 is a list of all patents, trade
names, trademarks, service marks, and copyrights ("Schedule of
Trade Names, Trademarks, Service Marks, and Copyrights") both
domestic and foreign, owned by Seller in respect of its
PAGE 103
replenishment inventory business and its promotional inventory
business and used in such business now or, to Seller's knowledge,
at any time within the last three (3) years and indicating their
registration number and dates of registration. Except as set forth
on Schedule 4.6 hereto, and except for limited licenses granted to
those customers solely in connection with promotions which licenses
terminate upon termination of the promotion (Seller will endeavor
to furnish copies or written summaries of such promotions to Buyer
prior to the First Closing Date), Seller owns all right, title and
interest in and to its Intellectual Property.
(b) Except as set forth on Schedule 4.6., Seller has not
received any notification, and has no knowledge that Seller has
infringed, within the past three (3) years, nor is now infringing,
on any patent, trade name, trademark, service mark or copyright
belonging to any other person, firm, or corporation, except for (I)
claims which have been fully and finally adjudicated or settled for
an individual amount not exceeding Five Thousand Dollars ($5,000)
or totaling Twenty Five Thousand Dollars ($25,000) in the
aggregate; and (ii) claims or demands asserted by third parties in
respect of which no further action has been taken by such third
parties within the past eighteen (18) months. Seller owns or holds
adequate licenses or other rights to use all trademarks, service
marks, trade names, and copyrights necessary for the sale and
promotion of Inventory. To Seller's knowledge, such use does not,
and will not, conflict with, infringe on, or otherwise violate any
rights of others.
4.7 Trade Secrets and Customer Lists. Seller is the owner of all
Trade Secrets and customer lists required for the sale,
distribution and marketing of the Assets, free and clear of any
Claims. Seller is not using, or in any way making use of, any
confidential information, trade secrets or customer lists of any
third party, including, without limitation, to Seller's knowledge,
any former employer of any present or past Employee of Seller.
There are no suits pending or, to Seller's knowledge, threatened
with respect to any Trade Secrets or customer lists of Seller.
4.8 Customers and Sales. Attached as Schedule 4.8 are complete
and accurate schedules of Powerhouse Customers and Promotional
Customers during the twelve (12) months ended June 30, 1996,
ranking (by sales dollar volume) all customers that made purchases
of (I) Powerhouse Inventory; and (ii) Promotional Inventory during
such period. Except as expressly set forth in the Summary of
Relations attached to Schedule 4.8: (x) Seller has not been
notified, and is not otherwise aware, that any of the twenty-five
(25) largest customers listed in Schedule 4.8 of any Powerhouse
Inventory or Promotional Inventory has ceased, or intends to cease,
purchasing from Seller, has materially altered or intends to
materially alter the amount of business that it is presently doing
with Seller, or, to Seller's knowledge, will refuse to do business
with Buyer following the Closing; and (y) there are no disputes or
controversies pending or, to Seller's knowledge, threatened between
Seller and any of the twenty-five (25) largest customers listed in
Schedule 4.8. Seller will deliver to Buyer, within ten (10) days
following the First Closing Date, a supplemental Schedule 4.8
PAGE 104
containing the same type information set forth in Schedule 4.8 for
the period July 1, 1996 through September 30, 1996 except that
Seller shall endeavor, but shall not be required to, add new
customers to the Summary of Relations attached to Schedule 4.8.
Buyer acknowledges and understands that Seller does not make,
and expressly disclaims, any representation or warranty with
respect to the present or future intention of any of Seller's
customers to purchase Inventory from Buyer following the Applicable
Closing Date, except as expressly provided in clause (x) of the
second sentence of the preceding paragraph.
4.9 Customer Deposits. Seller has not received, and will not
receive prior to the Applicable Closing Date, any deposits,
payments on account or similar payment with respect to any of its
Inventory contracts or orders (except with respect to Inventory
delivered to customers prior to the Applicable Closing Date), and
no such deposits, payments on account or similar payments are due
or owing to Seller.
4.10 Suppliers. Attached as Schedule 4.10 is, to Seller's
knowledge, a complete and accurate schedule of vendors of each
current Inventory item. Except as expressly set forth in the
Summary of Relations attached to Schedule 4.10: (I) Seller has not
been notified, and is not otherwise aware, that any of the ten (10)
largest suppliers listed in Schedule 4.10 intends to cease doing
business with Seller materially reduce the amount of its product
available to Seller, or, to Seller's knowledge, refuse to sell
Products to Buyer; and (ii) there are no current disputes or
controversies pending or, to Seller's knowledge, threatened between
Seller and any of the ten (10) largest suppliers listed in
Schedule 4.10. Seller is current in its payment obligations to its
ten (10) largest suppliers except as specifically described in the
Summary of Relations attached to Schedule 4.10.
Buyer acknowledges and understands that Seller does not make,
and expressly disclaims, any representation or warranty with
respect to the present or future intention of any of Seller's
suppliers to sell products to Buyer following the Applicable
Closing Date, except as expressly provided in clause (I) of the
second sentence of the preceding paragraph.
4.11 Insurance. Seller maintains policies of product liability
insurance in respect of the Inventory in amounts reasonably deemed
by its management to be sufficient. All such policies are
described in Schedule 4.11.
4.12 Contracts. Except as set forth on Schedule 4.5(a) or on
Schedule 4.12, attached hereto, Seller is not, and on the
Applicable Closing Date will not be a party to any contract or
commitment (whether oral or written), including, without
limitation, any franchise agreement, licensing agreement, sales
representative agreement, distributorship agreement, or employment
agreement, which relates to the sale of Inventory.
4.13 Inventories.
PAGE 105
(a) Any merchandise located at the Cheswick Facility or the
Warehouse Facilities which is on consignment from others will
either be clearly marked or physically segregated from the
Inventory being purchased by Buyer. Any merchandise owned by
Seller and which has been consigned to others will not be included
in the Inventory to be purchased by Buyer.
(b) Seller has not maintained records of defective product
return expense with respect to Powerhouse Inventory and Promotional
Inventory for several years, because it was determined that such
expense was minimal in relation to total sales dollar volume and
not significant enough to justify the cost of continuing to
maintain such records. Nothing has come to the attention of Seller
since these records were discontinued to indicate that defective
product return expense has increased significantly.
(c) Seller is not aware of, and has not received notice of
any design, structural or manufacturing defect or condition
(whether latent or patent) with respect to the Inventory which is,
has been or is reasonably likely to be: (I) the subject of legal or
administrative proceedings; (ii) in violation of any applicable
laws, rules or regulations; or (iii) except for DeMinimis Claims,
(defined in Section 4.16) the subject of any third party claim of
patent, trademark, trade name or copyright infringement or any
similar claim.
4.14 Product Warranties. There are no express outstanding product
warranty obligations of Seller, nor any express representations,
guarantees or indemnifications given or made by Seller in
connection with the sale of Inventory.
4.15 Tax Returns. Seller has filed with the Internal Revenue
Service and with all other appropriate foreign, federal, state,
provincial and local governmental agencies, and will continue to
file through and after the Second Closing Date, all personal
property tax returns and tax reports required to be filed by Seller
in respect of the Assets, and has paid and will continue to pay all
amounts due in connection therewith. No claims for assessment or
collection of taxes in respect of the Assets has been asserted
against Seller, and Seller does not know of any proposed tax
assessment against or in respect of the Assets.
