<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1997Commission file number 0-13118
ACTION PRODUCTS INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
Florida 59-2095427
(State of incorporation) (IRS Employer Identification No.)
344 Cypress Road, Ocala, Florida 34472-3108
(Address of principal executive offices)
Registrant's telephone number, including area code
(352) 687-2202
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[ ]
State issuer's revenues for its most recent fiscal year: $ 5,864,300
The aggregate market value of the voting stock held by the non-affiliates of
the Registrant was $2,850,625 based on the average high and low bid price
reported March 25, 1998 (based on 912,200 shares).
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of March 25, 1998
Class Outstanding
Common Stock, $.001 1,624,900
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS:
(a) General Development of Business
Action Products International, Inc. (the "Company") began its operations in
1977 and subsequently incorporated in Florida in 1984. The Company
designs, manufactures, and markets toys and published products in a
creative portfolio of educationally-minded product lines. The Company's
products are sold primarily to toy stores, specialty retailers, education
outlets, museums, zoos, aquariums, theme parks, and attractions in the
United States and worldwide.
In 1996, a new CEO was named from within the Company. He and his newly
formed management team have transformed the Company into a manufacturer and
producer of toys and published products from its previous role as a toy and
book distributor. During the past fiscal year, the Company has expanded
its existing product lines, developed new proprietary products and entered
new distribution channels. The result has been a marked growth in gross
profit margins and the beginning of a balanced portfolio of product lines.
The Company has also recently announced its plans to pursue acquisitions in
the children's toy, publishing and software arenas.
The Company's focus on core product lines has created opportunities for the
divestiture of non-core product lines. On December 31, 1997, the Company
completed its sale of the Action Snacks(r) freeze-dried foods line to
American Outdoor Products, Inc. The total purchase price was $2,200,000,
including notes receivable, the aggregate of which is $1,850,000, and
$350,000 cash. Total cash and principal payments plus interest will total
approximately $3,000,000. The purchase price represents approximately
three times the annual sales of this product line. The Company intends to
use the proceeds from this transaction for the development and marketing of
the Company's core product lines.
(b) Description of Business Products
The Company sells its educational toy product lines under the name "Action
Products." The lines include figurines, Woodkits(tm), activity kits,
Imaginetics(tm), PowerBalls(tm), and other toy and gift items with a
strategic emphasis on space, dinosaurs, science and nature, and other non-
violent categories. The Company's products are derived from approximately
20 sources and are produced by outside manufacturing companies in the
United States, Mexico, Taiwan, Hong Kong and increasingly, China, and are
brought in directly by the Company as finished goods.
The Company publishes its line of educational books under the name "Action
Publishing(tm)." The line includes children's activity, coloring and
sticker books and CD-ROM's on topics such as nature, science, dinosaurs and
aerospace. Its books are produced both domestically and overseas.
<PAGE>
Customers
Management has focused its efforts on growing the Company's distribution
channels. The Company still currently sells to approximately 1,500 museum
stores and attractions throughout the United States and the world, a market
that served as the Company's niche for many years. While this niche market
provides a solid foundation for future growth, the Company is continually
expanding its distribution outside its established niche to toy stores,
bookstores, and other types of specialty retailers.
Customers obtained from these new markets emulate the mass market with
multiple-outlet volume buying. This results in larger individual orders of
a reduced number of SKU's (stock keeping units). In addition to expanding
into these new markets, management has begun implementing its plan to enter
mass market distribution. The Company is exploring various licensing
arrangements of high-recognition names providing the strategic leverage
needed to capture the mass market customer base. In addition, the
Company's announced strategy of pursuing acquisitions of other toy or
publishing companies may provide an entree into the mass market through
established channels of distribution.
The Company has customers in every state in the United States, as well as
the District of Columbia. The Company exports to more than 15 foreign
countries and regions including Europe, South and Central America, Canada,
Saudi Arabia, Japan, Hong Kong, Korea, New Zealand, and Australia. No
single customer accounts for more than 6% of sales and no single product
accounts for more than 2% of sales.
Marketing and Sales
The Company markets its product lines through its full color catalogs,
newsletters, trade publications, client visits, the Internet, and telephone
contact and solicitation. The Company also exhibits its product lines and
services at toy, gift, museum, book, school supply, and other trade shows,
as well as showrooms located across the country staffed by manufacturers'
sales representatives. The Company capitalizes on strategic advertising,
product placement and package design to emphasize its own proprietary
product lines and trade names.
A network of manufacturers' representative companies ("rep companies")
provides the Company with national sales coverage. This network includes
toy reps, book reps, and educational dealers and distributors and is
supplemented by the Company's in-house sales staff. The Company employs
sales professionals to sell its product lines directly to certain house
accounts by telephone, visits, correspondence, trade shows, and other
personal contact. This combined sales method provides the Company with
ongoing customer contact, allowing the Company to identify new markets
quickly and to respond promptly to individual customer needs. The
Company's customer service representatives offer opportunities for sales
increases in assisting the rep companies and their customer base with
customer support and the various administrative tasks involved in new and
recurring orders.
The Company's catalogs segregate the Company's toy and published lines.
The catalogs are designed to permit buyers to select and purchase products
and play an important role in the generation of new customers and leads.
To supplement its printed catalogs, the Company recently established an
Internet-accessible "online" catalog as an added resource for its growing
customer base. Customers are encouraged to place orders from the catalogs
through the Company's toll-free telephone number, toll-free fax, and
password protected online ordering.
<PAGE>
International Sales and Manufacturing
Revenues from the Company's international sales represented approximately
3.3% and 5.8% of total revenues in 1997 and 1996, respectively. Product
lines marketed internationally are generally the same as those marketed
domestically and generally sold internationally directly to retail stores.
The Company recently added a South and Central American distributor and
plans to achieve wider distribution through the addition of distributors in
Europe and Japan. The Company's revenues from international sales
represent a limited percentage of total revenues and therefore do not
expose the Company to significant risk. The Company conducts its
international sales in U.S. dollars, and accordingly receives payment for
such sales in U.S. dollars. The Company also purchases its imported
products in U.S. dollars.
In general, international sales are subject to inherent risks, including,
but not limited to, transportation delays and interruptions, political and
economic disruptions, currency risks, the imposition of tariffs and import
and export controls, changes in government policies, cultural differences
affecting product demands and the burdens of complying with a variety of
foreign laws. While the Company to date has not experienced any material
adverse effect due to such risks, there can be no assurances that such
events will not occur in the future and possibly result in increases in
costs and delays of, or interference with, product deliveries resulting in
losses of sales and good will. The Company believes that it experiences
minimal currency risk because all foreign transactions are conducted using
U.S. dollars.
