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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, 1998 Commission 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.)
390 North Orange Avenue, Suite 2185, Orlando, Florida 32801
(Address of principal executive offices)
Registrant's telephone number, including area code
(407) 481-8007
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 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.[X]
State issuer's revenues for its most recent fiscal year: $ 5,868,800
The aggregate market value of the voting stock held by the non-affiliates of
the Registrant was $3,254,344 based on the average high and low bid price
reported March 26, 1999 (based on 913,500 shares).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 26, 1999
Class Outstanding
Common Stock, $.001 1,624,900
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
FORWARD-LOOKING STATEMENTS
Certain statements contained in the Form 10-KSB constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Exchange Act. Such
statements include management's expectations and objectives regarding the
Company's future financial position, operating results and business strategy.
These statements are subject to risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks and
uncertainties include those set forth under the caption "Forward-Looking
Statements" set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Form 10-KSB. The
Company assumes no obligation to update the forward-looking information to
reflect actual results or changes in the factors affecting such forward-looking
information.
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 1980. The Company designs,
manufactures, and markets toys and published products in a creative and
diversified portfolio of branded educationally-minded product lines. The
Company's products are sold primarily to toy stores, specialty retailers,
Internet retailers, education outlets, museums, zoos, aquariums, theme parks,
and attractions in the United States and worldwide.
While 1997 marked the Company's transition from its previous role as a toy
and book distributor into a manufacturer and producer of toys and published
products, 1998 demonstrated the Company's successes in developing the sales of a
core portfolio of brands to replace the sales of divested non-core lines.
During the past fiscal year, the Company continued expanding its product lines,
developed new proprietary products and entered new distribution channels,
resulting in the continued growth of gross profit margins. In 1998 the Company
launched its first internally generated branded proprietary toy line, Space
Voyagers(tm). Space Voyagers educational action figure toys helped establish
the Company as offering proprietary product lines in its new channels of
distribution. In addition to the further internal development of proprietary
lines and brands, the Company entered into a three-year renewable licensing
agreement with Discovery Communications, Inc. which provides for, among other
things, the Company's right to utilize intellectual properties surrounding the
Discovery Channel(r) brand. The internal development of brands coupled with the
Company's licensing efforts has led to the broadening of a balanced portfolio of
product lines. The Company is currently seeking and pursuing possible
acquisition opportunities in the children's toy, publishing, Internet and
software arenas to continue broadening its product offerings.
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(b) Description of Business Products
The Company sells its educational toy product lines under the name "Action
Products(tm)." The lines include such proprietary brands as SpaceVoyagers(tm),
Woodkits(tm), Imaginetics(tm), Science in Action(tm) and PowerBalls(tm).
Products include figurines, activity kits, other toy and gift items with a
strategic emphasis on space, dinosaurs, science and nature, and other
educational and non-violent categories. The Company's products are produced by
approximately 20 outside manufacturing companies in the United States, Mexico,
Taiwan, Hong Kong and China, and are imported directly by the Company as
finished goods. In addition to its proprietary brands, the Company also sells
products packaged under a license from Discovery Channel(r). In February 1999,
the Company obtained a letter of intent from Logiblocs Ltd., a UK manufacturer
of electronic building blocks, to exclusively market the Logiblocs(tm) product
line in North, Central, and South America, on a perpetual basis. However, there
can be no assurances that the Company will finalize an exclusive agreement with
Logiblocs Ltd.
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. Management anticipates
opportunities for the Company to further emphasize its publishing offerings both
through proprietary development and acquisition of new interactive book and
software titles. The Company may also utilize cross-promotional opportunities
with the Company's other brands and products.
Customers
Management focuses its efforts on both growing the Company's distribution
channels and the Company's portfolio of brands. The Company currently sells
three dominant brands to approximately 2,000 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, Internet
retailers, and other types of specialty retailers.
Customers obtained from these new specialty retail 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). One unique category
of customer arising from the specialty retail market is the Internet retailer.
The Company is currently working together with several of its current Internet
retailers, as well as new ones, to offer the Company's product lines to the
online market. Management is currently contemplating certain Internet-related
products and services to offer to its established and growing customer and
consumer niche (see "Marketing and Sales").
In addition to expanding into these new markets, Management began
implementing its plan to enter mass-market distribution. The Company's
licensing arrangement with Discovery Channel(r), signed in November 1998,
provides the Company with the strategic leverage needed to capture a mass-market
customer base. Specifically, the arrangement with Discovery Channel(r) provides
for a unique relationship with Dayton Hudson Corporation (Target Stores). Each
of Target's approximately 800 stores is expected to offer the Company's licensed
product in a variety of SKU's. In addition, the Company's announced strategy of
pursuing acquisitions of other toy or publishing companies and product lines is
expected to provide an entree into the mass-market through established channels
of distribution.
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Management differentiates the products and brands it offers to the
specialty and mass markets due to the importance of the preservation of each
distribution channel and differing product life cycles. While the special
relationships with Target Stores and Discovery Communications, Inc. allow for
some overlap, the Company generally separates the distribution of its products
and brands between the Specialty Toy/Specialty Retail Market and Mass-Market
distribution channels.
The Company services customers in every state in the United States, as well
as the District of Columbia. The Company exports to approximately 20 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 8% of 1998 sales. Management anticipates Target Stores
will account for more than 10% of sales in 1999. No single product accounts for
more than 4% of sales.
Marketing and Sales
The Company markets its product lines through its full-color catalog and
extensive Internet web sites. The Company also utilizes newsletters, trade
publications, client visits, 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 its independent manufacturers' sales representatives. The
Company capitalizes on strategic advertising, product placement and package
design to emphasize its own proprietary product lines and trade names.
