UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-Q
/X/ QUARTERLY REPORT Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1997
Commission File No. 1-6485
________________________________________________________________
or
/ / TRANSITION REPORT Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
________________________________________________________________
ACTION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________
Pennsylvania
(State or other jurisdiction of incorporation or organization)
________________________________________________________________
25-0918682
(I.R.S. Employer Identification No.)
________________________________________________________________
460 Nixon Road, Cheswick, Pennsylvania 15024-1098
(Address of principal executive offices) (Zip Code)
________________________________________________________________
Registrant's telephone number, including area code: (412) 274-8104
_________________________________________________________________
The number of shares of the Registrant's common stock outstanding
at November 10, 1997 was 5,539,458.
_________________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
INDEX
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1997, September 30, 1996,
and June 30, 1997
Consolidated Statements of Operations -
Three Months Ended September 30, 1997
and September 30, 1996
Consolidated Statements of Shareholders' Equity
(Capital Deficiency) - Three Months Ended
September 30, 1997 and September 30, 1996
Consolidated Statements of Cash Flows -
Three Months Ended September 30, 1997 and
September 30, 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II. Other Information
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
ACTION INDUSTRIES, INC, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands)
September September June
30, 1997 30, 1996 30, 1997
-------- -------- --------
ASSETS
Current Assets
Cash and cash equivalents $499 $5 $582
Trade accounts receivable, less allowances
of $0, $377, and $50 161 2,218 232
Inventories - 2,539 -
Other current assets 100 591 100
------ ------ ------
Total Current Assets 760 5,353 914
Property, Plant and Equipment - 307 -
Other Assets
Note Receivable 1,614 754 1,614
Other 250 193 241
------ ------ ------
$2,624 $6,607 $2,769
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current Liabilities
Notes payable and current portion of long-term debt $115 $1,858 $115
Accounts payable 635 2,592 970
Accrued compensation 223 604 122
Other accrued liabilities 871 589 969
------ ------ ------
Total Current Liabilities 1,844 5,643 2,176
Long-Term Liabilities
Long-term debt - 115 -
Convertible notes payable 1,003 500
Deferred compensation 1,253 1,353 1,426
------ ------ ------
Total Long-Term Liabilities 2,256 1,468 1,926
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) (16,119) (15,147) (15,976)
------ ------ ------
10,098 11,070 10,241
Less treasury shares, at cost 11,574 11,574 11,574
------ ------ ------
Total Shareholders' Equity (Capital Deficiency) (1,476) (504) (1,333)
------ ------ ------
$2,624 $6,607 $2,769
====== ====== ======
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands except per share data)
First Quarter Ended
------------------------
September September
30, 1997 30, 1996
--------- ---------
NET SALES $0 $3,668
COSTS AND EXPENSES
Cost of products sold 0 2,272
Operating expenses 305 1,975
Interest expense 26 183
------ ------
331 4,430
OTHER INCOME, NET 188 29
------ ------
LOSS BEFORE INCOME TAXES (143) (733)
PROVISION FOR INCOME TAXES - -
------ ------
NET LOSS ($143) ($733)
====== ======
NET LOSS PER SHARE ($0.03) ($0.13)
======= =======
Weighted average shares outstanding 5,539 5,539
===== =====
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
UNAUDITED
(In thousands except share amounts)
First Quarter Ended September 30, 1997 and September 30, 1996
----------------------------------------------------------------------------
Capital Retained
Common Stock In Excess Earnings Treasury Stock
Shares Amount of Par (Deficit) Shares Amount Total
------ ------ ------ --------- ------ ------ -----
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)
============================================================================
BALANCE - JUNE 30, 1997 7,187,428 $719 $25,498 ($15,976) 1,647,970 ($11,574) ($1,333)
Net Loss - - - (143) - - (143)
----------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 1997 7,187,428 $719 $25,498 ($16,119) 1,647,970 ($11,574) ($1,476)
============================================================================
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
First Quarter Ended
---------------------------
September September
30, 1997 30, 1996
--------- ---------
OPERATING ACTIVITIES:
Net loss ($143) ($733)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization - 78
Changes in operating assets and liabilities:
Trade accounts receivable 71 551
Inventories - 1,389
Other current assets - 80
Accounts payable and accrued expenses (505) (186)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (577) 1,179
======= =======
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment - -
------- -------
NET CASH USED IN INVESTMENT ACTIVITIES 0 0
======= =======
FINANCING ACTIVITIES:
Notes and acceptances payable - (1,181)
Principal payments on long-term obligations - -
Proceeds of convertible notes payable 503 -
Other, net (9) (71)
------- -------
NET CASH USED IN FINANCING ACTIVITIES 494 (1,252)
======= =======
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (83) (73)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 582 78
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $499 $5
======= =======
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
A. The consolidated financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations
of the Securities and Exchange Commission. With the exception
of the consolidated balance sheet which was derived from the
audited financial statements as of June 30, 1997, 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.