Many of the Company's products are manufactured outside of the United
States, primarily in Hong Kong, Taiwan, Mexico and China and in most cases
are directly imported by the Company. The implementation of the General
Agreement on Tariffs and Trade in 1996 reduced or eliminated customs duties
on many products imported by the Company. The Company believes that the
manufacturing capacity of its facilities and the supply of completed
products which it purchases from unaffiliated manufacturers is adequate to
meet the foreseeable demand for the product lines which it markets. Over a
period of time, the Company's reliance on external sources of manufacturing
can be shifted to alternative sources of supply should such change be
necessary. However, if the Company is prevented from obtaining products
from a substantial number of its current Far East suppliers due to
political, labor or other factors beyond its control, the Company's
operations would be disrupted while alternative sources of products were
secured. The imposition of trade sanctions by the United States against a
class of products imported by the Company , or loss of "most favored nation
trading status" by China, could significantly increase the cost of the
Company's products imported into the United States.
Competition
The Company competes against toy and educational manufacturers and
importers, distributors and book publishers. The Company's ability to
compete successfully is based upon its core competencies, including its
ability to offer a wide range of specialized "theme" products; unique
proprietary product lines; "same-day" shipment on most domestic orders; and
its regional independent reps, in-house sales professionals and customer
service representatives who maintain regular and close contact with the
Company's customers. The Company believes its reputation, service, and
customer orientation enable it to build and maintain customer loyalty.
The Company believes that it can maintain and expand its customer base due
to its wide range of product lines, its customer service abilities, and its
experience in the industry, as well as its recent emphasis on the
development of proprietary products and packaging. Management is improving
its distribution channel strategy and its representation to traditional toy
outlets. The Company has maintained focused efforts towards the
establishment and extension of proprietary product lines and is strongly
committed to maintaining and enhancing its advantages in its markets by
continually growing and improving the product lines and services it offers.
These services include "value-added" merchandising such as packaging and
display materials intended to assist customers in the sale of the Company's
products.
<PAGE>
Government Regulation
The Company's toys are subject to the provisions of the Consumer Product
Safety Act, the Federal Hazardous Substances Act and the Flammable Fabrics
Act, and the regulations promulgated thereunder. The Consumer Product
Safety Act and the Federal Hazardous Substances Act enable the Consumer
Product Safety Commission (the "CPSC") to exclude from the market consumer
products that fail to comply with applicable product safety regulations or
otherwise create a substantial risk of injury, and the articles that
contain excessive amounts of a banned hazardous substance. The Flammable
Fabrics Act enables the CPSC to regulate and enforce flammability standards
for fabrics used in consumer products. The CPSC may also require the
repurchase by the manufacturer of articles which are banned. Similar laws
exist in some states and cities and in various international markets.
All of the Company's products are rated according to the EN-71 safety
protocol adopted by the European Community and the Company's products will
be certified for the Japanese Toy Association ("JTA") safety criteria for
consumer products once the JTA standards go completely into effect in 1998.
The Company also voluntarily complies with certain standards established by
the American Society of Testing and Materials ("ASTM"). Although
compliance with this much stricter standard is completely at the discretion
of the manufacturer, it is the policy of the Company that its toys meet
this superior level of safety.
The Company maintains a quality control program to ensure product safety
compliance with the various federal, state and international requirements.
The Company's membership in the Toy Manufacturer's Association ("TMA")
provides an important resource to remain informed of the latest safety
guidelines.
Personnel
As of December 31, 1997, the Company had 33 full-time employees, including
four executive positions, thirteen sales positions, and sixteen other
positions to fulfill administrative responsibilities in marketing, product
development, accounting, logistics, etc. The employees are not represented
by a union. In 1997, the Company offered an improved benefits package to
its employees including health and life insurance plans, an Employee Stock
Ownership Plan (ESOP), a 401(k) plan, and employee contributed IRC Section
125 health plan. Employees are required to sign a non-compete agreement
prohibiting direct competition with the Company for a one-year period
following termination of their employment. Any personnel-related
agreements deemed significant by management have been included as exhibits.
The Company believes its employee relations are good.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY:
The Company's headquarters are located in a 35,000 square foot building on
2.5 acres which it owns in an industrial park in Ocala, Florida. The
property is currently unencumbered by lien or mortgage and is in usable and
sellable condition. While management considers the building adequate to
house its operations for the foreseeable future, the Company leased a
limited amount of office space in Orlando, Florida in 1997 which is staffed
by its marketing and product development personnel.
ITEM 3. LEGAL PROCEEDINGS:
The Company is not a party to any material litigation, and is not aware of
any pending or threatened litigation against the company that could have a
material adverse effect on the Company's business operating results or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
During the quarter ended December 31, 1997, there were no matters submitted
to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
The Company's Common Stock is traded on The NASDAQ SmallCap Market under
the respective symbol APII. The number of holders on record of the
Company's Common Stock as of March 25, 1998, was approximately 1,250.
The high and low bid quotations for each quarter of the fiscal years ended
December 31, 1996 and 1997 are follows:
<TABLE>
<CAPTION>
Quarter Ended: High Low
Bid Bid
<S> <C> <C> <C>
March 31, 1996 $3.3125 $2.875
June 30, 1996 4.25 3
September 30, 1996 3.125 2.75
December 31, 1996 2.8125 2.0625
March 31, 1997 2.188 2
June 30, 1997 2.188 2
September 30, 1997 3.188 2.5
December 31, 1997 2.375 2.375
</TABLE>
The quotations represent prices between dealers in securities; they do not
include retail mark ups, mark downs, or commissions and do not necessarily
represent actual transactions.
Dividend Policy
The Company paid an 8% stock dividend in August 1995. The Company has
previously distributed warrants as dividends, but has not paid any cash
dividends. Any payment of cash dividends in the future will be at the
discretion of the Board of Directors and will depend on, among other
things, the Company's future earnings, financial condition, any contractual
restrictions, capital and other cash requirements, and general business
conditions.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
General
Action Products International, Inc. is positioned for growth. New
management has focused on success as a toy and publishing company and
continues to lead the Company away from being a distributor of other
manufacturers' toy and published products towards the establishment and
distribution of products and brands of its own manufacture. The result has
been marked growth in gross profit margins, increased distribution
channels, and the beginnings of a balanced portfolio of product lines.
While still improving margins, management is now emphasizing the growth of
its distribution channels and resultant sales, as well as growing and
improving its product offerings.
Growth of Margins - The Company experienced significant increases in its
gross margins over prior years. The Company's margins had historically
remained in the mid-thirties, but dramatically increased to better than
forty-six percent this year. This increase was anticipated and comes as a
result of various initiatives. The first was the establishment and growth
of proprietary product lines. The shrinking margins of the Company as a
toy and book distributor are a stark contrast to the improved margins
experienced by the Company as a manufacturer of proprietary products.
Secondly, the Company has placed a strong emphasis on improving its terms,
pricing and relationships with its overseas vendors. The result has been
lower costs and improved lead and response times. The Company expects
still further improvement in its margins through added recognition of its
products, continued improvement in its sourcing, and the divestitures of
its lower-margin product lines.