The Company's catalog is supplemented by an Internet accessible "online"
catalog. While the Company's catalog markets primarily to the wholesale
customer, the Company utilizes its primary Internet site, "www.apii.com," to
provide information to both the wholesale customer and the end-user, or
consumer. By password protecting its customer-sensitive sites, the Company
allows its customers to browse an online catalog and generate orders that are
immediately processed by the Company. Customers are encouraged to place orders
from the catalog or web site through password protected online ordering or the
Company's toll-free telephone number and toll-free fax. The site utilizes many
of the same features to provide access to the retail market for special orders
and fill-ins that may be purchased directly from the Company. The Company also
utilizes its Internet presence to promote its brands, products, and identity,
while partnering with its customers who offer its products for sale online. In
late 1998 the Company launched a second web site, "www.spacevoyagers.com,"
designed specifically to promote the Space Voyagers(tm) brand name and product
lines to consumers. Management foresees the further proliferation of the
Company's Internet activity and promotion of its brands and products.
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In addition to its expanding Internet presence, a network of manufacturers'
representative companies ("rep companies") provides the Company with national
sales coverage. This network includes toy reps, 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 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 sales associates offer opportunities
for sales increases by assisting the rep companies and their customer base with
customer support and expediting the various administrative tasks involved in new
and recurring orders.
International Sales and Manufacturing
Revenues from the Company's international sales represented approximately
6.5% and 3.3% of total revenues in 1998 and 1997, respectively. Product lines
marketed internationally are generally the same as those marketed domestically
and generally sold internationally directly to retail stores. In 1998, the
Company 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 US dollars, and accordingly
receives payment for such sales in US dollars. The Company purchases its
imported products in US 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 goodwill. The Company
believes that it experiences minimal currency risk because all foreign
transactions are conducted using US 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 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.
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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 portfolio of
proprietary brands. The Company's also relies on its ability to offer a wide
range of specialized "theme" products; "same-day" shipment on most domestic
orders; and its regional independent reps, in-house sales professionals and
sales associates 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 it can maintain and expand its customer base due to
the growing recognition of its brands within the industry and by consumers.
Further, the Company's continued emphasis on the development of proprietary
products and packaging complements its abilities to service its customers and
its experience in the industry. Management is improving its distribution
channel strategy and its representation to traditional toy outlets. The Company
focused its efforts on 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. In the future Management intends to establish consumer-level
promotions, designed to drive consumers to retail outlets in search of the
Company's products and brands. The Company also plans to leverage its core
competencies through the strategic acquisition of other product lines in the
toy, publishing, game and puzzle areas. This diversification should help to
solidify distribution channels already served by the Company.
Intellectual Property
The Company's products are protected, for the most part and in as many
countries as practical, by trademark, copyright and patent law to the extent
that such protection is available and meaningful. The loss of such rights
concerning any particular product would not have a material adverse effect on
the Company's business, although the loss of such protection for a number of
significant items might have such an effect.
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.
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The Company's products are rated according to the EN-71 safety protocol
adopted by the European Community. In addition, the Company's expects to
certify its products according to the Japanese Toy Association ("JTA") safety
criteria for consumer products.
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.
Year 2000
The Company is currently addressing its exposure relative to year 2000
issues for both information and non-information technology systems. A committee
actively monitors the status of the readiness program of the Company. The
Company estimates the total year 2000 expenditures to be less than $100,000,
substantially all of which were incurred in fiscal 1997 and 1998. These costs
include, to the extent reasonably estimable, both internal and external
personnel costs related to the assessment process, as well as the cost of
purchasing certain hardware and software. There can be no guarantee that these
estimates will be achieved and actual results could differ from those planned.
The Company has currently completed substantially all of the tasks identified to
mitigate the year 2000 exposure.
Management currently believes the most significant impact of the year 2000
issue could be an interrupted supply of goods and services from vendors.
Management does not expect the potential disruption from Year 2000 issues to
have a material effect on the Company's business operations, but the outcome
remains uncertain. The Company has an ongoing effort to gain assurances and
certifications of suppliers' readiness programs. Contingency plans include the
search for alternate certified vendors and the increase of safety stock of major
product lines.
Personnel
As of December 31, 1998, the Company had 35 full-time employees, including
four executive positions, twelve sales and customer support positions, and
nineteen other positions to fulfill administrative responsibilities in
marketing, product development, accounting, logistics, etc. The employees are
not represented by a union. In 1998, the Company offered a benefits package to
its employees which included health and life insurance plans, an Employee Stock
Ownership Plan (ESOP), a 401(k) plan, and an 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.
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ITEM 2. DESCRIPTION OF PROPERTY:
The Company's corporate headquarters are located in Orlando, Florida. The
Company leases a 3,000 square foot suite in the downtown Orlando business
district which is staffed by executive, sales, marketing and product development
personnel.
The Company's operations are located in a 35,000 square foot building on
2.5 acres that it owns in an industrial park in Ocala, Florida. This location
is approximately one hour north of Orlando and has served as the Company's home
for nearly 20 years. The Company-owned Ocala location serves as the Company's
distribution center and houses its purchasing, accounting, management
information systems and administrative departments. The Ocala facility also
maintains a customer service call center. The Ocala property is currently
encumbered by a mortgage. The principal balance as of December 31, 1998 was
$748,100 and may be prepaid at any time without penalty. The mortgage is
amortized over 20 years and payable in monthly installments of principal and
interest until 2008, whereby a balloon payment of approximately $513,000 will
become due. The property is currently in usable and sellable condition.
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, 1998, there were no matters submitted
to a vote of the Company's security holders.
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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 26, 1999, was approximately 1,250.
