SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 Commission File Number
Registration Number 2-93512-A
ACTION PRODUCTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2095427
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
344 Cypress Road, Ocala, Florida 34472-3108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (352) 687-2202
Check 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1998.
Class Outstanding at September 30, 1998
Common Stock, $.001 par value 1,624,900
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I N D E X
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 1998
and December 31, 1997 (unaudited) 3
Condensed Statements of Operations and Changes
in Retained Earnings - Three and nine months ended
September 30, 1998 and 1997 (unaudited) 4
Condensed Statements of Cash Flows - Three and nine months
ended September 30, 1998 and 1997 (unaudited) 5
Notes to condensed financial statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
SIGNATURE PAGE 9
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Page 3 of 9
ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 254,200 $ 537,800
Accounts receivable, net
of allowance of $25,500
at September 30, 1998 and
December 31, 1997 1,121,800 720,000
Inventories, net 1,292,600 1,086,000
Prepaid expenses 144,100 58,600
Notes receivable 303,300 575,000
Total Current Assets 3,116,000 2,977,400
Property, plant and
equipment, net of accumulated
depreciation of $799,000 at
September 30, 1998 and
$718,700 at December 31, 1997 876,600 923,400
Notes receivable 1,161,500 1,275,000
Other assets 189,700 150,100
TOTAL ASSETS $5,343,800 $5,325,900
Current liabilities:
Accounts payable &
accrued expenses $ 299,100 $ 353,400
Deferred revenue 50,000 75,000
Borrowings under line of credit 337,000 591,800
Total Current Liabilities 686,100 1,020,200
Long term liabilities:
Deferred income taxes 178,000 266,000
Deferred revenue 211,500 225,000
Notes payable 600,000 600,000
Shareholders' equity:
Common stock $.001
par value authorized 15,000,000;
1,624,900 issued and outstanding
at September 30,1998 and
December 31, 1997 1,600 1,600
Capital in excess of par value 3,008,300 3,008,300
Stock subscriptions receivable (99,300) (113,200)
Retained earnings 757,600 318,000
Total Shareholders' Equity 3,668,200 3,214,700
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 5,343,800 $ 5,325,900
</TABLE>
See Accompanying Notes
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ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
AND CHANGES IN RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $1,764,800 $1,700,500 $4,846,300 $4,654,500
Cost of Sales 940,500 918,800 2,524,300 2,585,300
Gross Profit 824,300 781,700 2,322,000 2,069,200
Selling, General &
Administrative Expenses 760,500 623,600 2,027,900 1,703,500
Other (expenses) income
Other 119,000 300 200,900 4,700
Interest expense (26,400) (25,800) (55,400) (66,800)
Total 92,600 (25,500) 145,500 (62,100)
Income before income taxes 156,400 132,600 439,600 303,600
Provision for income taxes - - - -
Net Income 156,400 132,600 439,600 303,600
Beginning retained earnings
(accumulated deficit) 601,200 (146,600) 318,000 (317,600)
Ending retained earnings
(accumulated deficit) $ 757,600 $ (14,000) $ 757,600 $ (14,000)
Net Income per share
Basic $ 0.10 $ 0.09 $ 0.27 $ 0.20
Diluted $ 0.06 $ 0.05 $ 0.16 $ 0.12
Weighted average number of
common shares outstanding
Basic 1,624,900 1,549,900 1,624,900 1,549,900
Diluted 2,807,200 2,739,200 2,828,700 2,739,200
</TABLE>
See Accompanying Notes
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Page 5 of 9
ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income $156,400 $132,600 $439,600 $303,600
Adjustments to reconcile net
income to net cash provided
by(used in)operating
activities:
Depreciation 38,300 25,600 80,300 79,500
Change in assets and
liabilities:
Decrease (increase) in
current assets other than
cash and cash equivalents 286,800 92,800 (308,700) (1,113,200)
Decrease in current
liabilities (364,500) (313,800) (180,800) (133,000)
Decrease (increase) in
other assets (31,700) 29,000 (39,600) 71,200
Net cash provided by (used
in) operating activities 85,300 (33,800) (9,200) (791,900)
Net cash used in investing
activities (9,600) (5,800) (33,500) (14,100)
Cash flows from financing
activities:
Proceeds from (repayments
of) borrowings on line
of credit, net 1,000 135,000 (254,800) 376,800
Results of other financing
activities 13,900 - 13,900 69,400
Net cash (used in)
provided by fin. activities 14,900 135,000 (240,900) 446,200
Net increase (decrease) in
cash and cash equiv. 90,600 95,400 (283,600) (359,800)
Cash and cash equivalents at
start of period 163,600 7,900 537,800 463,100
Cash and cash equivalents at
end of period $254,200 $103,300 $254,200 $103,300
Supplemental disclosures -
cash paid for
Interest $26,400 $25,800 $55,400 $66,900
Taxes $ 0 $ 0 $ 0 $ 0
</TABLE>
See Accompanying Notes
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Page 6 of 9
ACTION PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Condensed consolidated financial statements
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all normal recurring adjustments
necessary to present fairly the financial position of Action Products
International, Inc. at September 30, 1998 and the results of its operations
and cash flows for the three and nine month periods ended September 30, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's report on Form 10-KSB
for the year ended December 31, 1997. The results of operations for the
period ended September 30, 1998 are not necessarily indicative of the
operating results for the full year.