4.16 Pending Claims, Litigation and Governmental Proceedings. Set
forth on Schedule 4.16 is a list and description of each recall
notice, government or manufacturer's warning notice, claim, suit,
action, arbitration or regulatory, administrative, or governmental
proceeding or investigation or any other proceeding or
investigation filed against or commenced by Seller with respect to
the Inventory in the last five (5) years and which relates solely
or primarily to product liability or product use or safety except
for: (I) claims which have been fully and finally adjudicated or
settled for an individual amount not exceeding Five Thousand
Dollars ($5,000), or totaling Twenty-Five Thousand Dollars
($25,000) in the aggregate; and (ii) complaints or demands asserted
by customers in respect of which no further action has been taken
by such customers within the past eighteen (18) months ("DeMinimis
PAGE 106
Claims"). Except as set forth on Schedule 4.16 and except for
DeMinimis Claims no litigation is pending or, to the knowledge of
Seller, threatened against Seller in respect of the sale, import,
marketing or use of Inventory.
4.17 Judgments, Orders and Consent Decrees. Seller is not subject
to any judgment, ruling, injunction, order, writ or decree of, or
agreement with, any court, arbitrator or regulatory authority
limiting, restricting or adversely affecting the sale by Seller of
the Inventory or Seller's ownership of the Assets.
4.18 Agents and Employees. No Employee of Seller is subject to any
confidentiality, non-disclosure or non-compete agreement with
Seller or, to Seller's knowledge, any other entity except as
described in Schedule 4.18. As used in this Section 4.18, the term
"Seller's knowledge" means, and is limited to, the actual
knowledge, without independent investigations, of T. Ronald Casper
and Kenneth Campbell.
4.19 Labor Matters.
(a) Seller acknowledges that Buyer is not assuming any of
Seller's obligations or liabilities relating to or arising from any
employment contract, collective bargaining agreement, Plan or
program in favor of Seller's Employees, all of which remain the
sole obligation of Seller.
(b) Seller shall bear all liability, if any, caused by or
arising from the termination and/or permanent layoff of its
Employees.
(c) Seller represents and warrants that it has taken or will
take prior to Closing all actions necessary, including but not
limited to any notice required to be given to its employees, local,
state or federal government agencies, to comply with WARN (if
applicable), COBRA and any other local or state laws applicable to
the transactions contemplated by this Agreement. Notwithstanding
the foregoing, Seller agrees that it will make no filings regarding
this transaction concerning or relating to Seller's Employees with
governmental, employment or worker's compensation agencies without
providing a copy thereof to Buyer at least five (5) days prior to
such filing.
4.20 Environmental Matters. Seller is in compliance with all
federal, state, and local laws, regulations, and ordinances
relating to the environment or to the discharge of matter into the
air, water, or earth, including, but not limited to, the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, and the Resource Conservation and Recovery
Act of 1976, as amended, except for such non-compliance as is not
likely to have a Material Adverse Effect. There are no actions,
suits, or proceedings pending or, to the best knowledge of Seller,
threatened against Seller in connection with the Inventory, the
Cheswick Facility or the Warehouse Facilities by or before any
federal, state, or local court or government authority or agency
concerning any non-compliance or alleged non-compliance with any
PAGE 107
such laws, regulations, and ordinances in respect of said
facilities.
4.21 Compliance with Laws. Seller has at all times conducted its
business in compliance and conformity in all material respects with
all applicable federal, state, local and foreign laws, statutes and
ordinances and the rules and regulations promulgated thereunder
(including, but not limited to, laws, rules and regulations
relating to the sale, marketing, packaging, labeling, export,
import, transport or distribution of the Inventory), except for
such non-compliance as is not likely to have a Material Adverse
Effect; and there are no pending or, to Seller's knowledge,
threatened claims or notices of violation by Seller in any such
laws, statutes, ordinances, rules and regulations or claims which
are likely of assertion.
4.22 Evaluation of Terms of Transaction. Seller, through its Board
of Directors, with the assistance of Parker/Hunter Incorporated,
its independent financial adviser, has determined to proceed with
the transactions provided for in this Agreement as the best
transaction for the sale of the Assets, taking into account the
purchase price for the Assets and the terms and conditions of the
transaction.
4.23 Full Disclosure. To Seller's knowledge, no representation,
covenant or warranty by Seller in this Agreement and no statement,
Schedule or Exhibit furnished to Buyer pursuant to this Agreement
omits or will omit to state a material fact necessary to make any
representations, covenants and/or warranties of Seller under this
Agreement not misleading.
4.24 Duty of Seller to Make Inquiry. To the extent that any of the
representations and warranties made by Seller in this Agreement are
qualified by the knowledge or belief of Seller, and except as
expressly otherwise provided in this Agreement, Seller represents
and warrants that it has made due and reasonable inquiry and
investigation concerning the matters to which such representations
and warranties relate, including, without limitation, diligent
inquiry of all key management personnel of Seller whose position
entails having detailed knowledge of the subject matter of such
representations and warranties.
4.25 No Broker's or Finder's Fees. No person or firm other than
Seller (and its directors, officers, employees and independent
accountants and attorneys) and Parker/Hunter Incorporated have
arranged or participated in arranging, on behalf of Seller, the
transactions provided for herein. Any broker's or finder's fees to
be paid by Seller to Parker/Hunter Incorporated or to others shall
be borne exclusively by Seller. Except as described in the
preceding sentence, Seller has no knowledge of any claim (or the
reasonable basis therefor) for a broker's or finder's fee to be
paid in connection with the consummation of the transactions
provided for herein.
4.26 Survival. All representations and warranties made by Seller
in this Agreement, including but not limited to, those contained in
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Section 4 hereof, shall survive the Applicable Closing Date
(irrespective of any investigation of the Assets made by Buyer) for
a period of eighteen (18) months and shall be true and correct on
as of the Applicable Closing Date as if specifically made thereon;
provided, however, that (I) the representations and warranties
contained in Sections 4.1 and 4.4 shall survive the Closing for a
period of ten (10) years; and (ii) the representations and
warranties contained in Section 4.15 shall survive the Closing
through the date that is thirty (30) days after the expiration of
the longest statute of limitations (including any waivers)
applicable to any action that may be brought by any governmental
entity with respect to liability for the relevant tax period.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer, in order to induce Seller to sell the Assets and
perform its other obligations hereunder, hereby makes the following
representations and warranties to Seller, each of which shall be
true and correct as of the execution hereof and shall be true and
correct on the First Closing Date and the Second Closing Date and
which shall survive the Closing for the period of time specified in
Section 5.3.
5.1 Authority, Enforceability, Etc.
(a) Due Organization. Buyer is a limited partnership duly
organized, validly existing and in good standing under the laws of
Delaware and is duly qualified to transact business as a foreign
limited partnership in the State of Ohio and in all other
jurisdictions where the nature of its business or the ownership,
leasing or operation of Buyer's properties or assets requires
qualification, except where the failure to be so qualified is not
likely to have a Material Adverse Effect on the business operations
and financial condition of Buyer or the ability of Buyer to
purchase the Assets.
(b) Power and Authority to Conduct Business. Buyer has the
full power and authority to own or lease its properties and to
conduct its business in the manner and the places where such
property is owned or leased and its business is conducted.
(c) No Defaults or Violations. As of the Applicable Closing
Date, the execution and delivery of this Agreement, and the
performance by Buyer of its obligations under this Agreement will
not violate, contravene, be in conflict with, result in a breach of
or constitute (with or without notice or lapse of time, or both) a
default under: (A) any provision of law; (B) any order, rule or
regulation of any court, arbitrator or other agency of government;
(c) any provision of the Third Amended and Restated Agreement of
Limited Partnership of Buyer; or (D) any lease, indenture,
agreement or other instrument to which Buyer is or may be bound, in
each case which will be likely to have a Material Adverse Effect.