The high and low bid quotations for each quarter of the fiscal years ended
December 31, 1997 and 1998 are follows:
Quarter Ended: High Bid Low Bid
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
March 31, 1998 3.25 2.25
June 30, 1998 3.188 2.563
September 30, 1998 2.875 2
December 31, 1998 6.438 1.75
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 previously distributed shares and 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
General
The Company is focused on developing brands. Management recently led the
Company away from simply being another distributor of other manufacturers' toy
and published products towards the establishment and distribution of products
and brands of its own manufacture or otherwise exclusive to the Company. In
addition to the marked growth in gross profit margins and increased market-
penetrating opportunities afforded by its new mix of product offerings, the
Company's efforts have resulted in the beginning of a balanced portfolio of
recognizable brands. The Company's strategy is to continue broadening its
collection of brands through internal development, licensing, and merger and
acquisition.
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Internal Development - The Company's continued rise in its gross margins is
due in a large part to the development of its proprietary brands, in particular
its Space Voyager(tm) product line. John Glenn's return to space and certain
mainstream motion pictures helped progress the already growing interest
generated within the educational markets. Sparked by a renewed consumer
interest in space exploration, the Company expanded its product line to
capitalize on the growing enthusiasm. The concept of Astronaut Action Figures
was conceived, developed, and brought timely to market by the Company's product
development professionals. Other products that the Company introduced were its
Space Playsets, Pocket Aliens, Inflatables, Gyroscopes and new additions to the
Power Ball line. New product introductions reached their initial sales
expectations and the Company plans on continuing each of the new product lines
in fiscal 1999. Management expects to continue its internal development
strategies in search of additional proprietary and profitable brands.
Licensing - In addition to the internal development of brands, the Company
began the strategic use of licensed intellectual properties. Aware of the risks
often associated with short-lived properties, the Company began its licensing
ventures by signing a licensing agreement with Discovery Communications, Inc.
The Discovery Channel(r) brand is recognized worldwide, and possesses the
unique, elusive qualities of name-recognition and longevity. While the value of
many licenses may fade in a short period of time, the Discovery Channel(r), with
its educational, quality, true-to-life image, and broad staying power, is a
natural fit with the Company's other product offerings. Further, Discovery
Communications, Inc. has arrangements with Dayton Hudson Corp. (Target Stores)
to form a solid distribution channel for its licensed products. While the
products that the Company offers through Target Stores under the license stand
on their own inherent qualities, the arrangement under the license affords the
Company with an entree into the mass-market. The Company expects to begin to
receive the benefits of this arrangement in 1999.
Mergers and Acquisitions - To supplement the internal development of brands
and its licensing efforts, the Company hopes to further augment its product
offerings through the acquisition of related companies, product lines, and
exclusive distribution rights. While the Company has not yet consummated any
transactions under this strategy, in February 1999 it negotiated a letter of
intent with Logiblocs Ltd. for the exclusive distribution of its electronic
building blocks called Logiblocs(tm). Management expects to sign an agreement
with the UK based company during the early part of the second quarter of 1999.
Additional mergers or acquisitions may further allow the Company to diversify
its product offerings with new categories, niches, channels, and customers.
Finally, the Company hopes to broaden its Internet presence and expects to
achieve the brand recognition and corporate identity that are critical for
success.
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FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-KSB including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward looking statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements The following factors,
among others, could cause actual results to differ materially from those set
forth in the forward-looking statements: the Company's ability to successfully
(i) develop its brands and proprietary products through internal development,
licensing and/or mergers and acquisitions, (ii) enter the mass market through
its licensing agreement with Discovery Communications, Inc., (iii) finalize the
terms of a distribution agreement with Logiblocs, Ltd. and (iv) develop its E-
commerce strategy. Additional factors include, but are not limited to the
following: the size and growth of the market for the Company's products;
competition, pricing pressures, market acceptance of the Company's product, the
effect of economic conditions, intellectual property rights and the outcome of
competitive products; the results of financing efforts, risks in product
development and other risks identified in this and the Company's other SEC
reports.
Results of Operations
The Company derived and selected the following table of financial data from
the financial statements which should be read in conjunction with the audited
financial statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
Twelve (12) Months Ended December 31,
<S> <C> <C>
1998 1997
Net Sales $5,868,800 $5,864,300
Gross Profit 2,787,000 2,720,100
Selling, General
& Administrative Expenses 2,775,800 2,490,200
Income before tax provision 202,000 938,600*
Net Income 130,000 635,600
Basic net income per share 0.08 0.40
Cash flow provided by
(used in) operations 95,800 (698,300)
(*) Includes pre-tax gain of $771,800
</TABLE>
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<TABLE>
<CAPTION>
As of December 31,
<S> <C> <C>
1998 1997
Current Assets 2,438,000 2,977,400
Total Assets 5,016,300 5,325,900
Current Liabilities 372,300 1,020,200
Long Term Liabilities 1,229,800 1,091,000
Stockholders' Equity 3,414,200 3,214,700
</TABLE>
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net sales increased slightly to a new record $5,868,800 in 1998 from
$5,864,300 in 1997. This represents the fifth straight improvement in annual
sales. The increase comes as a result of management's efforts to grow its
distribution channels and the growing strength of various proprietary lines and
brands. Management particularly notes the replacement of "lost" sales due to
the divestiture of certain product lines in the prior year.
Gross profit grew to $2,787,000, up $66,900, from $2,720,100 in 1997. As a
percentage of sales, gross profit improved to 47.5% compared to 46.4% in the
prior year. Management credited the continued improvement as a result of the
development of its proprietary brands.