Growth of Distribution and Sales - In addition to its margin growth, the
Company also experienced growth in its sales and distribution. This is
particularly important in light of the many "lost" sales resulting from the
elimination of previously distributed product lines from other
manufacturers. The year ended December 31, 1997 represents the fourth
consecutive year of increased sales. During the year, the Company saw five
record sales months, including its all-time best month, and three
consecutive record sales quarters, including its all-time best quarter.
During the latter part of the year, the Company recruited the sales manager
from one of its chief competitors. His experience and focus is on vastly
improving and increasing distribution through specialty retailers and
traditional toy outlets.
Growth of Product Lines - The development and expansion of the Company's
product lines is a key step in positioning the Company for growth. Through
the development of a balanced portfolio of brands and product lines
diversified among end-users by gender, age groups, and price points, the
Company expects to continue the growth trends of sales and margin. For
example, upon its initial introduction in mid-1997, the Company's new space
figurine line experienced overwhelming success. Drawing from the
authenticity of NASA specifications, the Company's space figurines are true
to-life replicas with lasting marketability. Within thirty days of
introduction, the line rocketed to the top of the Company's best selling
product list. In 1997 the Company also successfully introduced a CD-ROM
and book package licensed by World Book.
The Company seeks to capitalize on the successes of its previously
introduced lines through both the extension of those lines and the creation
and introduction of new and unique products and lines. A heightened
awareness of and pursuit of acquisition candidates will broaden the focus
on product development. Management hopes to capitalize on the strength of
the Company's financial statements, customer base, distribution channels,
and product mix to further enhance shareholder value through both internal
growth and the expanding possibilities of growth by merger and acquisition.
Cautionary Statements
Any statements that are not historical facts contained in this discussion
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.
<PAGE>
Results of Operations
The financial data included in the following table has been selected by the
Company and has been derived from the financial statements. The following
financial data should be read in conjunction with the audited financial
statements and related notes included elsewhere herein.
Twelve (12) Months Ended December 31,
1997 1996
Net Sales $5,864,300 $5,574,700
Gross Profit 2,720,100 1,923,300
Selling, General &
Administrative Expenses 2,490,200 2,226,200
Net Income (loss) 635,600 (317,900)
Net Income (loss) per Common Share 0.40 (0.21)
As of December 31,
1997 1996
Current Assets 2,977,400 2,432,800
Total Assets 5,325,900 3,872,300
Current Liabilities 1,020,200 768,200
Long Term Liabilities 1,091,000 600,000
Stockholders' Equity 3,214,700 2,504,100
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Net sales increased to a record $5,864,300 in 1997 from $5,574,700 in 1996,
up $289,600. The increase comes as a result of management's efforts to
grow its distribution channels and the successful introduction of various
proprietary lines.
Gross profit grew substantially to $2,720,100, up $796,800, from $1,923,300
in 1996. As a percentage of sales, gross profit improved to 46.4% compared
to 34.5% in the prior year. Management anticipated these results due to
its subsequent focus on product and product-packaging improvements in 1996
and 1995, as well as the introduction of successful proprietary lines.
Selling, General and Administrative (SG&A) expenses were $2,490,200 and
$2,226,200 in 1997 and 1996, respectively. As a percentage of sales, SG&A
expenses were 42.5% and 39.9% in 1997 and 1996, respectively. The increase
in SG&A expenses is due primarily to increased selling expenses including
marketing efforts, growth of the distribution channels, commissions to the
growing network of toy and book reps, as well as added product development
expenses and increased depreciation and amortization expenses. SG&A for
the year 1996 included certain product development and market repositioning
expenses totaling $491,700. This amount was segregated on the financial
statements due to its material nature when taken as a whole. These charges
resulted from management's decision to reposition the Company from toy and
book distributor to toy and book manufacturer. The Company continues to
incur certain positioning expenses but does not expect the future
aggregated expenses to be material and has accordingly included them in
SG&A.
Interest expense related to current and long term debt was $91,100 and
$55,500 in 1997 and 1996, respectively. The increase is due to additional
activity relating to the line of credit. (See "Liquidity and Capital
Resources")
Interest income was $24,600 and $12,500 in 1997 and 1996, respectively, and
related primarily to interest earned on temporary cash investments.
Other income has historically been insignificant and represented less than
one fourth of one percent of net sales in each of the last two years.
During 1997, the Company sold or otherwise disposed of certain assets,
primarily associated with its snack food and certain silk screen product
lines, resulting in a gain of $771,800.
Liquidity and Capital Resources
As of December 31, 1997, current assets were $2,977,400 compared to current
liabilities of $1,020,200 for a current ratio of approximately 3 to 1.
The Company had cash flows used in operations of $698,300 due in part to
the disposition of assets, because the underlying transaction was primarily
non-cash in the current year. Total current assets increased by $544,600
and total assets increased by $1,453,600 primarily due to the addition of
notes receivable related to the sale of assets associated with the
Company's food line. Accounts receivable increased by $202,000 due in part
to increased selling activities in the fourth quarter. Inventories
decreased by $118,800 to $1,086,000 at December 31, 1997 due to the sale of
certain product line inventories, reserve adjustments, and the lower costs
of inventory purchases. Cash and cash equivalents were up by $74,700 and
prepaid and other current assets were down $188,300 due to the timing of
cash outlays in the prior year. Current liabilities were up $252,000 due
primarily to borrowings against the Company's revolving line of credit and
income taxes payable.
In connection with the sale of assets during December 1997, the Company
received notes aggregating $1,850,000. The notes bear interest at a rate
approximating ten percent and provide for principal and interest payments
of approximately $400,000 per year with the final payment due in March
2004. As collateral for the notes, the Company has obtained liens on
certain real estate, mortgage receivables, life insurance policies and
other assets of the purchaser. The Company intends to use the proceeds
from this transaction for the development and marketing of the Company's
core product lines and the retirement of short-term debt.
As of December 31, 1997, the Company's only long-term debt was a
convertible promissory note of $600,000 owed to a related party. This note
bears interest at 9% per annum, payable monthly, and is convertible into
approximately 1,036,300 shares of the Company's Common Stock. Other long
term liabilities comprised of deferred revenue of $225,000, associated with
a non-compete agreement, and deferred income taxes of $266,000, associated
with the gain, both in connection with the sale of certain food line
assets.
During the year ended December 31, 1997, the Company received $75,000 from
the collection of stock subscription receivables from related parties. In
addition, the Company had a stock subscription receivable of approximately
$113,000 due from a related party at year-end.
The Company has established a revolving line of credit with a commercial
bank that is collateralized by accounts receivable and inventory. The
borrowing limit as of December 31, 1997 was $700,000, on which the Company
had borrowed $591,800. The Company subsequently paid the line to zero and
satisfied its resting covenant.