(d) Power and Authority to Enter Into Agreements. Buyer has
PAGE 109
the right, power and authority to enter into and perform its
obligations under this Agreement and the other agreements provided
for herein. No consent, approval or authorization of, or
registration, declaration or filing with any court, governmental
authority (federal, state or local), collective bargaining unit,
lending institution or other third party is required in connection
with the execution and delivery by Buyer of this Agreement or its
performance of or compliance with the terms, provisions and
conditions hereof.
(e) Due Execution and Enforceability. The execution,
delivery and performance of this Agreement and the other agreements
provided for herein by and on behalf of Buyer have been duly and
validly authorized and approved by all requisite partnership
action, and Buyer has taken all such other action as is necessary
or required to enter into, execute and deliver this Agreement and
the other agreements provided for herein and to perform Buyer's
obligations hereunder and thereunder. This Agreement and the other
agreements provided for herein constitute the valid and legally
binding obligations of Buyer, enforceable in accordance with their
respective terms and conditions (except to the extent the same may
be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditor's rights generally or by general
equitable principles).
5.2 No Broker's or Finder's Fees. No person or firm has been
engaged by Buyer in arranging or participating in arranging, on
behalf of Buyer, the transactions provided for herein. Any
broker's or finder's fees to be paid by Seller to Parker/Hunter
Incorporated or to others shall be borne exclusively by Seller.
Except as described in the preceding sentence, Buyer has no
knowledge of any claim (or the reasonable basis therefor) for a
broker's or finder's fee to be paid in connection with the
consummation of the transactions provided for herein.
5.3 Judgments, Orders and Consent Decrees. Buyer is not subject
to any judgment ruling, injunction, order, writ or decree of, or
agreement with any court, arbitrator, or regulatory authority,
limiting, restricting or adversely affecting the purchase by Buyer
of the Assets or Buyer's ownership thereof immediately following
the Applicable Closing Date, nor is Buyer party to any litigation
or other legal proceeding which would restrict or adversely affect
Buyer's ability to purchase the Assets.
5.4 Survival. All representations and warranties made by Buyer in
this Agreement, including, but not limited to, those contained in
Section 5 hereof, shall survive the Applicable Closing Date for a
period of ten (10) years and shall be true and correct as of the
Applicable Closing Date as if specifically made thereon.
SECTION 6
COVENANTS OF SELLER
6.1 Conduct of Business Pending Second Closing Date. From and
after the date of this Agreement and until the Second Closing Date,
Seller hereby covenants and agrees as follows:
PAGE 110
(a) Full Access. Buyer and its authorized representatives
shall have full access during normal business hours and upon prior
notice, but without unreasonably interrupting business, to the
premises and to all books of account, financial records, contracts,
pricing practices, warranty records, sales and credit records and
other business information of Seller, but only to the extent that
same relate to the Assets, and to Seller's personnel, and Seller
shall furnish or cause to be furnished to Buyer and its authorized
representatives all information with respect to the Business and
affairs of Seller as Buyer and its authorized representatives may
reasonably request.
(b) Customer Purchase Orders, Product Supply Orders, Bids and
Proposals. Seller shall not:
(I) purchase any additional Powerhouse Inventory or
Promotional Inventory except: (A) pursuant to
currently outstanding supply orders issued by
Seller for Promotional Inventory, true and complete
copies of which are attached hereto as Schedule
6.1(b); and (B) as otherwise necessary to fill
customer orders prior to the Applicable Closing
Date and as may be preapproved in writing by Buyer;
provided, however, that Seller may place orders for
"point of sale" inventory in an aggregate amount
not exceeding Forty Five Thousand Dollars ($45,000)
without obtaining the prior written approval of
Buyer, and Seller shall furnish Buyer copies of
each such order. Seller shall promptly furnish
Buyer true and complete copies of any new supply
orders placed by Seller pursuant to Clause (B) of
the preceding sentence; or
(ii) solicit or accept new customer orders for
Powerhouse Inventory or Promotional Inventory,
whether from existing customers or new customers of
Seller, provided, however that Seller may solicit,
accept and fill customer orders received following
the date hereof for the sole purpose of disposing
of Seller's existing Inventory as well as the
Promotional Inventory ordered by Seller that is
described in the supply orders attached to Schedule
6.1(b) and any additional Promotional Inventory
ordered by Seller following the date hereof and
which has been preapproved in writing by Buyer.
(c) Use of Intellectual Property. Seller will not license
any person or entity other than Buyer to use any of its
Intellectual Property, other than licenses granted to customers in
connection with promotions in accordance with past practice.
(d) Inventory Liquidation Sales. Seller will not conduct any
liquidation sale, "going out of business" sale or similar sales
activities (or offer any extraordinary price reductions), and
Seller shall offer sales discounts solely to the extent such
discounts are consistent with those offered by Seller during the
PAGE 111
six (6) months immediately preceding the date of execution of this
Agreement; provided, however, that the covenants and agreements
contained in this Section 6.1(d) shall not apply with respect to
any of the Excluded Assets.
(e) Business Operations.
(I) Seller will use its reasonable efforts to sell
(without replacing) its Promotional Inventory
between the First Closing Date and the Second
Closing Date by filling existing customer orders.
(ii) Prior to the Second Closing Date, Seller shall
refrain from the following:
(A) making sales on other than Seller's customary
terms and conditions within the past six (6)
months (including price and terms of payment)
and in the ordinary course of business; or
(B) selling, assigning, transferring, abandoning
or permitting to lapse any Intellectual
Property, Trade Secrets or other intangible
assets, or disclosing any Trade Secrets or
other material proprietary confidential
information to any person other than Buyer or
its representatives; provided, however, that
if preventing the lapse of any Intellectual
Property requires the payment of money, then
Buyer shall reimburse Seller on the Second
Closing Date for Buyer's pro rata portion of
such expense.
(f) Insurance. Seller shall continue in full force and
effect its existing insurance and bonding coverages in respect of
the Assets.
(g) Compliance with Laws. Seller shall comply in all
material respects with all applicable statutes, laws, ordinances,
rules and regulations as may be required in connection with the
maintenance and operation of the Assets or for the valid and
effective transfer to Buyer of the Assets and the consummation of
the transactions contemplated by this Agreement.
6.3 Conditions Precedent. Seller and Buyer shall use all
reasonable efforts to assure that the conditions precedent set
forth in Section 7 and 8 hereof, respective are satisfied on or
prior to the Applicable Closing Date.
6.4 Injunctions. If any court of competent jurisdiction over
Seller or the Assets issues or otherwise promulgates any injunction
order or decree which prohibits the sale of, or otherwise adversely
affects, the Assets, Seller shall use its reasonable efforts to
have such injunction dissolved or otherwise eliminated as promptly
as possible.
PAGE 112
6.5 Taxes. Seller covenants and agrees that it will prepare and
file all tax returns required to be filed by it in respect of the
Assets for periods ending on or prior to the Closing Date
including, without limitation, personal property taxes, and pay all
amounts due thereunder.
SECTION 7
CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Each and every obligation of Buyer to be performed on the
First Closing Date or the Second Closing Date shall be subject to
the satisfaction on or prior thereto of each of the following
conditions:
7.1 Representations and Warranties True on Applicable Closing
Date. The representations and warranties made by Seller in this
Agreement and in the Schedules and Exhibits hereto shall be true
and correct in all material respects on and as of the Applicable
Closing Date as though such representations and warranties had been
made again and reaffirmed on and as of the Applicable Closing Date.
7.2 Compliance with Agreement. Seller shall have performed and
complied in all material respects with all of its obligations under
this Agreement which are to be performed or complied with by it on
or prior the Applicable Closing Date.