Selling, General and Administrative (SG&A) expenses were $2,775,800 and
$2,490,200 in 1998 and 1997, 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 reps, as
well as added product development expenses and salaries.
Interest expense related to current and long term debt was $75,000 and
$91,100 in 1998 and 1997, respectively. The decrease is due primarily to the
improvement in operating cash flow and a reduction in the interest rates on its
short and long-term borrowings. (See "Liquidity and Capital Resources")
Interest income was $149,700 and $24,600 in 1998 and 1997, respectively.
The increase related primarily to interest earned on notes receivable obtained
upon the divestiture of certain product lines.
Other income and expense are netted for financial statement presentation.
This amount has historically been insignificant and represented less than one-
third-of-one-percent of net sales in each of the last two years. Other income
in 1998 included non-compete and consulting income resulting from product line
divestitures. During 1998 and 1997, the Company sold or otherwise disposed of
certain assets, primarily associated with its snack food and certain silk screen
product lines, resulting in gains of $97,100 and $771,800, respectively.
Liquidity and Capital Resources
As of December 31, 1998, current assets were $2,438,000 compared to current
liabilities of $372,300 for a current ratio of approximately 6.5 to 1,
representing a much stronger liquidity position over the prior year. In fiscal
1997, the Company's current ratio was 2.9 to 1.
The Company had cash flows provided by operations of $95,800 in 1998
compared to cash flows used in operations of $698,300 in 1997, a net change of
$794,100. This change was due in part to collections on trade accounts
receivable, as well as collections on notes receivable related to the gain
recognized on the disposition of assets in the prior year. Accounts receivable
decreased by $189,600 due in part to collection activities in the fourth
quarter. Other Assets increased as a result of the purchase of molds and dies
related to the Company's proprietary brands and advance licensing fees paid.
Current liabilities decreased $647,900 due primarily to repayments of borrowings
on the Company's revolving line of credit.
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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 obtained liens on certain real estate,
mortgage receivables, life insurance policies and other assets of the purchaser.
As of December 31, 1998, the balance of the notes receivable was approximately
$1,465,000.
As of December 31, 1998, the Company's only long-term debt was a mortgage
payable to a commercial bank of $748,100. The Mortgage is collateralized by
real estate and improvements, bearing interest annually at 7.5% and amortized
over twenty years, with ten years of monthly principal and interest payments,
then a balloon payment of approximately $513,000. The Company obtained the loan
in November 1998 and used the proceeds to repay the $600,000 convertible 9%
promissory notes owed to related parties and provide additional permanent
working capital. Other long term liabilities comprised of deferred revenue of
$200,000, associated with a non-compete agreement, and deferred income taxes of
$338,000, primarily associated with the gain, both in connection with the sale
of certain food line assets.
During the year ended December 31, 1998, the Company collected $69,500 of
stock subscription receivables from related parties. In addition, the Company
had stock subscription receivables of approximately $44,000 due from related
parties at year-end.
The Company maintains a revolving line of credit with a commercial bank
collateralized by accounts receivable and inventory bearing an interest rate
approximating the Prime lending rate. The borrowing limit as of December 31,
1998 was increased to $1,000,000, against which the Company had borrowed
$99,900. The Company subsequently paid the line to zero and satisfied its
resting covenant for the calendar year 1999.
During 1998, the Company recorded normal depreciation and amortization of
its fixed assets of approximately $84,000. In addition, the Company invested
approximately $116,000 and $70,000 in the acquisition of new assets in 1998 and
1997, respectively.
Shareholders' equity at December 31, 1998 increased by approximately
$200,000 to $3,414,200 due to net income and the collection of stock
subscriptions receivable.
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.
<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:
None.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT:
MANAGEMENT/BOARD OF DIRECTORS
The executive officers and directors of the Company are as follows:
Name Age Position
Ronald S. Kaplan 33 Chair of the Board of Directors, President,
Chief Executive Officer (1)
Richard Gordon, Jr. 69 Director, Chair of Nominating Committee (1) (2)
Ronald Tuchman 63 Director, Chair of Audit Committee (2)
Judith Kaplan 60 Director
Pablo Savetman 33 Vice President, Director of Sales
Delton G. de Armas 28 Chief Financial Officer, Secretary (2)
Robert Zumbahlen 42 Treasurer, Purchasing and Inventory Control Manager
(1) Member of the Nominating Committee
(2) Member of the Audit Committee
Ronald S. 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 Judith Kaplan.
<PAGE>
Richard Gordon, Jr., Director since April 1996, is a former Apollo and
Gemini Astronaut and has recently 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 and holds a
Bachelor of Science degree from the University of Washington and an Honorary
Doctorate of Science from Niagara University.
Ronald Tuchman , Director since August 1998, is a respected member of the
toy industry with 30+ years of experience in all aspects of the toy business.
Prior to joining the Company's Board, Mr. Tuchman most recently served as
Chairman of the Board, Chief Executive Officer and a Director of Imaginarium, an
"upscale" educational specialty toy store chain. In addition to other
professional accomplishments, Tuchman was employed by Toys R Us for nearly 25
years, where he held several positions, including Senior VP, and is widely known
within the Toy Industry as one of Toys-R-Us' founding fathers. Mr. Tuchman
attended Roosevelt University in Chicago where he majored in advertising and
marketing.
Judith Kaplan, Company Founder and Director since 1980, served as Chair of
the Board of Directors of the Company since its incorporation in 1980 until
December 31, 1995. Ms. Kaplan was President ('80-'87), Secretary ('80-'97),
Chief Executive Officer ('80-'95), Chief Financial Officer ('80-'98) and
Treasurer ('80-'91) of the Company. She is the mother 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
the Company 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 the
Company 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 the Company in September
of 1995. He was previously with the Certified Public Accounting firm of
Lovelace, Roby & Company, P.A.