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. The Company's
Powerhouse-related assets were sold on October 18, 1996. The
Promotional-related assets were sold on February 12, 1997
pursuant to a foreclosure sale by Foothill Capital Corporation
("Foothill"), the Company's secured lender. The assets sold
represented substantially all of the operating assets employed
in the Company's business. Trade accounts receivable were
retained, as were non-operating notes and other receivables
from prior sales of the Company's headquarters facility and
certain business units. The Company also retained its
substantial income tax net operating loss carryforwards.
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.
D. In April 1997 the Company announced that it had signed a letter
of intent to acquire General Vision Services, Inc. ("GVS"), a
direct and third-party provider of retail vision services
primarily in the New York City metropolitan area, as well as
elsewhere in New York and surrounding states, and in Florida.
The terms of the merger call for the Company to issue 3,040,000
shares of its Common Stock and 3,650,000 shares of a new Class
B Redeemable Preferred Stock with a par value of $1 per share,
in exchange for 100% of the outstanding capital stock of GVS.
The proposed merger is subject to a number of closing
conditions, including a private placement financing transaction
which was completed in June, July and August of 1997. The
gross proceeds of the financing were $3,700,000, approximately
$2,697,000 of which has been loaned to GVS pursuant to the
terms of the merger. If the merger is not consummated, GVS is
obligated to repay the loan amount directly to the holders of
the private placement notes. The securities issued in the private
financing transaction will not be registered with the
Securities Exchange Commission and may not be offered or sold
in the United States without registration or an applicable
exemption from registration. The proposed merger is also
subject to the approval of the current shareholders of both the
Company and GVS. The process of obtaining such approval is
expected to be completed in November or December, 1997.
The American Stock Exchange ("AMEX") halted trading in the
Company's Common Stock on October 21, 1996. The AMEX has
determined to delist the Company's Common Stock, but has granted
a period for the Company to effect an acquisition to satisfy
the criteria for AMEX listing. The proposed merger with GVS
may or may not result in the Company qualifying for AMEX
listing. There can be no assurance that the listing will be
maintained.
E. The results of operations for the first fiscal quarter ended
September 30, 1997 are not necessarily indicative of the
results to be expected for the full year. As a result of the
asset sales described above, the Company does not currently
have an operating business or source of revenue.
F. Inventories consisted primarily of merchandise held for resale.
Inventories were valued at the lower of first-in, first-out
(FIFO) cost or market. All inventories were sold or otherwise
disposed of in connection with the asset sales described above.
G. The Company had a credit agreement which provided for up to $10
million in committed credit lines through June 30, 1997. In
connection with the foreclosure sale by Foothill, the credit
agreement was terminated as of February 12, 1997.
The Company did not meet the requirements under the restrictive
covenants of the credit agreement as of December 31, 1996, and
was not able to meet these covenants subsequently. Foothill's
remedies under such a default included the right to demand
repayment of the outstanding loan and interest due, which was
done in connection with the foreclosure sale of the Company's
Promotional-related assets on February 12, 1997.