7.3 Secretary's Certificate. Seller shall have delivered to Buyer
the certificate of its Secretary or Assistant Secretary certifying
as of the Applicable Closing Date to the authorization and approval
of this Agreement and the transactions provided for herein by duly
adopted resolutions of the Board of Directors of Seller.
7.4 Compliance Certificate. Seller shall have delivered to Buyer
the certificate of T. Ronald Casper, President of Seller
certifying, as of the Applicable Closing Date, the fulfillment of
the conditions set forth in Sections 7.1 and 7.2 hereof.
7.5 No Litigation. No investigation, suit, action or other
proceeding shall be pending or threatened before or by any court of
governmental agency which in the reasonable opinion of Buyer, may
adversely affect this Agreement or the consummation of the
transactions provided for herein.
7.6 Consents and Approvals. Seller and Buyer shall have obtained
all necessary and material authorizations, consents and approvals
required for the valid consummation of the transactions provided
for in this Agreement, and each of them shall be in full force and
effect.
7.7 Termination of Liens; Warehouseman's Waiver. The Bank Lien
shall have been released with respect to the Assets being
transferred to Buyer on the Applicable Closing Date, and original
UCC-3 Partial Releases, executed by Bank, as well as a written
waiver or other written instrument from Transmanagement Corporation
and any and all other persons or entities with a Claim against any
of the Assets, delivered to Buyer, each in form and substance
PAGE 113
reasonably satisfactory to Buyer.
7.8 Damage or Destruction. There shall not have been any material
damage to or destruction of the Assets (whether or not covered by
insurance).
7.9 Warehouse Arrangements. Buyer shall have entered into
arrangements with the owner of the Warehouse Facilities upon terms
and conditions satisfactory to Buyer in its sole discretion;
provided, however, that the foregoing condition shall automatically
be deemed waived upon consummation of the transactions to be
completed on the First Closing Date.
7.10 Opinion of Counsel. Seller shall have delivered to Buyer an
opinion of Cohen & Grigsby, P.C., counsel to Seller, in the form
attached hereto as Exhibit "G".
7.11 Injunctions. There shall not be in effect any injunctions,
decrees or orders prohibiting the sale of, or otherwise adversely
affecting, the Assets.
SECTION 8
CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
Each and every obligation of Seller to be performed on the
First Closing Date or the Second Closing Date shall be subject to
the satisfaction on or prior thereto of each of the following
conditions:
8.1 Representations and Warranties True at the Applicable Closing
Date. The representations and warranties of Buyer contained in
this Agreement shall be true and correct in all material respects
on and as of the Applicable Closing Date as though such
representations and warranties had been made again and reaffirmed
on and as of the Applicable Closing Date.
8.2 Compliance With Agreement. Buyer shall have performed and
complied in all material respects with all of its obligations under
this Agreement which are to be performed or complied with by it on
or prior to the Applicable Closing Date.
8.3 Secretary's Certificate. Buyer shall have delivered to Seller
a certificate of the Secretary or Assistant Secretary of its
Managing General Partner certifying as of the Applicable Closing
Date to the authorization and approval of this Agreement and the
transactions provided for herein by duly adopted partnership
authorization of the General Partners of Buyer.
8.4 Compliance Certificate. Buyer shall have delivered to Seller
the certificate of the President or any duly authorized Vice
President of Buyer certifying as of the Applicable Closing Date to
the fulfillment of the conditions set forth in Sections 8.1 and 8.2
hereof.
8.5 No Litigation. No investigation, suit, action or other
proceeding shall be pending or threatened before or by any court or
PAGE 114
governmental agency which in the reasonable opinion of Seller may
adversely affect this Agreement or the consummation of the
transactions provided for herein.
8.6 Consents and Approvals. Buyer shall have obtained all
necessary and material authorizations, consents and approvals as
required for the valid consummation of the transaction provided for
in this Agreement, and each of them shall be in full force and
effect.
8.7 Opinion of Counsel. Buyer shall have delivered to Seller an
opinion of Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A., counsel
to Buyer, in the form attached hereto as Exhibit "H".
8.8 Approval by Shareholders of Seller. The shareholders of
Sellers shall have approved and ratified the transactions described
in this Agreement at a Special Meeting of Shareholders called for
such purpose; provided, further, that this condition precedent
shall apply solely with respect to those transactions that are to
be consummated on the Second Closing Date; provided, however, that
if the shareholders of Seller fail or refuse to approve and ratify
the transactions and the Second Closing does not occur, then the
provisions of Section 14.1(b) shall apply.
SECTION 9
FURTHER AGREEMENTS OF THE PARTIES
9.1 Employees.
(a) The parties acknowledge that prior to the date hereof,
Buyer has notified Seller that Buyer may desire to enter into
arrangements for the employment by Buyer of (or other association
of Buyer with) one or more of the following individuals: Charles
Stewart, Sherri Stitt, Donald Cashman, Richard DeLong, Deanna
Hayman, Thomas Ranieri, Wayne Smith and James Meehan, as such
Employees of Seller may be potentially relevant to Buyer's
business, and Buyer agrees to notify Seller prior to extending any
offer of employment or other association to any of the
aforementioned individuals or to any other present or future
Employee of Seller, provided, that any such offer to then-current
employees of Seller made prior to the Second Closing Date shall be
made only with the prior written consent of Seller. Seller agrees
to notify Buyer prior to terminating, laying off or otherwise
taking any action directly affecting the employment status of any
of the aforementioned Seller's Employees. Buyer may, but shall not
be obligated pursuant to this Agreement or for any other reason to,
offer full or part-time employment or other association (i.e.,
consulting) after the First Closing Date to any of the
aforementioned individuals or to any other present or future
Employees of Seller on such terms and conditions as Buyer, in its
sole discretion, may determine, subject however, to the preceding
sentence. Buyer may communicate with the present employees or
agents of Seller prior to the Closing upon reasonable prior notice
to Seller. Seller shall not directly or indirectly induce, suggest
or recommend to Employees of Seller that they reject offers of
employment or other association with Buyer. Seller shall cooperate
PAGE 115
with Buyer in all reasonable respects in connection with any offers
of employment or other association that Buyer may make to Seller's
employees and to transition any such employees from Seller's
employment to possible association with Buyer. Seller shall also
cooperate with Buyer, to the extent reasonably consistent with
Seller's operational requirements, between the First Closing Date
and the Second Closing Date, to make available to Buyer Seller's
employees whose services are reasonably required by Buyer. In any
such case, Buyer shall reimburse Seller on the Second Closing Date
for a portion of the direct employee-related costs incurred by
Seller for any such employees on an hourly or per diem basis for
service committed to or utilized exclusively by Buyer. "Direct
employee-related costs" means, and shall be limited to, direct
wages, payroll taxes, insurance benefits and travel expenses
directly related to Buyer's business, provided, however, that
Buyer's obligation to reimburse Seller for the cost of Employee
insurance benefits shall in no event exceed $300 per full calendar
month per Employee.
(b) Seller hereby agrees that it will not, without the prior
written consent of Buyer, notify, promise, represent, advise, state
or otherwise communicate to any employee of Seller that Buyer will
be hiring any or all such employees or make any offer of employment
or other association on behalf of Buyer.
9.2 Nondisclosure. Seller and Buyer shall not disclose, directly
or indirectly, the terms of or reveal the existence of this
Agreement, its Schedules or Exhibits to any person, firm or entity
other than their respective attorneys, accountants, lenders, and
representatives who are required to be informed thereof in
connection with their representation of the parties in connection
with the transactions, except for proxy statements, press releases
and other filings and disclosures as, in the reasonable judgment of
Seller's counsel, required by applicable securities or other laws.