During 1997, the Company recorded normal depreciation and amortization of
its fixed assets of approximately $107,000. In addition, the Company
invested approximately $70,000 and $196,000 in the acquisition of new
assets in 1997 and 1996, respectively. The Company also disposed of assets
with a book value of approximately $104,000. Accordingly, net property,
plant and equipment decreased by approximately $141,000.
Shareholders' equity at December 31, 1997 increased by approximately
$710,600 to $3,214,700. Shareholder equity increased due to net income and
the issuance of common stock from stock options.
Other Matters
The Company's product line historically has not been significantly affected
by inflation and inflation has not had a significant effect on gross
earnings.
The Company's sales have historically been seasonal in nature, reflecting
peak sales in the second quarter and slower sales in the fourth quarter.
Due to changes and improvements in the Company's customer base, the impact
of the seasonal nature of the Company's sales is expected to diminish.
Due to the structure of the Company's internal computer system and
database, certain modifications will need to be made to accommodate the
year 2000. However, the Company does not anticipate costs of greater than
$100,000 in connection with these changes.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS:
Financial statements and schedules are submitted in Items 13(1) and (2) on
this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE:
Not applicable.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT:
MANAGEMENT/BOARD OF DIRECTORS
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Ronald S. Kaplan 32 Chair of the Board of Directors,
President, Chief Executive Officer
Richard Gordon, Jr. 68 Director, Chair of Nominating
Committee
David A. Carter 47 Director, Chair of Audit
Committee
Judith Kaplan 59 Director
Warren Kaplan 60 Director
Pablo Savetman 32 Vice President, Director of Sales
Delton G. de Armas 27 Chief Financial Officer, Secretary
Robert Zumbahlen 41 Treasurer, Purchasing and
Inventory Control Manager
</TABLE>
Ronald Kaplan, Director since 1991, was appointed Chair of the Board on
January 1, 1996. He was President ('93-present), Chief Executive Officer
('96-present), Chief Operating Officer ('93-present), and Executive Vice
President ('91-'93) of the Company. He is the son of Warren Kaplan and
Judith Kaplan.
Richard Gordon, Jr., Director since April 1996, is a former Apollo and
Gemini Astronaut and has served both as director and officer with other
publicly traded companies, including Executive Vice President of the
National Football League's New Orleans Saints, Board Director of Scott
Science and Technology, Inc., President/CEO of Astro Sciences Corporation,
and President of Space Age America, Inc. Mr. Gordon chairs the Nominating
Committee.
David A. Carter, Director since February of 1998, Mr. Carter has managed a
legal practice under the name David A. Carter, P.A. since October of 1990.
The firm's client base and expertise have emphasis in Securities, General
Corporate and Commercial Litigation. He holds a Bachelor of Arts degree in
Finance from the University of South Florida and a Juris Doctor from Drake
University and has more than 16 years experience in Banking and General
Corporate law. Mr. Carter chairs the Audit Committee.
Judith Kaplan, Company Founder and Director since 1981, served as Chair of
the Board of Directors of the Company since its formation in 1981 until
December 31, 1995. Ms. Kaplan was President ('81-'87), Secretary ('81-
present), Chief Executive Officer ('81-'95), Chief Financial Officer ('81-
98) and Treasurer ('81-'91) of the Company. She is the wife of Warren
Kaplan and mother of Ronald Kaplan.
Warren Kaplan, Director since 1987, was President of the Company from 1987
until he retired in 1994. He is the husband of Judith Kaplan and father of
Ronald Kaplan.
Pablo Savetman, Vice President, earned an Associate degree in Business
Management from St. Johns University in New York. His experience previous
to Action Products focused on the sales and distribution of consumer
products primarily in international markets and included his position as
International Sales Manager for Cowboy Brothers Trading Corp from 1993 to
1994, and several years preceding as a sales manager for Juno Export
Trading. Mr. Savetman joined Action Products in April of 1994 and is
currently the Company's Vice President of Sales.
Delton G. de Armas, Chief Financial Officer and Secretary, is a graduate
of the University of Central Florida in Orlando, Florida with Bachelor of
Science degrees in Accounting and Finance. Mr. de Armas joined Action
Products in September of 1995. He was previously with the Certified Public
Accounting firm of Lovelace, Roby & Company, P.A.
Robert Zumbahlen has been Treasurer since 1991. He is a graduate of
Bentley College in Waltham, Massachusetts (1979) with a Bachelor of Science
in accounting. Mr. Zumbahlen joined Action Products in 1984 and is
currently the Company's Purchasing and Inventory Control Manager.
Nominating Committee - Richard Gordon, Chair; Warren Kaplan; Ron Kaplan
Audit Committee - David Carter, Chair; Richard Gordon; Judith Kaplan;
Delton de Armas
<PAGE>
PART III
ITEM 10. EXECUTIVE COMPENSATION:
The following table sets forth the aggregate compensation paid to Ronald
Kaplan (the "Named Executive Officer") by the Company. None of the other
executive officers of the Company were paid a total annual salary and
bonuses of $100,000 or more. Except as set forth in the table below, no
bonuses or other compensation was paid during the 1997, 1996 or 1995 fiscal
years.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
<S> <C> <C> <C> <C>
Other
Name and Annual Restricted
Principal Salary Bonus Compensation
Position Year ($) ($) ($)(1)
Ronald 1997 $75,000 0 $6,000
Kaplan 1996 $73,370 0 $6,000
CEO 1995 $54,218 0 $6,000
____________
(1)Includes value of use of automobile, vacation pay, sick pay.
</TABLE>
Ron Kaplan was promoted to Chief Executive Officer and Chairman of the
Board of Directors as of January 1, 1996 and continues to serve as
President of the Company. Mr. Kaplan's annual salary is $75,000 plus the
use of an automobile.
Option Grants in Last Fiscal Year
The Company did not grant any options to the Named Executive during the
fiscal year ended December 31, 1997.
Aggregated Option Exercises and Year End Option Values in Last Fiscal Year
The following table sets forth the aggregate of options exercised in the
year ended December 31, 1997 and the value of options held at December 31,
1997.
<TABLE>
<CAPTION>
Option Exercises/Option Values
Number of
Securites
Underlying
Unexercised Value of Unexercised
Shares Options at In-the-money Options
Acquired on Value Fiscal Year End At Fiscal Year End
Exercise Realized Exercisable Exercisable
Name (#) ($) /Unexercisable /Unexercisable
<S> <C> <C> <C> <C>
Ronald Kaplan - - 343,000/0 $212,625/0(1)
(1) The dollar value was calculated by determining the difference
between the fair market value at fiscal year-end of the Common
Stock underlying the options and the exercise prices of the
options. The last sale price of a share of the Company's Common
Stock on December 31, 1997 as reported by Nasdaq was $2.375.