H. No income tax benefits were provided on the losses incurred in
the three month periods ended September 30, 1997 and September
30, 1996 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 $47 million, including losses for
financial reporting purposes which have not yet been reported
for income tax reporting purposes.
I. In September, 1997 Action completed negotiations of an
agreement which settled certain obligations to former officers
and their beneficiaries under lifetime severance agreements.
The agreement provides for Action to pay $80,000 in cash,
assign an interest in the $2.3 million note receivable due to
Action in connection with a the 1996 settlement of a 1991
sale/leaseback transaction, which interest approximates
$920,000, and assign an interest in the amounts remaining due
to Action from the sale of its lamp assembly business in 1995,
which interest approximates $270,000 (both included in Other
Assets - Notes Receivable in the accompanying balance sheet).
Upon assignment of the interests in these notes, the
obligations are non-recourse to Action. In addition to the
recognition of the sale/leaseback note to the extent it is
utilized to satisfy the obligations, the settlement results in
a reduction of the aggregate amount of the obligations which
had been previously recorded in the financial statements by
approximately $320,000. This agreement was reflected in the
financial statements as of June 30, 1997. In the first quarter
of fiscal 1998 other severance and employment obligations were
resolved, resulting in the reduction of the previously recorded
liabilities for such obligations in the amount of $96,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Until February, 1997, the principal business of Action Industries,
Inc. and its Subsidiaries ("Action" or the "Company") was the sale
of comprehensive promotional programs to retailers. These programs
were designed to provide a broad range of products, programs,
displays and services for retail stores. The principal product
categories were housewares (kitchenware, cleaning aids, food
storage), plastic products for the home, picture frames, toys,
stationery, closet accessories, health and beauty aids and similar
products.
In October, 1996 Action sold part of its business and operating
assets to Mazel Stores, Inc. ("Mazel") and in February, 1997
Action's secured lender sold substantially all of the remaining
operating assets to Mazel in a foreclosure sale.
Later in February, 1997 a nonbinding letter of intent was signed
providing for Action to acquire General Vision Services, Inc.
("GVS"). A definitive merger agreement was signed in August, 1997,
providing for Action to acquire all of the outstanding capital
stock of GVS in exchange for approximately 35% of the outstanding
common stock of Action, and $3,650,000 of a new Series B Preferred
Stock. The merger is subject to a number of conditions, including
approval of the shareholders of both Action and GVS.
GVS offers a full range of vision care products and services at 21
retail stores in New York City. GVS sells prescription eyeglasses,
contact lenses and related accessories. In addition, at each store
GVS engages one or more licensed optometrists and opticians who
perform eye examinations and assist in the selection and fitting of
eyewear. GVS also operates a production laboratory which supplies
its retail stores with eyewear. GVS markets its services
principally to labor unions and managed care organizations
("MCO's"). Eligible members of the union or MCO receive an eye
examination and a pair of prescription eyeglasses or contact lenses
for a fixed price, which can range from $50 to $200. Currently GVS
has non-exclusive agreements with approximately 525 unions and six
MCO's representing in excess of 2.5 million members. Approximately
225,000 of these members are customers of GVS. GVS has agreements
with 127 independent vision care providers, to whom it refers
eligible members who live in areas in which GVS does not have a
retail store. GVS also offers hearing services to its customers,
consisting principally of providing hearing aid devices and hearing
care programs. GVS is a privately owned Delaware corporation
organized in 1982.
BACKGROUND AND REASONS FOR THE MERGER
Action experienced declining sales in its traditional Promotional
business each year since 1989. Net sales were $134.2 million in
1989, had declined to $84.1 million by 1992, and had declined
further to $30.2 million in 1996. Action's initial response to its
declining sales was to implement a restructuring plan in 1990,
including various activities intended to return Action to sales
growth or stability and profitability. Action focused on its core
Promotional business and sold or eliminated those noncore business
units (including non-promotional merchandise item sales lines,
plastics manufacturing and lamp assembly, and retail store
operations) and assets which were not profitable or were
incompatible with those objectives.