Seller will advise Buyer in writing and, to the fullest extent
practicable, will consult with Buyer prior to any such disclosure.
No press release or governmental notification, report or other
filing by either party shall be made without the other party's
prior written approval of the content thereof, except as provided
in the first sentence of this Section. The parties will issue a
joint press release upon the consummation of the transactions
contemplated by this Agreement.
9.3. Restrictive Covenants.
(a) Confidentiality. Each party covenants and agrees that
from and after the date hereof, it shall not directly or indirectly
disclose, divulge, discuss, copy or otherwise use or cause to be
used in any unlawful manner, any confidential information relating
to the sale and promotion of the Inventory, including but not
limited to, information regarding operations, accounts, books and
records, sales, customers, pricing and other activities of Seller
which constitute "trade secrets" within the meaning of Section
133.51(a)(3) of the Ohio Revised Code, except for (I) in the case
of Seller, the conduct of its business through the Second Closing
Date in the manner contemplated by Section 6.1; and (ii) in the
PAGE 116
case of Buyer, the sale and promotion of Powerhouse Inventory
following the first Closing Date and the sale and promotion of
Powerhouse Inventory and Promotional Inventory following the Second
Closing Date. Each party recognizes and agrees that the disclosure
of such trade secrets to parties other than the other party or the
improper use thereof will cause serious and irreparable injury to
such other party. In the event a party is requested or required
(by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigation, demand or similar
process) to disclose any confidential information, such party
agrees to provide the other party with prompt notice of such
request so that the other party may seek an appropriate protective
order and/or waive such party's compliance with the provisions of
this paragraph. The foregoing shall not prevent either party from
making such disclosures as are in the reasonable judgment of such
party's counsel, required by applicable securities laws, except
that each party shall advise the other party in writing and, to the
fullest extent practicable, will consult with the other prior to
making any such disclosure. Upon termination of this Agreement,
for whatever reason, prior to the Second Closing Date, Buyer agrees
to deliver to Seller all written materials, reports and information
(including Trade Secrets) furnished by Seller concurrently with or
prior to the execution of this Agreement (except for Assets
purchased by Buyer on the First Closing Date), and Buyer will
destroy all copies of same.
(b) Non-Competition. Seller agrees that commencing on the
First Closing Date and for a period expiring five (5) years
following the First Closing Date (if the First Closing occurs but
the Second Closing fails to occur) or expiring five (5) years
following the Second Closing Date (if the Second Close Date occurs)
(the "Restricted Period"), Seller will not, directly or indirectly,
either as principal, agent, partner, lender, investor, or in any
other capacity, engage in, have a financial interest in or be in
any way connected or affiliated with any enterprise (whether or not
incorporated) which engages in the purchase, sale, marketing,
import, distribution or brokerage of replenishment inventory or
promotional inventory of a format, category or product line which
is sold or offered for sale by Seller in the United States of
America at the date of this Agreement ("Competitive Products"),
except for the sale of Promotional Inventory pending the Second
Closing Date, and except for Inventory included in the Excluded
Assets. In addition, Seller will not, during the Restricted
Period, divert or take away or attempt to divert or take away any
of Buyer's or any Buyer's affiliates' employees and, solely with
respect to the Competitive Products and Competitive Business
(defined below), Buyer's or Buyer's affiliates' customers or
suppliers, and, further, Seller shall refrain from, directly or
indirectly: (I) committing any act which would in any way
jeopardize any relationship Buyer or any Buyer affiliate has or may
come to have with any such employee, customer or supplier; or (ii)
engaging in, having a financial interest in, or being in any way
connected or affiliated with any enterprise which engages in the
wholesale or retail sale and distribution of closeout merchandise.
Notwithstanding anything to the contrary contained in the
PAGE 117
above paragraph, in the event the Second Closing does not occur
solely as a result of Buyer's breach of its obligations hereunder
(as finally determined by a court of law), the covenants contained
in Paragraph 9.3(b) shall be inoperative and of no force and
effect.
(c) Injunctive Relief. Seller and Buyer agree that the
remedy at law for any breach by them of the foregoing provisions of
this section will be inadequate, and Buyer shall be entitled to
both temporary and permanent injunctive relief (without bond)
enforcing such provisions, in addition to any other remedy it may
have at law or in equity.
9.4 Negotiation with Others. From and after the date hereof until
the earlier to occur of: (I) the termination of this Agreement
pursuant to Section 11, or (ii) December 31, 1996, neither Seller
nor any of Seller's officers, directors, employees or agents will,
directly or indirectly: (a) solicit or initiate discussions or
engage in negotiations with any person (whether such negotiations
are initiated by them or otherwise), other than Buyer, with respect
to the possible acquisition of the Assets or any portion thereof,
(b) provide any information with respect to the Assets to any
person, other than Buyer, relating to the possible acquisition of
the Assets or any portion thereof, or (c) enter into a transaction
with any person, other than Buyer, concerning the possible
acquisition of the Assets or any portion thereof. Nothing in this
Section shall be deemed to prevent sales to customers prior to the
Applicable Closing Date in the ordinary course of business. If
Seller or any of Seller's officers, directors, employees or agents
receives any unsolicited offer or proposal to enter into
negotiations relating to any of the above, Seller shall immediately
notify Buyer of such fact.
9.5 Replenishment Sales Following First Closing Date. Except for
the payments described in Section 2.5(a), any sales of Powerhouse
Inventory by Buyer at any time following the First Closing Date for
replenishment of goods originally ordered by a Powerhouse Customer
or a Promotional Customer prior to the First Closing Date, which
replenishment request is filled by Buyer, shall be for the sole
account of Buyer (it being understood, however, that Buyer shall
not be obligated to fill any such replenishment order).
9.6 Approval of Shareholders of Seller. Seller will use its best
efforts to obtain the approval of its shareholders the execution
and delivery by Seller of this Agreement and the consummation of
the transactions described herein. Seller represents and warrants
that it is not aware of any reason why shareholder consent and
approval will not be obtained by December 31, 1996.
9.7 Right of First Refusal with Respect to Other Assets of Seller.
Unless the First Closing Date does not occur solely by reason of
Buyer's default or breach hereunder, in the event Seller receives
an offer for all or a significant portion of its assets other than
the Assets at any time within thirty (30) days following the First
Closing Date (such other assets may include, but are not limited
to, warehouse and office fixture and equipment, electronic and
PAGE 118
computer equipment, and transferable software), Buyer shall have a
right of first refusal to acquire all or any portion of such assets
upon the same terms and conditions as offered by the third party.
Seller shall promptly furnish Buyer with a complete description of
the terms and conditions of such offer, including the purchase
price, the terms and conditions of purchase, the proposed Closing
Date, and the identity of the Purchaser. In addition to the
foregoing, in the event the First Closing occurs but the Second
Closing does not occur (other than solely by reason of Buyer's
default or breach under this Agreement), Buyer shall have a right
of first refusal to purchase any Intellectual Property which is not
conveyed to Buyer at the First Closing upon the same terms and
conditions as offered by a third party at any time prior to the
fifth (5th) anniversary of the First Closing Date, and Seller shall
furnish a copy of the third party offer containing the same detail
as prescribed in the preceding sentence. Buyer shall notify Seller
in writing within twenty (20) days following receipt of the third
party offer ("Notice of Exercise") whether Buyer desires to
exercise its rights of refusal hereunder, and the purchase and sale
of assets under this Section shall occur on the later of the
closing date described in the third party offer or thirty (30) days
following the date of Buyer's Notice of Exercise.