Robert Zumbahlen, Treasurer since 1991, is a graduate of Bentley College in
Waltham, Massachusetts (1979) with a Bachelor of Science in accounting. Mr.
Zumbahlen joined the Company in 1984 and is currently the Company's Purchasing
and Inventory Control Manager.
Nominating Committee - Richard Gordon, Chair; Ronald S. Kaplan
Audit Committee - Ronald Tuchman, Chair; Richard Gordon; Delton G. de Armas
<PAGE>
PART III
ITEM 10. EXECUTIVE COMPENSATION:
The following table sets forth the aggregate compensation paid to Ronald S.
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
$100,000 or more. Except as set forth in the table below, no bonuses or other
compensation was paid during the 1998, 1997, or 1996 fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
<S> <C> <C> <C> <C>
Other
Name and Annual Restricted
Principal Salary Bonus Compensation
Position Year ($) ($) ($)(1)
Ronald Kaplan 1998 $100,000 $35,000 $6,000
CEO 1997 $75,000 - $6,000
1996 $73,370 - $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 $100,000 plus the use of an
automobile.
Option Grants in Last Fiscal Year
The Company did not grant any options to the Named Executive during the
fiscal year ended December 31, 1998.
Aggregated Option Exercises and Year End Option Values in Last Fiscal Year
The following table sets forth the aggregate of options exercised in the
year ended December 31, 1998 and the value of options held at December 31, 1998.
The Named Executive did not exercise any options during fiscal 1998.
Option Exercises/Option Values
<TABLE>
<S> <C> <C> <C> <C>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-money Options
Acquired on Value Options at Fiscal Year End At Fiscal Year End
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
Ronald S. Kaplan - - 343,000/0 $1,067,111/0 (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, 1998 as reported by Nasdaq was $4.50.
</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, from
time to time the Company may grant 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 that 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, 1998, there were
24,077 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 the applicable
maximum allowed by the Internal Revenue Code. The top 1/3 of employees cannot
contribute a percentage greater than 15% of their compensation or 150% of the
average contribution of the lowest 66% of paid employees to 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.
<PAGE>
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 Plan was
subsequently ratified by a majority vote of the Company's shareholders. The
Board of Directors 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 75% of the fair market value of the underlying shares on the
date of the grant. As of December 31, 1998, there were 634,000 Incentive
Options existing under the plan. No Non-Qualified Options have been issued.
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 26, 1999. 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 26, 1999, there
were issued and outstanding 1,624,900 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 1,193,127 1 42.7%
Judith Kaplan Common 1,022,164 2 52.7%
Warren Kaplan Common 1,022,164 3 52.7%
Ronald Tuchman Common 60,000 4 3.6%
Richard Gordon, Jr. Common 20,000 5 1.2%
All Directors and
Officers as a Group
(8 persons,
Directors and 5%
owners shown above) Common 2,423,471 6 73.2%
___________________
1 Includes immediately exercisable options to purchase 243,000 shares at $1.38
per share and 100,000 shares at $3.50 per share. Also includes immediately
exercisable warrants to purchase approximately 829,000 shares of Common Stock at
$0.579.
2 Includes 24,077 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 24,077 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 60,000 shares at $3.50
per share.
5 Includes immediately exercisable options to purchase 20,000 shares at $3.50
per share.
6 The 1,022,164 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>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
As of December 31, 1997, 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 bore interest at 9% per annum,
payable monthly, and were convertible into an aggregate of approximately
1,036,300 shares of the Company's Common Stock. During 1998, Ronald S. Kaplan
and Elissa Kaplan redeemed the conversion features of their notes in exchange
for warrants exercisable for shares of the Company's Common Stock under
substantially the same terms. The exchange, therefore, did not have a dilutive
effect. Once alternative financing was arranged with a financial institution,
the previous notes payable were repaid with proceeds from the mortgage payable.
Accordingly, there are no notes payable to related parties as of December 31,
1998.
In connection with stock options exercised during the year, there were
stock subscriptions receivable from related parties of $43,700 as of December
31, 1998, of which $25,000 was collected early in the first quarter of 1999.
<PAGE>
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, 1998
Statements of Income - Years ended December 31, 1998 and 1997
Statements of Changes in Stockholders' Equity - Years ended
December 31, 1998 and 1997
Statements of Cash Flows - Years ended December 31, 1998 and 1997
Notes to Financial Statements - Years ended December 31, 1998 and
1997
2. Financial Statement Schedules
None.
3. Exhibits
Exhibit No.
(3) Articles of Incorporation and By-Laws
(a) Articles of Incorporation and By-Laws incorporated by reference to
an Exhibit to Form 10-K filed April 12, 1988
(b) Amended Articles of Incorporation and By-Laws incorporated by
reference to an Exhibit to Definitive Proxy Statement filed May 22, 1998.
(10) Material Contracts
(a) Employee Stock Ownership Plan incorporated by reference to 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 incorporated by reference to 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, incorporated by reference to an
Exhibit to Form 10-K filed August 15, 1987
<PAGE>
ITEM 13. (a) (10), continued
(d) Amendment to Employee Stock Ownership Plan dated February 8, 1988,
incorporated by reference to an Exhibit to Form 10-K filed March 31, 1989
(e) Amendment to Employee Stock Ownership Plan dated March 10, 1989,
incorporated by reference to an Exhibit to Form 10-K filed March 31, 1989
(f) Asset Purchase Agreement between the Company and American Outdoor
Products, Inc. dated December 31, 1997 incorporated by reference to
Exhibit 2.1 in the Company's Current Report on Form 8-K filed
February 26, 1998.