2. Income per common share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, which is effective for the
periods ending after December 15, 1997. SFAS No. 128 replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share based upon the weighted average number of common shares
for the period.
3. Convertible Debt
At September 30, 1998, the Company had long-term debt payable to
shareholders, resulting primarily from working capital loans and the purchase
of the Company''s plant facility and real property in prior years, as
follows: unsecured promissory notes payable to related parties, bearing
interest at 9% per annum, monthly payments of interest only until September
1, 2002, with 24 monthly payments of principal and interest of $27,400 due
thereafter, convertible at any time in whole or in part at the lender''s
option after May 9, 1995, into common shares of the Company at $0.579 per
share. The Company has reserved, from its authorized but unused shares of
common stock, 1,036,300 shares for use in the event the long-term debt is
converted. During the third quarter, the Company issued warrants to purchase
1,036,300 shares at the same conversion price in exchange for the removal of
the convertibility feature of the debt. The remaining terms and features of
the debt are unchanged.
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Page 7 of 9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations:
Any statements contained in this discussion that are not historical facts are
forward-looking statements. It is possible that the assumptions made by
management for purposes of such statements may not materialize. Actual results
may differ materially from those projected or implied in any forward-looking
statements. Such statements may involve risks and uncertainties, including but
not limited to those relating to product demand, pricing, market acceptance, the
effect of economic conditions, and intellectual property rights and the outcome
of competitive products, risks in product development, the results of financing
efforts, the ability to complete transactions, and other risks identified in
this and the Company''s other Securities and Exchange Commission filings.
Three months ended September 30, 1998
Revenue increased again during the three month period ended September 30, 1998
to a third quarter record $1,764,800 in 1998 from the previous third quarter
high of $1,700,500 set in 1997. Stronger than expected sales from its new
proprietary lines contributed to the gain, particularly in light of foregone
sales of product lines divested in the fourth quarter of 1997. The third
quarter 1998 net income also improved to a new record of $156,400 versus
$132,600 for the 1997 comparable period due to the increases in sales and
continued growth in the gross margins.
Gross profit increased $42,600 to $824,300 from $781,700. Management attributes
its gross profitability strength to additional proprietary products,
divestitures of lower margin lines, and continued improvement of terms and
pricing with overseas vendors. Selling, General & Administrative Expenses
increased $136,900. Management attributes the increase in expenses to certain
sales and marketing expenditures, including additional salaries and commissions
connected with the Company''s strengthening of its marketing staff, sales force,
and outside sales representative organizations, as well as expenses related to
corporate development. Other income improved significantly to $92,600 due to
gains on the disposal of assets and the recognition of deferred revenue in
connection with the divestiture of certain product lines.