9.8 Trade Show Deposits. Buyer acknowledges that Seller has
heretofore provided to Buyer written evidence of payment by Seller
of deposits (collectively, "Trade Show Deposits") for floor space
for show booths for the following trade conventions: (I) National
Housewares Merchants Association (NHMA), McCormick Place, Chicago,
Illinois (to be held January 1997) - $12,375.00, and (ii)
Association of Retail Marketing Services (ARMS), Ramada Congress
Hotel, Chicago, Illinois (to be held January 1997) - such amounts
as have been paid by the Second Closing Date, not to exceed $2,360
(collectively, the "Trade Show Deposits"). On the Second Closing
Date, Buyer will pay to Seller an amount equal to the Trade Show
Deposit pertaining to such convention trade show, and shall assume
Seller's remaining payment obligations, if any, in respect of the
ARMS convention. Seller represents and warrants that its floor
space for trade show booth for the NHMA Trade Show has been paid in
full.
9.9 Accounts Receivable. The parties acknowledge that Buyer is not
acquiring any of Seller's accounts receivable. Any payments
received by Buyer in respect of Seller's receivables shall be
allocated in accordance with the customer's designation; absent
such designation, such payments shall be allocated and paid first
to Seller to the extent of the unpaid balance owed by such customer
to Seller for goods shipped and billed prior to the applicable
Closing Date. Each party agrees to properly remit to the other, in
precisely the form received, with endorsement, any and all
payments received by such party which payment is actually due and
owing to the other party, and any such sums erroneously paid by the
customer to such party shall be held in trust for the other party.
Each party agrees to furnish the other access to deposit slips,
bank reconciliation statements, customer correspondence and other
documents upon the reasonable request of such other party in order
to verify the prompt remittance of all sums required to be remitted
PAGE 119
to the other party pursuant to this Section 9.9.
SECTION 10
RISK OF LOSS
10.1 Risk of Loss. Risk of Loss with respect to the Assets being
transferred on an Applicable Closing Date shall pass to Buyer
effective as of the opening of business on such Applicable Closing
Date.
SECTION 11
TERMINATION AND ABANDONMENT
11.1 Termination. This Agreement may be terminated forthwith upon
the receipt of notice of termination as provided for in Section
11.2 hereof, and the purchase and sale and the other transactions
provided for by this Agreement may be abandoned, without liability
on the party of either party to the other, except as otherwise
provided in Section 14.1(b):
(a) By mutual written consent of Seller and Buyer;
(b) By Buyer, if any of the conditions of Section 7 of this
Agreement have not been satisfied on the intended Closing Date and
have not been waived by Buyer in writing;
(c) By Seller, if any of the conditions of Section 8 of this
Agreement have not been satisfied on the intended Applicable
Closing Date and have not been waived by Seller in writing;
(d) By either Buyer or Seller, if the Second Closing Date has
not occurred (for any reason other than a breach of any
representation, warranty, covenant or agreement contained herein or
in any Schedule or Exhibit hereto by the party seeking to so
terminate) on or before January 31, 1997; or
(e) By either Buyer or Seller, if the other party files on or
before the Second Closing Date a petition in bankruptcy,
reorganization, liquidation or receivership or a petition in
bankruptcy, reorganization, liquidation or receivership is filed on
or before the Second Closing Date against such other party.
11.2 Notice of Termination. In the event of termination and
abandonment by either party as provided in Section 11.1 hereof,
prompt written notice thereof shall forthwith be given to the other
party.
SECTION 12
INDEMNIFICATION AND REIMBURSEMENT
12.1 Indemnification by Seller.
(a) In order to induce Buyer to enter into this Agreement and
to consummate transactions contemplated hereby, Seller covenants
and agrees to and shall indemnify Buyer and its partners (and their
constituent partners and shareholders), officers, employees and
PAGE 120
agents, and their heirs, executors, administrators, personal
representatives, successors and assigns (collectively, the "Buyer
Interests") and shall hold the Buyer Interests harmless against and
with respect to any and all Damages incurred in connection with or
arising out of or resulting from or incident to:
(I) any misrepresentation, omission, breach of
warranty, representation or covenant, or
non-fulfillment of any obligation on the part of Seller
under this Agreement, any certificate, Schedule or
Exhibit, or other instrument furnished to Buyer in
connection with this Agreement;
(ii) the Unassumed Liabilities;
(iii) Seller's failure to comply with the provisions
of the Bulk Sales Law;
(iv) any claims, violations or alleged violations by
Seller of any laws, statutes, codes, ordinances,
rules or regulations whether foreign or domestic,
state, federal or local;
(v) the filing (or failure to file) or payment (or
non-payment) of any taxes by Seller, pursuant to any
federal, state, local or foreign income tax, excise
or franchise tax, ad valorem, sales and use tax,
payroll tax, and/or F.I.C.A. taxes or any
deficiencies in any taxes payable by or on behalf
of Seller;
(vi) arising from or relating to any and all claims,
grievances or arbitrations under any collective
bargaining agreement to which Seller may have been
a party at any time prior to the Closing Date,
including, but not limited to, claims and/or
judgments for unfair labor practices incurred on or
limited to, before the Closing Date whether filed
(by either union or non-union employees) prior to,
on, or after the Closing Date with the National
Labor Relations Board or any comparable federal,
state or local board, agency, or commission, or any
state or federal court;
(vii) any damages, obligation or penalty for
contributions to any Plan with respect to
Seller's employees for all periods on and
before the Closing Date, ERISA claims or
violations;
(viii) any and all amounts owed by Seller to Bank or
to Transmanagement Corporation;
(ix) any liability related to any Excluded Asset; and
(x) any and all actions, suits, proceedings, demands,
PAGE 121
assessments, penalties, fines, judgments, costs and
legal and other expenses incident to any of the
foregoing.
(b) The indemnification of this Section shall survive the
Closing; provided, however, that any claim for the incorrectness or
breach of the representations, warranties or covenants of Seller
contained in Section 4 must be brought within the applicable
limitations period as described in Section 4.26.
12.2 Indemnification by Buyer.
(a) In order to induce Seller to enter into this Agreement
and to consummate the transactions contemplated hereby, Buyer
covenants and agrees to and shall indemnify Seller, its directors,
officers, employees, agents, successors and assigns (collectively,
the "Seller Interests") and shall hold the Seller Interests
harmless against and with respect to any and all Damages, incurred
in connection with or arising out of or resulting from or incident
to:
(I) a breach of any representation, warranty, covenant
or agreement on the party of Buyer under this
Agreement or under any document executed and
delivered by Buyer in connection therewith;
(ii) the failure of Buyer to pay or perform any of the
Assumed Liabilities;
(iii) the conduct by Buyer of its business following
the Closing Date; and
(iv) any and all actions, suits, proceedings, demands,
assessments, penalties, fines, judgments, costs and
legal and other expenses incident to any of the
foregoing.
(b) The indemnification in this Section shall survive the
Closing.
12.3 Product Liability Matters. Notwithstanding anything to the
contrary contained in this Agreement, none of the provisions of
this Section 12 shall apply to any Damages claimed under Section
12.1(a)(ii) or Section 12.2(a)(ii) or (iii) which directly result
from any product liability claims, suits, demands or causes of
action arising following the Applicable Closing Date and that
pertain to any of the Inventory. With respect to such matters, the
parties do not intend for this Agreement to alter the legal
relationship between them that would exist in the absence of this
Agreement.