(11) Statement re: computation of per share earnings (filed herewith)
(27) Financial data schedule (filed herewith)
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of 1998.
<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, 1999 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, 1999
Ronald S. Kaplan President/Chief Executive
Officer/ Director
/s/ Delton G. de Armas Chief Financial Officer/ March 30, 1999
Delton G. de Armas Secretary
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
For the Years Ended December 31, 1998 and 1997
1998 1997
Basic EPS Diluted EPS Basic EPS Diluted EPS
<S> <C> <C> <C> <C>
Net income $130,000 $130,000 $635,600 $635,600
Add assumed interest
savings on debt,
net of tax effect $ - $ 29,700 $ - $ 35,600
Adjusted net income $ 130,000 $ 159,700 $ 635,600 $ 671,200
Weighted average number of
common shares outstanding 1,624,900 1,624,900 1,579,100 1,579,100
Dilutive effect of common stock
options and warrants - 318,200 - 122,900
Dilutive effect of 9%
convertible debt due to
related parties (a) - 863,600 - 1,036,300
Weighted average common shares
used in EPS calculation 1,624,900 2,806,700 1,579,100 2,738,300
Earnings per share $ 0.08 $ 0.06 $ 0.40 $ 0.25
(a) Convertible debt is considered an other potentially dilutive security. The
conversion feature of the debt was exchanged for warrants in November 1998.
</TABLE>
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
<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 Income 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, 1998, and the related statements of income, changes in
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1998. 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, 1998, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ MOORE STEPHENS LOVELACE, P.A.
Certified Public Accountants
Orlando, Florida
January 26, 1999
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 339,900
Accounts receivable, net of an allowance
for doubtful accounts of $25,500 530,400
Notes receivable 303,300
Interest receivable 36,300
Inventories, net 1,091,000
Prepaid expenses and other assets 100,100
Income tax refundable 37,000
TOTAL CURRENT ASSETS 2,438,000
PROPERTY, PLANT AND EQUIPMENT
Land 67,400
Building and building improvements 1,021,600
Equipment 547,100
Furniture and fixtures 122,500
1,758,600
Less accumulated depreciation and amortization (802,500)
NET PROPERTY, PLANT AND EQUIPMENT 956,100
NOTES RECEIVABLE 1,161,500
OTHER ASSETS 460,700
TOTAL ASSETS $ 5,016,300
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 44,100
Accrued expenses 101,100
Accrued payroll and related 45,900
Current portion of mortgage payable 56,300
Borrowings under line of credit 99,900
Deferred revenue 25,000
TOTAL CURRENT LIABILITIES 372,300
MORTGAGE PAYABLE 691,800
DEFERRED INCOME TAXES 338,000
DEFERRED REVENUE 200,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $.001 par value; 15,000,000
shares authorized; 1,624,900 shares issued
and outstanding 1,600
Additional paid-in capital 3,008,300
Retained earnings 448,000
Stock subscription receivable (43,700)
TOTAL SHAREHOLDERS' EQUITY 3,414,200
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,016,300
</TABLE>
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF INCOME
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
NET SALES $ 5,868,800 $ 5,864,300
COST OF SALES 3,081,800 3,144,200
GROSS PROFIT 2,787,000 2,720,100
OPERATING EXPENSES
Selling 1,149,000 1,040,100
General and administrative 1,626,800 1,450,100
2,775,800 2,490,200
OTHER INCOME (EXPENSE)
Interest expense (75,000) (91,100)
Gain on disposition of assets 97,100 771,800
Interest income 149,700 24,600
Other income (expense), net 19,000 3,400
190,800 708,700
INCOME BEFORE PROVISION FOR INCOME TAXES 202,000 938,600
PROVISION FOR INCOME TAXES
Current - 37,000
Deferred 72,000 266,000
72,000 303,000
NET INCOME $ 130,000 $ 635,600
INCOME PER SHARE
Basic $ 0.08 $ 0.40
Diluted $ 0.06 $ 0.25
</TABLE>
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK TOTAL
$.001 PAR VALUE PAID-IN RETAINED SUBSCRIPTION SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 1,549,900 $ 1,500 $ 2,904,200 $ (317,600) $ (84,000) $ 2,504,100
COLLECTION OF STOCK SUBsCRIPTIONS - - - - 75,000 75,000
ISSUANCE OF COMMON SHARES
ON EXERCISE OF OPTIONS 75,000 100 104,100 - (104,200) -
NET INCOME - - - 635,600 - 635,600
BALANCE - DECEMBER 31, 1997 1,624,900 1,600 3,008,300 318,000 (113,200) 3,214,700
COLLECTION OF STOCK SUBSCIPTIONS - - - - 69,500 69,500
NET INCOME - - - 130,000 - 130,000
BALANCE - DECEMBER 31, 1998 1,624,900 $ 1,600 $ 3,008,300 $ 448,000 $ (43,700) $ 3,414,200
</TABLE>
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 130,000 $ 635,600
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation 83,800 107,900
Amortization 109,100 136,200
Deferred income tax provision 72,000 266,000
Gain on disposition of fixed assets (97,100) (771,800)
Changes in:
Accounts receivable 189,600 (224,000)
Inventories (5,000) (616,600)
Prepaid expenses and other current assets (41,500) 38,000
Income taxes refundable (37,000) 21,000
Notes receivable 385,200 9,900
Interest receivable (36,300) -
Other assets (419,700) (128,600)
Accounts payable (53,600) (193,300)
Accrued expenses (71,700) (15,600)
Income taxes payable (37,000) 37,000
Deferred revenue (75,000) -
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 95,800 (698,300)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (116,500) (68,800)
Proceeds from sale of assets 97,100 350,000
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (19,400) 281,200
CASH FLOWS FROM FINANCING ACTIVITIES
Collection of stock subscriptions receivable 69,500 75,000
Proceeds from mortgage borrowings 750,000 -
Repayment of mortgage principal (1,900) -
Repayment of notes payable to related parties (600,000) -
Net change in borrowings under line of credit (491,900) 416,800
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (274,300) 491,800
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (197,900) 74,700
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 537,800 463,100
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 339,900 $ 537,800
</TABLE>
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
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
entertainment 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 the lower of cost (determined by the first-in, first-out method) or
market. The inventory valuation allowance at December 31, 1998 was
approximately $110,000.