</TABLE>
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of the Company's outstanding common stock to file with the Securities
and Exchange Commission (the "SEC") and NASDAQ initial reports of ownership
and reports of changes in ownership of common stock. Such persons are
required by the SEC regulations to furnish the Company with copies of all
such reports they file. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a)
filing requirements applicable to officers, directors and greater than ten
percent (10%) beneficial owners were complied with.
Director Compensation
Directors who are full-time employees of the Company receive no additional
compensation for services rendered as members of the Company's Board or any
committee thereof. Directors who are not full-time employees of the
Company receive $2,500 per year, $500 for each Board meeting attended in
person, and $250 for each Company Board meeting attended telephonically. In
addition, the Company grants incentive stock options with an exercise price
greater than the market value of the underlying stock to the directors for
services rendered while serving on the Board.
Employee Stock Ownership Plan
On April 23, 1984, the Company adopted an Employee Stock Ownership Plan
("ESOP"). The ESOP qualifies for special tax benefits under the Internal
Revenue Code. Under the ESOP, the Company, at the discretion of its Board
of Directors, may make an annual contribution to a trust which purchases
the Company's stock from the Company for the benefit of the Company's
employees who have completed at least 1,000 hours of work during the fiscal
year. Employer contributions under the ESOP are allocated to each
employee's account on a pro-rata basis according to the total compensation
paid to, and the number of years of service by, all eligible employees. An
employee becomes 100% vested in the ESOP following 5 years of plan
eligibility. As of December 31, 1997, there were 28,215 shares of Common
Stock held by the Company's ESOP trust.
401(k) Plan
Effective October 3, 1986, the Company adopted a Voluntary 401(k) Plan.
All employees are eligible for the plan. Employees who have worked for the
Company 18 months are currently eligible for a 34% match of their
subsequent contributions. Benefits are determined annually. The lowest
66% of paid employees may contribute the lesser of 15% of their salary or
$9,500. The top 1/3 of employees cannot contribute a percentage greater
than 15% of their compensation or 150% the of average contribution of the
lowest 66% of paid employees to a maximum of $9,500 or the applicable
maximum allowed by the Internal Revenue Code. Employer contributions vest
within three months and all contributions are held in individual employee
accounts with an outside financial institution.
Stock Option Plan
To increase the officers', key employees' and consultants' interest in the
Company and to align more closely their interests with the interests of the
Company's shareholders, the Board of Directors, adopted a stock option plan
called the "1996 Stock Option Plan" (the "Plan") on May 28, 1996. The
Board of Directors has determined that the Plan will work and believes that
the Plan is in the Company's best interests.
Under the Plan, the Company has reserved an aggregate of 900,000 shares of
Common Stock for issuance pursuant to options granted under the Plan ("Plan
Options"). Plan Options are either options qualifying as incentive stock
options ("Incentive Options") or options that do not qualify ("Non-
Qualified Options"). Any Incentive Option granted under the Plan must
provide for an exercise price of not less than 100% of the fair market
value of the underlying shares on the date of such grant. The exercise
price of Non-Qualified Options shall be determined by the Board of
Directors or the Committee but shall in no event be less than 5% of the
fair market value of the underlying shares on the date of the grant. As of
December 31, 1997, there were 509,000 options existing under the plan.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The following table sets forth information with respect to the number of
shares of Common Stock beneficially owned by (i) each director of the
Company, (ii) the executive officer named in the Summary Compensation
Table, (iii) all directors and officers as a group and (iv) each
shareholder known by the Company to be a beneficial owner of more than 5%
of the Company's common stock as of March 25, 1998. Except as otherwise
indicated, each of the shareholders listed below has sole voting and
investment power over the shares beneficially owned and the address of each
beneficial owner is c/o Action Products International, Inc., 344 Cypress
Road, Ocala, Florida 34472-3108. As of March 25, 1998, there were issued
and outstanding 1,624,926 shares of Common Stock.
<PAGE>
<TABLE>
<CAPTION>
Table of Beneficial Ownership
Amount and
Nature of
Name and Title Beneficial Percent
Address of Class Ownership of Class
<S> <C> <C> <C>
Ronald S. Kaplan Common 364,127 (1) 18.5%
Judith Kaplan Common 1,026,302 (2) 52.9%
Warren Kaplan Common 1,026,302 (3) 52.9%
David A. Carter Common 1,000 0.1%
Richard Gordon, Jr. Common 20,000 (4) 0.6%
All Directors and
Officers as a Group
(8 persons, Directors
and %5 owners shown) Common 1,509,912 (5) 62.9%
___________________
(1) Includes immediately exercisable options to purchase 243,000 shares at $1.38
per share and 100,000 shares at $3.50 per share. Does not include
approximately 1,036,300 shares of Common Stock which may be issued upon
conversion of certain convertible promissory notes held by Ronald S. Kaplan
and Elissa Kaplan.
(2) Includes 28,215 shares held as Trustee of the Company's Employee Stock
Ownership Plan Trust and immediately exercisable options to purchase 58,000
shares at $1.38 per share and 100,000 shares at $3.50 per share. Also
includes 338,875 shares held by her husband, and of which Ms. Kaplan
disclaims beneficial ownership.
(3) Includes immediately exercisable options to purchase 58,000 share at $1.38
per share and 100,000 shares at $3.50 per share. Also includes 28,215
shares held as Trustee of the Company's Employee Stock Ownership Plan Trust
and 343,212 shares owned by his wife, and of which Mr. Kaplan disclaims
beneficial ownership.
(4) Includes immediately exercisable options to purchase 20,000 shares at $3.50
per share.
(5) The 1,026,302 shares of Common Stock owned by Judith Kaplan and Warren
Kaplan referred to in footnotes 2 and 3 are counted only once in calculating
the total in order to avoid a misleading total.
</TABLE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
As of December 31, 1996, the Company owed $600,000 to Ronald S. Kaplan and
Elissa Kaplan in the amounts of $480,000 and $120,000, respectively, on
five-year convertible promissory notes. These notes bear interest at 9%
per annum, payable monthly, and are convertible into an aggregate of
approximately 1,036,300 shares of the Company's Common Stock.
In connection with stock options exercised during the year, there were
stock subscriptions receivable from related parties of $113,200 as of
December 31, 1997.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheet - December 31, 1997
Statements of Operations - Years ended December 31, 1997 and 1996
Statements of Changes in Stockholders' Equity - Years ended
December 31, 1997 and 1996
Statements of Cash Flows - Years ended December 31, 1997 and 1996
Notes to Financial Statements - Years ended December 31,
1997 and 1996
2. Financial Statement Schedules
None.
3. Exhibits
Exhibit No.