12.4 Claims for Reimbursement. In the event that the Buyer
Interests or the Seller Interests shall have suffered any Damages
(as hereinabove defined) with respect to any liability or claim to
which the foregoing indemnities relate, the Buyer Interests or the
PAGE 122
Seller Interests, as the case may be (the "Indemnified Party"),
shall give Seller or Buyer, as the case may be (the "Indemnifying
Party"), prompt written notice of the nature and amount of such
Damages and the Indemnified Party's claim for reimbursement
therefor. The Indemnifying Party shall have thirty (30) days from
the date of said notice to investigate and dispute the nature,
validity or amount of any such claim. During said 30-day period,
the Indemnifying Party shall have reasonable access, during normal
business hours and upon prior notice, to the books and records of
the Indemnified Party for the purpose of such investigation in
accordance with the provisions of Sections 12.1 or 12.2 hereof. In
the event that the Indemnifying Party shall dispute the nature,
validity or amount of said claim, the Indemnifying Party shall give
the Indemnified Party written notice of such dispute within said
30-day period, and the parties shall attempt in good faith to
resolve such dispute.
In the absence of a dispute, the Indemnifying Party shall
promptly, and in any event not later than the expiration of said
30-day period, reimburse the Indemnified Party in full for any such
Damages, as set forth in the Indemnified Party's notice. In the
event that the Indemnifying Party shall dispute only the amount of
the claim, the Indemnifying Party shall, concurrently with the
delivery of its notice of dispute, pay to the Indemnified Party the
undisputed portion of the claim.
12.5 Defense of Third-Party Claims. If any lawsuit or enforcement
action is filed against an Indemnified Party by a third party and
the Indemnified Party is entitled to indemnification pursuant to
this Agreement, written notice thereof shall be given to the
Indemnifying Party as promptly as practicable (and in any event
within ten (10) days after the service of the citation or summons);
provided, however, that the failure of any Indemnified Party to
give timely notice shall not affect rights to indemnification
hereunder except to the extent that the Indemnifying Party
demonstrates actual damages caused by such failure, if (I) such
failure to give timely notice does not materially affect the
ability or right of the Indemnifying Party to participate in the
defense of such lawsuit or enforcement action, (ii) actual notice
is given to the Indemnifying Party within a reasonable time, and
(iii) to the extent that such failure to give timely notice causes
the Indemnifying Party to incur additional expense with respect to
such lawsuit or enforcement action, the Indemnified Party promptly
reimburses the Indemnifying Party for such additional expense.
After such notice, if the Indemnifying Party shall acknowledge
in writing to such Indemnified Party that such Indemnifying Party
may be obligated under the terms of its indemnity hereunder in
connection with such lawsuit or action, then the Indemnifying Party
shall be entitled, if it so elects, to take control of the defense
and investigation of such lawsuit or action, and to employ and
engage attorneys of its own choice to handle and defend the same,
at the Indemnifying Party's cost, risk and expense; and such
Indemnified Party shall cooperate in all reasonable respects, at
its cost, risk and expense, with the Indemnifying Party and such
attorneys in the investigation, trial and defense of such lawsuit
PAGE 123
or action any appeal arising therefrom.
12.6 Indemnification as Sole Remedy; Exceptions. Absent fraud on
the part of Seller, and subject to Section 14.1(b), the
indemnification provided to Buyer in this Agreement shall be the
sole remedy of Buyer against Seller in respect of any claims
arising under or out of this Agreement or any of the documents
delivered on the Applicable Closing Date that are based upon any
action, fact or circumstance existing as of the date of this
Agreement; provided, however, that should Buyer assert a claim for
indemnification between the First Closing Date and Second Closing
Date, Buyer, upon notice to Seller, and to the extent that Seller
does not dispute said claim in writing within five (5) days
following receipt thereof, may satisfy such indemnification claim
by setting off the amount of such claim against its payment
obligations on the Second Closing Date. Should Seller dispute said
claim, or a portion of said claim, in writing, Buyer shall deposit
the disputed portion of the claim in a joint signature interest-
bearing escrow account pending full and final resolution of the
claim (costs of escrow to be paid or reimbursed by the non-prevailing
party).
Subject to Section 14.1(b), the indemnification provided to
Seller in this Section 12 shall be the sole remedy of Seller
against Buyer against Buyer in respect of any claims arising under
or out of this Agreement or any of the documents delivered on the
Applicable Closing Date that are based upon any action, fact or
circumstance existing as of the date of this Agreement.
12.7 Limitations. Buyer acknowledges and agrees that, absent fraud
on the part of Seller: (I) the indemnification obligations of
Seller pursuant to this Section 12 shall in no event exceed the
aggregate Purchase Price; (ii) should the First Closing occur but
the Second Closing fail to occur, for whatever reason, neither
party shall be required to indemnify the other pursuant to this
Section 12 except in the event that the aggregate amount of Damages
suffered or incurred by the Indemnified Party exceeds Five Thousand
Dollars ($5,000), whereupon the Indemnifying Party shall be liable
to the Indemnified Party for the full extent of such Damages
(including the first Five Thousand Dollars ($5,000)); and (iii)
should the Second Closing occur, neither party shall be required to
indemnify the other pursuant to this Section 12 except in the event
that the aggregate amount of Damages suffered or incurred by the
Indemnified Party exceeds Fifteen Thousand Dollars ($15,000),
whereupon the Indemnifying Party shall be liable to the Indemnified
Party for the full extent of such Damages (including the first
Fifteen Thousand Dollars ($15,000)).
SECTION 13
RIGHT TO PROCEED
13.1 Waiver of Conditions. Anything in this Agreement to the
contrary notwithstanding, if any of the conditions specified in
Section 7 hereof have not been satisfied, Buyer shall have the
right to waive one or more conditions precedent and proceed with
the transactions contemplated hereby without waiving any of its
PAGE 124
other rights hereunder, and if any of the conditions specified in
Section 8 hereof have not been satisfied, Seller shall have the
right to waive one or more conditions precedent and proceed with
the transactions contemplated hereby without waiving any of its
other rights hereunder; provided, however, that if a party shall so
elect to proceed, such party shall not thereafter attempt to hold
the other party responsible for Damages resulting from the
condition or conditions waived and such other party shall not be
responsible for such Damages.
SECTION 14
MISCELLANEOUS PROVISIONS
14.1 Costs and Expenses.
(a) Each party covenants and agrees that it shall be
responsible for and bear its respective costs and expenses in
connection with, or arising out of, the negotiation and execution
of this Agreement and consummation of the transactions provided for
herein; provided, however, that Seller shall bear and be
responsible for any and all sales or transfer taxes applicable to
the transfer of Assets provided for herein.
(b) In the event any or all of the transactions described in
this Agreement fail to close in accordance with the terms hereof
because Seller is in default hereunder or has failed to obtain
director or shareholder approval or any other required consent and
provided Buyer is not in default hereunder, Seller shall pay to
Buyer, as liquidated damages, within three (3) days following
demand by Buyer, the amount of $150,000, the parties having
attempted in good faith to ascertain the damages which will result
should the transactions fail to close other than due to the fault
or breach of Buyer, and said sum represents the parties' best
efforts to estimate such damage. In the event any or all of the
transactions described in this Agreement fail to close in
accordance with the terms hereof, and such failure is due solely to
the breach by Buyer of its obligations hereunder or because any of
the conditions described in Sections 8.1 through 8.7 have not been
satisfied or waived in writing by Seller, Buyer shall pay to
Seller, as liquidated damages, immediately upon demand by Seller
the amount of $100,000, the parties having attempted in good faith
to ascertain the damages which will result should the transactions
fail to close due solely to the fault or breach of Buyer, and said
sum represents the parties' best efforts to estimate such damage.