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
Other Assets
Other assets consist of costs associated with molds and dies for form-
pressed toys, purchased text for the Company's books, and license fees for the
use of the Discovery Channel(r) name on the packaging of certain educational
toys (See Note 11). These assets are amortized on a straight-line basis over
their useful lives as follows:
Molds and dies 10 Years
Purchased text 3 - 10 Years
License fees 1 Year
In the event a product is discontinued and the associated costs are not
fully amortized, the unamortized portion is charged to expense at the time the
product is discontinued.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company assesses the recoverability of intangible assets if facts
and circumstances suggest that their carrying amount may have been impaired. In
making its assessment, the Company gives consideration to the undiscounted cash
flows from the use of such assets, the estimated fair value of such assets, and
other factors that may affect the recoverability of such assets. If such an
assessment indicates that the carrying value of intangible assets may not be
recoverable, the carrying value of intangible assets is reduced.
Shareholders' Equity
During 1998, the Company amended its Articles of Incorporation to
increase the number of authorized shares of common stock from 7,500,000 to
15,000,000 and to authorize the issuance of up to 10,000,000 shares of preferred
stock, in one or more series with rights, preferences, privileges and
restrictions, including voting and conversion rights as determined by the
Company's board of directors. No shares of preferred stock have been issued.
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 5). 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
is amortizing them into income using the straight-line method over the terms
specified in the agreement. As of December 31, 1998, deferred revenue was
$225,000.
Revenue Recognition
The Company recognizes revenue from the sale of its products when goods
are shipped to customers.
Comprehensive Income
The Company has no accumulated or current items of comprehensive income
that are excluded from net income. Accordingly, the Company has not presented a
statement of comprehensive income.
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 7).
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income Per Share
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128), which requires presentation of
both basic and diluted earnings per share. Basic earnings 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, warrants, and convertible debt. Earnings per share information for all
periods have been restated to conform to the requirements of SFAS 128.
The following tables reconcile the numerators and denominators of the
basic and diluted earnings per share computations for 1998 and 1997:
Year Ended December 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Net income $ 130,000 1,624,900 $0.08
Effect of Dilutive Securities
Common Stock Options and
Warrants - 318,200
9% Convertible Notes Due to
Related Parties 29,700 863,600
Diluted EPS
Net Income Plus Assumed
Conversions $ 159,700 2,806,700 $0.06
Options to purchase 634,000 shares of common stock at approximately $3.50 per
share were outstanding during 1998, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market price of the common shares. The options expire from 1999 to 2003.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Year Ended December 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Net income $ 635,600 1,579,100 $0.40
Effect of Dilutive Securities
Common Stock Options - 122,900
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 approximately $3.50 per
share were outstanding during 1997, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market price of the common shares. The options expire from 1999 to 2001.
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.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified
to conform to the 1998 presentation.
Credit Risk and Fair Value of Financial Instruments
Financial instruments which potentially subject the Company to
concentrations of credit risk at December 31, 1998 include trade receivables,
notes receivable, and approximately $360,000 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, the line of credit,
and the mortgage payable 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.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Year 2000
The Year 2000 issue is the result of shortcomings in electronic data
processing systems and other electronic equipment that may adversely affect
business operations.
The Company's management is making efforts to determine the possible
effects of Year 2000 issues on its operations. Management will also attempt to
determine if its significant customers, vendors and other third parties upon
which it relies have addressed or will be able to address any affected systems
on a timely basis. Management does not expect the potential disruption from
Year 2000 issues to have a material effect on the Company's business operations,
but the outcome remains uncertain. The accompanying financial statements
contain no provision or adjustments related to the ultimate outcome of this
uncertainty.
NOTE 2 - RELATED-PARTY BORROWINGS
At December 31, 1997, the Company had long-term notes payable to two
shareholders of the Company in the aggregate amount of $600,000. The notes bore
interest at 9% per annum and were convertible at any time in whole or in part at
the lender's option into common shares of the Company at $0.579 per share.
During 1998, the conversion features attached to the long-term notes payable
were exchanged for an equivalent number of warrants. The Company subsequently
repaid the notes using proceeds from mortgage borrowings (see Note 3). The
Company has reserved, from its authorized but unused shares of common stock,
1,036,300 shares for use in the event the warrants are exercised. The warrants
are exercisable under substantially the same terms as the conversion feature for
which they were exchanged.
Cash paid for interest on the notes payable to related parties during
the years ended December 31, 1998 and 1997, was approximately $49,900 and
$59,000, respectively.
The Company had stock subscriptions receivable from related parties of
approximately $43,700 and $113,200 as of December 31, 1998 and 1997,
respectively.
NOTE 3 - MORTGAGE PAYABLE
In November 1998, the Company borrowed $750,000 from a financial
institution in the form of a mortgage payable, as follows:
Mortgage payable, collateralized by real
estate and improvements, bearing interest at
7.5% per annum, 120 monthly payments of
principal and interest of approximately
$6,100 based on a 20-year amortization, with
a balloon payment of approximately $513,500
due in 2009. $ 748,100
The mortgage provides that, among other things, the Company maintain a
minimum working capital and net worth, and a maximum debt to net worth ratio.