Nine months ended September 30, 1998
Record nine months revenue for the period ended September 30, 1998 of $4,846,300
in 1998 improved over the record set in the prior year of $4,654,500, up
$191,800. Management attributes the increase in net sales to the planning and
implementation of its focused strategy and stronger than expected results,
including improved selling systems and channels, broader distribution, sales
from its new proprietary lines, and the earlier availability of shippable
inventories. The nine months 1998 net income was $439,600 versus $303,600 in
1997, an improvement of 45%, due to the continued improvement of gross margins;
other income from gains on the disposal of assets and the recognition of
deferred revenue in connection with the divestiture of certain product lines;
and the increase in sales. The increase in sales is attributable in part to
significant merchandising and marketing efforts; sustained sales of its
continuing core of proprietary product lines; and a strengthened effort by sales
management to expand the sales force and broaden the market base.
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Page 8 of 9
Gross profit increased $252,800 to $2,322,000 from $2,069,200, up 12%. As a
percent of sales, gross profit improved again to 48% after the dramatic
improvement to 46% for the 1997 comparable period. Management attributes this
sustained improvement in gross profit percentage to additional proprietary
products, divestiture of lower margin lines, and continued improvement of terms
and pricing with overseas vendors. Selling, General & Administrative Expenses
for the nine months ended increased $324,400, or 19%. As previously discussed,
management attributes the increase in expenses to certain sales and marketing
expenditures, including additional salaries and commissions connected with the
Company''s strengthening of its marketing staff, sales force, and outside sales
representative organizations, as well as certain expenditures for corporate
development. Other Income (Expense) improved significantly to $145,500 for the
nine months ended September 30, 1998 compared to Other Income (Expense) of
($62,100) for the same 1997 period, due to gains on the disposal of assets, the
recognition of deferred revenue in connection with the divestiture of certain
product lines, and reductions in interest expense.
Financial Condition, Liquidity and Capital Resources
As of September 30, 1998, current assets were $3,116,000 compared to current
liabilities of $686,100 for a current ratio of 4.5:1, up from 2.9:1 at December
31, 1997. At September 30, 1998, working capital improved by $472,700 compared
to December 31, 1997.
Historically, the peak period of the Company's business cycle has been March
through August. Thus, accounts receivable and inventories were $1,121,800 and
$1,292,600, respectively, at September 30, 1998 compared to $720,000 and
$1,086,000, respectively, at December 31, 1997. The increase in receivables and
inventories are considered normal for the Company and reflect the increased
activity in the Company''s high volume period. Current liabilities decreased by
$334,000 due primarily to reduced draws on the Company''s line of credit.
Cash and cash equivalents were down $283,600 from December 31, 1997 but up
$90,600 from June 30, 1998. Operations provided cash flow of $85,300 for the
three months ended September 30, 1998 compared to cash flow used in operations
of $33,800 for the comparable period ended September 30, 1997. This positive
swing is due primarily to improved earnings before interest, taxes, depreciation
and amortization (EBITDA) and seasonal increases in inventory since June 30,
1998. Cash flow used in operations was $9,200 for the nine months ended
September 30, 1998 compared to $791,900 used in the comparable nine month period
ended September 30, 1997. The improvement is primarily due to better control of
seasonal increases in inventories associated with the Company''s peak period and
payments received on notes receivable.
Shareholders'' equity at September 30, 1998 increased during the nine months by
$453,500 to $3,668,200 due to earnings and the receipt of payments of stock
subscriptions from related parties.
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Page 9 of 9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Action Products International, Inc.
Date: November 12, 1998 By: /s/ Delton G. de Armas
Delton G. de Armas
Chief Financial Officer
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 254
<SECURITIES> 0
<RECEIVABLES> 1122
<ALLOWANCES> 0
<INVENTORY> 1293
<CURRENT-ASSETS> 3116
<PP&E> 1676
<DEPRECIATION> (799)
<TOTAL-ASSETS> 5344
<CURRENT-LIABILITIES> 686
<BONDS> 600
<COMMON> 2
0
0
<OTHER-SE> 3666
<TOTAL-LIABILITY-AND-EQUITY> 5344
<SALES> 4846
<TOTAL-REVENUES> 4846
<CGS> 2524
<TOTAL-COSTS> 2524
<OTHER-EXPENSES> 2028
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 440
<INCOME-TAX> 0
<INCOME-CONTINUING> 440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 440
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.16
</TABLE>