(c) Seller agrees that should Seller fail to pay in full to
Buyer as liquidated damages the sum of $150,000 within three (3)
days following demand by Buyer as required pursuant to the first
sentence of Section 14.1(b), Buyer may, at its sole election and
upon notice to Seller, satisfy such payment obligations of Seller
by selecting, removing and retaining for Buyer's own account for
no additional consideration, such Promotional Inventory of Seller
as remains on hand and which Buyer desires to acquire, having a
purchase price (calculated in accordance with Section 2.5(b)) equal
to (x) $150,000 less (y) the amount of liquidated damages actually
paid by Seller to Buyer pursuant to Section 14.1(b). Buyer agrees
PAGE 125
that, should it elect to satisfy Seller's payment obligations under
Section 14.1(b) by selecting and retaining for its account
Promotional Inventory (subject to the terms and conditions
contained in this Paragraph 14.1(c)), Buyer shall, prior to
selecting such Inventory, satisfy Seller's liquidated damages
payment obligation by setting off such amount, to the fullest
extent possible, against its royalty payment obligations (described
in Section 2.5(a)(iii)) then due and owing to Seller. Seller
agrees to cooperate with Buyer and shall use its best efforts to
cause Bank and others to cooperate with Buyer, in all reasonable
respects in connection with Buyer's selection, removal and
transport of Promotional Inventory pursuant to this Section
14.1(c).
14.2 Amendment and Modification. This Agreement may be amended,
modified or supplemented only in writing executed by each of the
parties hereto.
14.3 No Assignment. No party hereto shall assign, in whole or in
part, this Agreement or its respective rights and obligations
hereunder without the prior written consent of the other party
hereto, and, absent such consent, any assignment (including,
without limitation, any assignment by merger, death, dissolution or
operation of law) shall be null and void. Notwithstanding the
foregoing, Buyer may assign its rights and delegate its obligations
hereunder to Mazel Stores, Inc., an Ohio corporation, without the
consent of Seller; provided, that no such assignment shall relieve
Buyer of any of its obligations hereunder.
14.4 Notices. All notices, requests, demands or other
communications hereunder must be in writing executed by an
authorized representative of the party responsible therefor, and
must be given either by hand or telex, telecopy, telefax or other
telecommunications device capable of creating a written record
(confirmed by registered or certified mail or by overnight courier)
(I) if to Buyer, to: Mazel Company L.P., 31200 Aurora Road, Solon,
Ohio 44139 (telecopier number (216) 349-1543, Attention: Reuven
Dessler, Chairman) or to such other person or place as Buyer shall
furnish to Seller in writing, with a copy to Bennett Yanowitz,
Esq., Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A., 2600 Tower at
Erieview, Cleveland, Ohio 44114 or (ii) if to Seller to: Action
Industries, Inc., 460 Nixon Road, Cheswick, Pennsylvania 15024
(telecopier number (412) 782-8606, Attention: T. Ronald Casper,
President) or to such other person or place as Seller shall furnish
to Buyer in writing, with a copy to Daniel Wessels, Esq., Cohen &
Grigsby, P.C., 2900 CNG Tower, 625 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3115 (telecopier number (412) 391-3382).
14.5 Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute but one and
the same instrument.
14.6 Headings. Section and paragraph headings in this Agreement
are provided for convenience of reference only and shall not be
deemed to constitute a part hereof.
PAGE 126
14.7 Recitals, Exhibits and Schedules. The recitals contained at
the beginning of this Agreement and all Schedules and Exhibits
attached hereto shall be deemed an integral part of this Agreement
and shall be incorporated herein by reference.
14.8 Schedules and Exhibits. Any Schedules and Exhibits which are
to be attached hereto at Closing, updated as of the Closing Date or
delivered separately upon execution hereof or on the Closing Date
shall be initialed by the parties hereto and shall be deemed
delivered under this Agreement.
14.9 Waiver; Remedies. No waiver of any breach of any provision of
this Agreement shall be held to be a waiver of any other subsequent
breach, and the failure of a party to enforce at any time any
provision hereof shall not be deemed a waiver of any right of such
party to subsequently enforce such provision or any other provision
hereof. All remedies afforded in this Agreement shall be taken and
construed as cumulative, that is, in addition to every other remedy
provided herein or by law.
14.10 Governing Law. This Agreement shall be construed,
interpreted and enforced in accordance with the laws of the State
of Ohio and applicable federal law.
14.11 Jurisdiction and Venue. Both parties agree that in the
event that any lawsuit is filed by one of them against the other in
connection with any matter arising from or connected with this
Agreement, any related agreement, and/or the transactions
contemplated hereby, such lawsuit shall be filed exclusively in the
United States District Court for the Northern District of Ohio,
Eastern Division, or the United States District Court for the
Western District of Pennsylvania or the Court of Common Pleas for
Cuyahoga County, Ohio or for Allegheny County, Pennsylvania (at the
election of the party filing suit) and each party covenants and
agrees that it shall voluntarily consent and irrevocably submit to
the personal and subject matter jurisdiction of said courts.
14.12 Severability. In the event that any provision or any
portion of any provision of this Agreement shall be held invalid,
illegal or unenforceable under applicable law, the remainder of
this Agreement shall remain valid and enforceable to the maximum
extent permitted by law.
14.13 Entire Agreement. This Agreement, the Schedules and
Exhibits hereto and the ancillary documents executed hereunder set
forth the entire agreement and understanding between the parties
hereto with respect to the transactions provided for herein and
supersede and cancel any and all prior discussions, correspondence,
agreements or understandings (whether oral or written) between the
parties hereto with respect to such matters (including, but not
limited to, the Summary of Preliminary Terms and Conditions dated
August 30, 1996).
14.13 Time is of the Essence. Time is of the essence in the
performance of the terms and conditions of this Agreement.
PAGE 127
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound, have caused this Agreement to be executed by their
authorized representatives on and as of the date first above set
forth.
ACTION INDUSTRIES, INC. MAZEL COMPANY L.P.
By: ZS Mazel L.P., Managing
General Partner
By: T. RONALD CASPER
----------------------
T. Ronald Casper,
President By: ZS Mazel, Inc., General
Partner of ZS Mazel L.P.
By: REUVEN DESSLER
------------------------
Reuven Dressler,
Authorized Agent
PAGE 128
- --------------------------------------------------------------------
ACTION INDUSTRIES, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY __, 1997
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
- ---------------------------------------------------------------------
The undersigned hereby appoints Joel M. Berez and Kenneth L. Campbell or
either of them, agents and proxies of the undersigned, with full power
of substitution to each of them, to represent the undersigned and vote
the shares of Common Stock of ACTION INDUSTRIES, INC. which the
undersigned would be entitled to vote if personally present at the
Annual Meeting to be held on January __, 1997 or any adjournment(s)
thereof, upon all matters that may properly come before the Special
Meeting:
(1) To elect the following nominee as director for the ensuing
three years:
CHARLES C. COHEN [ ] For [ ] Withhold
(2) To approve the Plan of Asset Transfer attached as Exhibit A to
the Proxy Statement dated December 2, 1996 (the "Proxy
Statement") accompanying the Notice of Special Meeting.
(3) To approve the proposed amendment to the Restated Articles of
Incorporation described in the Proxy Statement.
(4) In their discretion to vote upon such other matters as may
properly come before the Annual Meeting.
IF YOUR PROXY IS SIGNED AND RETURNED WITHOUT INDICATING ANY VOTING
INSTRUCTIONS, YOUR SHARES WILL BE VOTED "FOR" APPROVAL OF ALL PROPOSALS
LISTED ABOVE.
* * SIGN HERE * *
Dated: __________________, 1997 _____________________________
PLEASE SIGN AND RETURN THIS PROXY _____________________________
IMMEDIATELY IN THE ENCLOSED POSTAGE
PAID ENVELOPE. Please sign exactly as name
appears hereon. When
signing as executor,
trustee, etc., or as
corporation officer, give
full title as such. For
joint accounts, provide both
signatures.