(3) Articles of Incorporation and By-Laws filed as an
Exhibit to Form 10-K filed April 12, 1988
(10) Material Contracts
(a) Employee Stock Ownership Plan filed as an Exhibit to
the Company's Registration Statement on Form S-18, dated April
23, 1984, at pages 154-208
(b) Incentive Stock Option Plan filed as an Exhibit to the
Company's Registration Statement on Form S-18 dated September
25, 1984, at pages 210-220
(c) 401(k) Plan dated October 3, 1986, filed as an Exhibit
to Form 10-K filed August 15, 1987
(d) Convertible Promissory Notes dated August 4, 1994 to
Ronald S. Kaplan and Elissa Kaplan filed as an Exhibit to Form
10-KSB filed February 21, 1995.
(e) Amendment to Employee Stock Ownership Plan dated
February 8, 1988, filed as an Exhibit to Form 10-K filed March
31, 1989
(f) Amendment to Employee Stock Ownership Plan dated March
10, 1989, filed as an Exhibit to Form 10-K filed March 31,
1989
(11) Statement re: computation of per share earnings
(27) Financial data schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated December 31, 1997 was filed with the SEC
on February 26, 1998 to announce the sale of the Action Snacks(r) food
product lines. The Current Report included pro forma financial information
about the effects of the disposition, with a balance sheet as of September
30, 1997 and an income statement for the period ending September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Action Products International, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
ACTION PRODUCTS INTERNATIONAL, INC.
a Florida corporation
Date: March 30, 1998 By: /s/ Ronald S. Kaplan
Ronald S. Kaplan,
Chairman of the Board,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Ronald S. Kaplan Chairman of the Board/ March 30, 1998
Ronald S. Kaplan President/Chief Executive
Officer/ Director
/s/ Delton G. de Armas Chief Financial Offcer/ March 30, 1998
Delton G. de Armas Secretary
ACTION PRODUCTS INTERNATIONAL, INC.
FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
<PAGE>
C O N T E N T S
_______
Page
Number
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance Sheet F-2
Statements of Operations F-3
Statements of Changes in Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Action Products International, Inc.
Ocala, Florida
We have audited the accompanying balance sheet of Action Products International,
Inc. as of December 31, 1997, and the related statements of operations, changes
in shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of Action Products International,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
MOORE STEPHENS LOVELACE, P.L.
Certified Public Accountants
Orlando, Florida
January 29, 1998
F-1
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
BALANCE SHEET
December 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 537,800
Accounts receivable, net of an allowance
for doubtful accounts of $25,500 720,000
Notes receivable 575,000
Inventories, net 1,086,000
Prepaid expenses and other assets 58,600
TOTAL CURRENT ASSETS 2,977,400
PROPERTY, PLANT AND EQUIPMENT
Land 67,400
Building and building improvements 993,000
Equipment 462,100
Furniture and fixtures 119,600
1,642,100
Less accumulated depreciation
and amortization (718,700)
NET PROPERTY, PLANT AND EQUIPMENT 923,400
NOTES RECEIVABLE 1,275,000
OTHER ASSETS 150,100
TOTAL ASSETS $5,325,900
The accompanying notes are an integral part of the financial statements.
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 97,700
Accrued expenses 167,700
Accrued payroll and related 51,000
Borrowings under line of credit 591,800
Deferred revenue 75,000
Income tax payable 37,000
TOTAL CURRENT LIABILITIES 1,020,200
NOTES PAYABLE TO SHAREHOLDERS 600,000
DEFERRED INCOME TAXES 266,000
DEFERRED REVENUE 225,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $.001 par value; 7,500,000
shares authorized; 1,624,900 shares issued
and outstanding 1,600
Additional paid-in capital 3,008,300
Retained earnings 318,000
Stock subscription receivable (113,200)
TOTAL SHAREHOLDERS' EQUITY 3,214,700
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,325,900
F-2
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31,
1997 1996
NET SALES $5,864,300 $5,574,700
COST OF SALES 3,144,200 3,651,400
GROSS PROFIT 2,720,100 1,923,300
OPERATING EXPENSES
Selling 1,040,100 775,400
General and administrative 1,450,100 1,450,800
2,490,200 2,226,200
INCOME (LOSS) FROM OPERATIONS 229,900 (302,900)
OTHER INCOME (EXPENSE)
Interest expense (91,100) (55,500)
Gain on disposition of assets 771,800 -
Interest income 24,600 12,500
Other income 3,400 7,000
708,700 (36,000)
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES 938,600 (338,900)
PROVISION (BENEFIT) FOR INCOME TAXES
Current 37,000 (21,000)
Deferred 266,000 -
303,000 (21,000)
NET INCOME (LOSS) $ 635,600 $(317,900)
INCOME (LOSS) PER SHARE
Basic $ 0.40 $ (0.21)
Diluted $ 0.25 $ (0.21)
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITI RETAINED STOCK TOTAL
ONAL EARNINGS
$.001 PAR PAID- (ACCUMULAT SUBSCRI SHAREHO
VALUE IN ED PTION LDERS'
SHARE AMOUN CAPITA DEFICIT) RECEIVA EQUITY
S T L BLE
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 1,499,900 $1,500 $2,829,200 $ 300 $(277,000) $2,554,000
31, 1995
COLLECTION OF STOCK - - - - 268,000 268,000
SUBCRIPTIONS
ISSUANCE OF COMMON 50,000 - 75,000 - (75,000) -
SHARES ON EXERCISE
OF OPTIONS
NET LOSS - - - (317,900) - (317,900)
BALANCE - DECEMBER 1,549,900 $1,500 $2,904,200 ($317,600)($84,000)$2,504,100
31, 1996
COLLECTION OF STOCK - - - - 75,000 75,000
SUBCRIPTIONS
ISSUANCE OF COMMON
SHARES ON
EXERCISE OF OPTIONS 75,000 100 104,100 - (104,200) -
NET INCOME - - - 635,600 - 635,600
BALANCE - DECEMBER 1,624,900 $1,600 $3,008,300 $318,000 ($113,200) $3,214,700
31, 1997
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 635,600 $ (317,900)
Adjustments to reconcile net
income (loss) to net cash
used in operating activities
Depreciation 107,900 110,400
Amortization 136,200 67,300
Deferred income tax benefit 266,000 -
Provision for bad debts - 22,000
Provision for Product development and
market repositioning expense - 491,700
(Gain) loss on disposal of fixed assets (771,800) 600
Changes in:
Accounts receivable (224,000) 14,900
Inventories (616,600) 106,500
Prepaid expenses and
other current assets 47,900 (360,300)
Income taxes refundable 21,000 (21,000)
Other assets (128,600) (511,000)
Accounts payable (193,300) (88,400)
Accrued expenses (15,600) 112,400
Income taxes payable 37,000 (11,100)
NET CASH USED IN OPERATING ACTIVITIES (698,300) (383,900)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant
and equipment (68,800) (196,100)
Proceeds from sale of assets 350,000 -
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES 281,200 (196,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Collection of stock
subscriptions receivable 75,000 268,000
Net proceeds from borrowings
under line of credit 416,800 175,000
NET CASH PROVIDED BY FINANCING ACTIVITIES 491,800 443,000
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 74,700 (137,000)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 463,100 600,100
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 537,800 $ 463,100
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Action Products International, Inc. (the Company) is engaged in the
design, manufacture and sale of toys, books, and other educational and
entertaining products. The Company also sells promotional products.