Almost continuous downsizing efforts were made over the years since
1990 to reduce merchandise inventories and Action's reliance on
working capital borrowings, and to reduce personnel and other
operating costs in order to compensate for the decline in sales.
While progress was made initially and at other times over the
years, Action was unable to make sufficient progress overall to
improve or even maintain its position in the retail marketplace.
In fiscal year 1996 the decline in sales continued. Action lost
significant business with two of its largest customers, three
significant customers went out of business, export business was
lost due to unfavorable currency activity, and Action was not able
to match the number of new stores added to the Powerhouse business
in the prior year.
Despite the steps taken by Action to improve sales and
profitability, sales continued to decline, and losses have been
substantial since 1993.
Action's liquidity was significantly impaired as a result of the
decline in sales and the resulting operating losses. Action's
credit agreement provided for secured loans on a revolving basis.
At June 30, 1996 outstanding borrowings under the credit agreement
had been $3.0 million. Action did not meet restrictive covenants
in the credit agreement as of June 30, 1996, September 30, 1996 and
December 31, 1996 related to minimum levels of net worth and
working capital, current ratio, and the ratio of liabilities to
tangible net worth.
LIQUIDITY AND CAPITAL RESOURCES
The major source of cash during the first quarter of fiscal 1998
was the issuance of an additional $1,700,000 in convertible notes
under the private placement financing. The aggregate amount of
the private placement financing was $3,700,000, including $2,000,000
issued prior to June 30, 1997. Net proceeds were $1,485,000 after
costs of the financing, $1,047,000 of which was loaned to GVS.
Operating losses and repayment of accounts payable and other
current obligations were the primary uses of cash. Working capital
at September 30, 1997 was a deficit of $1,084,000, improved from
deficit working capital of $1,262,000 at June 30, 1997. Action
continues to manage the timing of payment of its obligations to
deal with this impaired liquidity.
Cash and cash equivalents were $499,000 at September 30, 1997, as
compared to $582,000 at June 30, 1997. Cash balances fluctuate
daily, as they are used to meet operating requirements.
Accounts receivable of $161,000 at September 30, 1997 decreased
from $232,000 at June 30, 1997 as a result of collections.
Remaining receivables at September 30, 1997 represent settlements
of prior business expected to be collected during the second
quarter ending December 31, 1997. No sales have been made since
January 1997.
Remaining Promotional inventories were sold in the foreclosure sale
to Mazel in February of 1997. Inventories on hand had been $1.1
million at December 31, 1996, decreased from $2.5 million at
September 30, 1996 as a result of the sale of the Powerhouse
inventories to Mazel.
Aggregate borrowings decreased from $1,973,000 at September 30,
1996 to $615,000 at June 30, 1997. This was the result of the
payoff in February 1997 of Action's short-term borrowings under its
credit agreement in connection with the foreclosure sale of
inventories by Foothill. Borrowings were repaid with cash
generated from the sale of inventories and collection of
receivables, net of cash used to fund operating losses incurred.
As of September 30, 1997, aggregate borrowings consisted of
$115,000 remaining outstanding under the Company's 9% Convertible
Debentures due April 1, 1998 and $1,003,000 in 10% Convertible
Notes issued in June, July and August, 1997 in connection with the
private placement financing required by the GVS merger agreement.
Action did not meet the requirements under the restrictive
covenants of its credit agreement with Foothill as of June 30,
1996, September 30, 1996 and December 31, 1996. Foothill waived
the non-compliance with the covenants, and continued to provide
Action with advances within the borrowing formula and other
limitations, with the understanding that the sale to Mazel would
provide funds to pay off the financing. Foothill's remedies under
such a default included the right to demand repayment of the
outstanding loan and interest due, which was done in February of
1997, as a result of the delays in completing the sale to Mazel.
In connection with the foreclosure sale by Foothill, Action's credit
agreement was terminated as of February 12, 1997.