The Company's products are wholesaled worldwide to educational and
leisure industry retailers.
Cash and Cash Equivalents
For financial presentation purposes, the Company considers short-term,
highly liquid investments with original maturities of three months or
less to be cash equivalents.
Inventories
Inventories, which consist of finished goods purchased for resale, are
stated at lower of cost (determined by the first-in, first-out method)
or market. The inventory valuation allowance at December 31, 1997 was
approximately $400,000.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives
of the various classes of assets, as follows:
Building 40 Years
Building improvements 6 - 12 Years
Furniture and fixtures 5 Years
Equipment 5 - 7 Years
Revenue Recognition
The Company recognizes revenue from the sale of its products when goods
are shipped to customers.
Deferred Revenue
In December 1997, the Company entered into an agreement with the
purchaser of certain of the Company's assets associated with its snack
food product line (see Note 3). The agreement provides, among other
things, for the Company to receive compensation of $250,000 in exchange
for ceasing its activities related to the manufacture and sale of
freeze-dried snack foods for a period of ten years. The agreement also
provides for compensation of $50,000 in exchange for making certain
information available to the purchaser during 1998. The Company
recorded these amounts as deferred revenue at December 31, 1997 and
will amortize them into income using the straight-line method over the
ten-year term specified in the agreement.
F-6
<PAGE>
NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
its financial statements or tax returns. Deferred income tax
liabilities and assets are determined based on the difference between
the financial statement and tax bases of liabilities and assets using
enacted tax rates in effect for the year in which the differences are
expected to reverse (see Note 5).
Net Income (Loss) Per Share
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128) Earnings Per Share, which requires
presentation of both basic and diluted earnings per share. Basic
earnigs per share is based on the weighted average number of common
shares outstanding during each year. Diluted earnings per share is
based on the sum of the weighted average number of common shares
outstanding plus common stock equivalents arising out of stock options
and convertible debt. Earnings per share information for all periods
have been restated to conform to the requirements of SFAS 128.
The following table is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations
for 1997:
<TABLE>
<CAPTION>
For the Year
Ended December 31,
1997 Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Net income $ 635,600 1,579,100 $0.40
Effect of Dilutive
Securities
Common Stock 122,900
Options
9% Convertible
Notes Due
to Related
Parties $ 35,600 1,036,300
Diluted EPS
Net Income Plus
Assumed Conversions $ 671,200 $2,738,300 0.25
Options to purchase 509,000 shares of common stock at
$3.50 per share were outstanding during 1997 but were
not included in the computation of diluted EPS because
the options' exercise price was greater than the average
market price of the common shares. The options, which
expire through 2001, were still outstanding at the end
of 1997.
</TABLE>
Common share equivalents were not considered in the earnings per share
calculation for 1996 because their effect would have been anti-
dilutive. As a result, both basic and diluted earnings per share for
1996 were calculated based on 1,524,900 weighted average common shares
outstanding during the year.
F-7
<PAGE>
NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Credit Risk and Fair Value of Financial Instruments
Financial instruments which potentially subject the Company to
concentrations of credit risk at December 31, 1997 include trade
receivables, notes receivable, and approximately $103,000 of cash
deposited in money market funds. Concentrations of credit risk with
respect to trade receivables are limited, in the opinion of management,
due to the Company's large number of customers and their geographic
dispersion.
The carrying values of cash and cash equivalents and the line of credit
approximate their fair values. It is not practicable to estimate the
fair value of the notes receivable due to the nature of the underlying
collateral, or the notes payable to related parties due to the related
party nature and the equity conversion features.
Product Development and Market Repositioning Costs
During 1996, to reposition itself in its market and enter new markets,
the Company consolidated its array of products into distinct,
proprietary lines. As a result, approximately $492,000 was charged to
General and Administrative expense for previously deferred costs
related to abandoned and substantially altered products, costs
associated with the development of new products and changes to existing
products.
NOTE 2 - RELATED-PARTY BORROWINGS
At December 31, 1997, the Company had long-term debt payable to
shareholders, resulting primarily from working capital loans and the
purchase of the Company's facility 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 $600,000
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.
Future principal maturities of long-term debt to related parties are
approximately as follows: $93,000 in 2002; $295,000 in 2003: and
$212,000 in 2004. Cash paid for interest on these related party notes
payable during the years ended December 31, 1997 and 1996 was
approximately $59,000 and $55,000, respectively.
F-8
<PAGE>
NOTE 2 -RELATED-PARTY BORROWINGS (Continued)
The Company had stock subscriptions receivable from related parties of
approximately, $113,200 and $84,000 as of December 31, 1997 and 1996,
respectively.
NOTE 3 -GAIN ON DISPOSITION OF ASSETS
During 1997, the Company sold or otherwise disposed of certain assets,
primarily associated with its snack food and silk screen product lines.
The selling price of the assets sold was approximately $2,200,000 and
was received in the form of $350,000 cash and $1,850,000 notes
receivable (see Note 4). The aggregate net book value of assets sold
or otherwise disposed was approximately $1,430,000, resulting in a gain
of approximately $770,000.
NOTE 4 -NOTES RECEIVABLE
In connection with the sale of certain assets during December 1997, the
Company received notes aggregating $1,850,000. The notes bear interest
at a rate approximating ten percent and provide for principal and
interest payments of approximately $400,000 per year with the final
payment due in March 2004. As collateral for the notes, the Company
has obtained liens on certain real estate, mortgage receivables, life
insurance policies and other assets of the purchaser.
In January 1998, the purchaser sold a parcel of real estate that was
pledged as collateral for the notes receivable. Accordingly, sale
proceeds of $394,000 were remitted to the Company as a reduction in the
principal amount of the notes receivable.
NOTE 5 -INCOME TAXES
Significant components of the Company's deferred tax liabilities and
assets at December 31, 1997 are approximately as follows:
Deferred Tax Liabilities
Depreciation $ (25,000)
Deferred income on installment sale (356,000)
Net deferred tax liabilities (381,000)
Deferred Tax Assets
Bad debt allowance $ 8,000
Inventory reserves 122,000
Alternative minimum tax
credit carryforwards 37,000
Non-Compete agreement 14,000
Net operating loss carryforwards 24,000
Gross deferred tax assets 205,000
Valuation allowance (90,000)
Net deferred tax assets 115,000
Net deferred taxes $(266,000)
During 1997, the deferred tax asset valuation allowance increased
$23,000.