The ability of Action to repay its existing obligations and to
continue in existence until the merger with GVS can be consummated,
is dependent on the realization of Action's remaining assets, as
well as the ability to coordinate the timing of payment of its
remaining obligations with cash receipts. Unless the merger is
consummated, Action cannot continue as a going concern.
Action has negotiated the settlement of certain long-term severance
obligations to satisfy those obligations, in part, by utilizing a
partial interest in a note receivable due to Action as a result of
the sale/leaseback of its headquarters facility several years ago.
The note receivable is valued in the accompanying balance sheet at
the amount of those obligations which the partial interest in the
note receivable will offset by agreement. The remainder of the
note receivable has been offset by a valuation allowance.
Action believes that its cash on hand, together with the additional
funds generated from its remaining assets, will be sufficient to
permit Action to meet most or all of its operating needs until the
merger is consummated.
For the longer term, if Action is to benefit from the use of its
tax net operating losses it must improve its liquidity through the
operations of GVS in the merger. Unless the merger is completed in
calendar 1997 or shortly thereafter, there can be no assurance that
the Action's capital resources will be sufficient to meet its
operating needs, in which case material adverse consequences may
result. Such consequences would most likely involve liquidation of
Action.
Action made no capital expenditures in fiscal 1998 or 1997. Action
is not planning any capital expenditures prior to the merger.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Net Sales. There were no sales during the first quarter of fiscal
1998 ended September 30, 1997. Aggregate net sales for the first
quarter of fiscal 1997 were $3,668,000. The decline in sales is
the result of the sale of the Powerhouse business on October 18,
1996 and the Promotional business on February 12, 1997.
Cost of Products Sold and Gross Profit Margins. There were no
sales during the first quarter of fiscal 1998. Gross profit
margins (as a percentage of sales) were 38.1% in fiscal 1997,
increased from the prior year.
Operating Expenses. Operating expenses decreased from $1,975,000
(53.8% of sales) in fiscal 1997 to $305,000 in fiscal 1998. The
decrease in costs was primarily the result of the sale of the
operating businesses and Action's continuing cost reduction efforts.
Interest Expense. The decrease of $157,000 (86%) was due to the
payoff of short-term borrowings at the termination of the Company's
credit agreement.
Other Income (Expense), Net. Other income of $188,000 in fiscal
1998 included the settlement of severance and other employment
obligations of $96,000, settlement of other obligations of $49,000
and net recovery of prior receivable writeoffs of $22,000. The
prior year other income amount of $29,000 was comprised of
miscellaneous items.
Loss Before Income Taxes. The loss before income taxes decreased
from $733,000 in fiscal 1997 to $143,000 in fiscal 1997. The
improvement of $590,000 reflects the lower level of operations and
the combined effect of all the above.
Provision for Income Taxes. No income tax benefits were provided
on the losses in fiscal 1998 and 1997 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 $47 million,
including losses for financial reporting purposes which have not
yet been reported for income tax reporting purposes due to timing
differences.
Net Loss. The decrease of $590,000 reflects the combined effect of
all of the above.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
__________________________________________________________________
During June, July and August, 1997, the Company issued $3,700,000
principal amount of its 10% Convertible Notes, convertible into a
new Class A Preferred Stock upon completion of the merger with
General Vision Services, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
__________________________________________________________________
The Company did not submit any matters to a vote of security
holders during the first quarter of fiscal 1998 (quarter ending
September 30, 1997).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
__________________________________________________________________
The following documents are filed as part of this report:
(a) Exhibits: None
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the
quarter ended September 30, 1997.
SIGNATURES
__________________________________________________________________
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ACTION INDUSTRIES, INC.
(Registrant)
Date: November 12, 1997 T. RONALD CASPER
-----------------------------
T. Ronald Casper
Acting President and
Chief Executive Officer
Date: November 12, 1997 KENNETH L. CAMPBELL
-----------------------------
Kenneth L. Campbell
Senior Vice President, Finance
(Principal Financial and
Accounting Officer)