F-9
<PAGE>
NOTE 5 - INCOME TAXES (Continued)
The difference between the Company's effective income tax rate and the
federal statutory rate is reconciled below:
1997 1996
Federal provision (benefit) expected
at statutory rates $ 320,000 $(111,000)
Surtax exemption - 4,000
Alternative minimum tax, depreciation,
non-deductible expenses, and
other items 63,000 (21,000)
Tax effects of net operating loss (80,000) 107,000
Provision (benefit) for
income taxes $ 303,000 $ (21,000)
The Company had no foreign operations subject to foreign income taxes.
At December 31, 1997, net operating losses in the amount of $42,000 are
available to carry forward to offset taxable income through the year
2012. Income taxes paid in cash were approximately $10,000 and zero
during the years ended December 31, 1997 and 1996, respectively.
NOTE 6 -EMPLOYEE STOCK OWNERSHIP AND OPTION PLANS
The Company has an Employee Stock Ownership Plan (the ESOP), which
covers substantially all employees. The ESOP provides, among other
things, that contributions to the ESOP shall be determined by the Board
of Directors prior to the end of each year and that the contributions
may be paid in cash, Company stock or other property at any time within
the limits prescribed by the Internal Revenue Code. At December 31,
1997, the ESOP held approximately 28,000 shares of the Company's common
stock. No shares were contributed in 1997 or 1996.
On May 28, 1996 the Company's Board of Directors adopted the "1996
Stock Option Plan" (the SOP). Under the SOP, the Company has reserved
an aggregate of 900,000 shares of Common Stock for issuance pursuant to
options. SOP Options are issuable at the discretion of the Board of
Directors at exercise prices of not less than the fair market value of
the underlying shares on the grant date. During 1997 and 1996, a total
of 10,000 and 509,000 options, respectively, were issued under the SOP
at a weighted average exercise price of approximately $3.50 per share.
Stock options outstanding at December 31, 1997 expire as follows:
463,000 in 1999, 509,000 in 2001. In the event of a change in the
Company's control, the options may not be callable by the Company. The
following table summarizes the stock option activity for the years
ended December 31, 1996 and 1997:
Shares Under
Option
Outstanding at December 31, 1995 513,000
Exercised during 1996 (50,000)
Granted during 1996 509,000
Outstanding at December 31, 1996 972,000
Exercised during 1997 (75,000)
Called during 1997 (10,000)
Granted during 1997 10,000
Outstanding at December 31, 1997 897,000
F-10
<PAGE>
NOTE 6 -EMPLOYEE STOCK OWNERSHIP AND OPTION PLANS (Continued)
All stock options not granted under the SOP are exercisable at $1.38
per share.
During 1996, 50,000 stock options were exercised, resulting in proceeds
to the Company of $75,000, all of which was in the form of
subscriptions receivable. Stock subscriptions receivable as of
December 31, 1996 were $84,000 and were receivable from related
parties.
During 1997, 75,000 stock options were exercised, resulting in proceeds
to the Company of $104,200, all of which was in the form of
subscriptions receivable. Total subscriptions receivable as of
December 31, 1997 were $113,200 and were receivable from related
parties.
Stock subscriptions receivable of $75,000 and $268,000 were collected
in 1997 and 1996, respectively.
The Financial Accounting Standards Board pronouncement FAS 123,
"Accounting for Stock-Based Compensation," requires that the Company
calculate the value of stock options at the date of grant using an
option pricing model. The Company has elected the "pro-forma,
disclosure only" option permitted under FAS 123, instead of recording a
charge to operations, as shown below:
1997 1996
Net income (loss) As reported 635,600 (317,900)
Pro forma 617,800 (635,500)
Income (loss) per share Primary
As reported 0.40 (0.21)
Pro forma 0.39 (0.42)
Fully diluted
As reported 0.25 (0.21)
Pro forma 0.24 (0.42)
The Company's weighted-average assumptions used in the pricing model
and resulting fair values were as follows:
1997 1996
Risk-free rate 6.50% 6.50%
Expected option life (in years) 5 5
Expected stock price volatility 105% 45%
Grant date value $1.78 $0.62
NOTE 7 -EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee benefit plan, which covers
substantially all employees. Under the terms of the 401(k) plan, the
Company is to contribute an amount, as determined annually by the
Company's Board of Directors, of the participants' voluntary
contributions to the plan. The Company has charged approximately
$17,700 and $15,500 in 1997 and 1996, respectively, to operations for
its contributions to the plan.
F-11
<PAGE>
NOTE 8 -CREDIT LINE
The Company maintains a line of credit with a commercial bank under a
revolving loan agreement, which matures May 1, 1998. The borrowing
limit as of December 31, 1997 was $700,000. Borrowings are
collateralized by all accounts receivable and inventories and interest
is payable quarterly at one half of one percent over the commercial
bank's prime rate (8.5% at December 31, 1997). The agreement provides
that, among other things, the Company maintain a minimum working
capital and net worth, a maximum debt to net worth ratio, and a 30 day
resting requirement, all as defined in the agreement. The agreement
also prohibits additional indebtedness in excess of $200,000 in
aggregate. At December 31, 1997 the Company had $591,800 of borrowings
under the line of credit. The Company has subsequently paid the line
to zero and satisfied the 30-day resting requirement. Cash paid for
interest on the line of credit during the years ended December 31, 1997
and 1996 was approximately $36,000 and zero, respectively.
NOTE 9 -INTERNATIONAL SALES
Export sales amounted to approximately $194,000 and $325,000 in 1997
and 1996, respectively.
F-12
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
For the Year Ended December 31, 1997 (b)
Basic EPS Diluted EPS
Weighted average number of
common shares outstanding 1,579,100 1,579,100
Dilutive effect of common
stock options - 122,900
Dilutive effect of 9%
convertible debt
due to related parties (a) - 1,036,300
Weighted average common shares
used in EPS calculation 1,579,100 2,738,300
Net income $635,600 $635,600
Add assumed interest
savings on debt,
net of tax effect $ - $35,600
Adjusted net income $ 635,600 $671,200
Earnings per share $0.40 $0.25
(a) Convertible debt is considered an other potentially dilutive security.
(b) Common share equivalents and other potentially dilutive securities were
not considered in the earnings per share calculation for 1996 because their
effect would have been anti-dilutive.
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 538
<SECURITIES> 0
<RECEIVABLES> 720
<ALLOWANCES> 0
<INVENTORY> 1086
<CURRENT-ASSETS> 2977
<PP&E> 1642
<DEPRECIATION> (719)
<TOTAL-ASSETS> 5326
<CURRENT-LIABILITIES> 1020
<BONDS> 600
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0
0
<OTHER-SE> 3213
<TOTAL-LIABILITY-AND-EQUITY> 5326
<SALES> 5864
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<CGS> 3144
<TOTAL-COSTS> 3144
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<INCOME-TAX> 303
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