The proceeds were used to repay notes payable to related parties of $600,000 and
to provide additional permanent working capital.
<PAGE>
NOTE 3 - MORTGAGE PAYABLE (Continued)
Maturities on the mortgage payable are as follows:
Year Principal
1999 $ 56,300
2000 55,100
2001 53,600
2002 52,000
2003 50,400
Thereafter 480,700
$ 748,100
Cash paid for interest on the mortgage payable during the year ended
December 31, 1998 approximated $4,200.
Cash paid for interest on all borrowing arrangements was approximately
$75,000 and $91,000 in 1998 and 1997, respectively.
NOTE 4 - CREDIT LINE
The Company maintains a line of credit with a financial institution
under a revolving loan agreement, which matures in November 1999. The borrowing
limit as of December 31, 1998 was $1,000,000. Borrowings are collateralized by
all accounts receivable and inventories and interest is payable monthly at the
financial institution's prime rate (7.75% at December 31, 1998). 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,
1998, the Company had $99,900 of borrowings under the line of credit. The
Company has subsequently paid the line to zero and satisfied the 30-day resting
requirement for the calendar year 1999.
NOTE 5 - 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 in cash and $1,850,000 in notes receivable (see Note 6).
The aggregate net book value of assets sold or otherwise disposed of was
approximately $1,430,000, resulting in a gain of approximately $770,000.
During 1998, the Company sold assets related to its silk screen product
line which had been abandoned in 1997.
NOTE 6 - 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 10% 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.
<PAGE>
NOTE 6 - NOTES RECEIVABLE (Continued)
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 7 - INCOME TAXES
Significant components of the Company's deferred tax liabilities and
assets at December 31, 1998, are approximately as follows:
Deferred Tax Liabilities
Depreciation $ (51,000)
Deferred income on installment sale (301,000)
Net deferred tax liabilities (352,000)
Deferred Tax Assets
Bad debt allowance 8,000
Inventory reserves 32,000
Alternative minimum tax credit carryforwards 37,000
Non-compete agreement 6,000
Net operating loss carryforwards 21,000
Gross deferred tax assets 104,000
Valuation allowance (90,000)
Net deferred tax assets 14,000
Net deferred taxes $ (338,000)
During 1998, deferred tax asset valuation allowance did not change.
The difference between the Company's effective income tax rate and the
federal statutory rate is reconciled below:
1998 1997
Federal provision expected at
statutory rates $ 70,000 $ 320,000
Alternative minimum tax,
depreciation, meals and
entertainment, and other items 5,000 63,000
Tax effects of net operating loss (3,000) (80,000)
Provision for income taxes $ 72,000 $ 303,000
The Company had no foreign operations subject to foreign income taxes.
At December 31, 1998, net operating losses in the amount of $24,000 are
available to carry forward to offset federal taxable income through the year
2012. Income taxes paid in cash were approximately $37,000 and $10,000 during
the years ended December 31, 1998 and 1997, respectively.
NOTE 8 - INTERNATIONAL SALES
International sales amounted to approximately $382,000 and $194,000 in
1998 and 1997, respectively. All foreign transactions are transacted in US
dollars.
<PAGE>
NOTE 9 - EMPLOYEE STOCK OWNERSHIP AND OPTION PLANS
Employee Stock Ownership Plan
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, 1998, the ESOP held approximately 24,077 shares
of the Company's common stock. No contributions were made in 1998 or 1997.
1996 Stock Option Plan
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 1998 and 1997, a total of 130,000 and 10,000 options,
respectively, were issued under the SOP at a weighted average exercise price of
approximately $3.50 per share. As of December 31, 1998 there were 634,000 SOP
options outstanding.
Other Stock Options
In addition to the SOP options, the Company has other options
outstanding. All outstanding stock options not granted under the SOP are
exercisable at $1.38 per share. As of December 31, 1998 there were 388,000
other options outstanding.
There was an aggregate of 1,022,000 stock options outstanding at
December 31, 1998. The options expire as follows: 408,000 in 1999; 554,000 in
2001; and 60,000 in 2003. 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 aggregate stock option activity for the years ended December 31, 1998 and
1997:
Shares Under
Option
Outstanding at December 31, 1996 972,000
Exercised during 1997 (75,000)
Expired during 1997 (10,000)
Granted during 1997 10,000
Outstanding at December 31, 1997 897,000
Expired during 1998 (5,000)
Granted during 1998 130,000
Outstanding at December 31, 1998 1,022,000
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, 1998 were $43,700
and were receivable from related parties.
Payments of stock subscriptions receivable of $69,500 and $75,000 were
collected in 1998 and 1997, respectively.
<PAGE>
NOTE 9 - EMPLOYEE STOCK OWNERSHIP AND OPTION PLANS (Continued)
The Financial Accounting Standards Board pronouncement FAS No. 123,
"Accounting for Stock-Based Compensation," (FAS 123) 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:
1998 1997
Net income (loss) As reported $ 130,000 $ 635,600
Pro forma (166,700) 617,800
Income (loss) per share Basic
As reported 0.08 0.40
Pro forma (0.10) 0.39
Diluted
As reported 0.06 0.25
Pro forma (0.10) 0.24
The Company's weighted-average assumptions used in the pricing model
and resulting fair values were as follows:
1998 1997
Risk-free rate 6.50% 6.50%
Expected option life (in years) 4.25 5.00
Expected stock price volatility 152% 105%
Grant date value $2.08 $1.78
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee benefit plan (the Plan), which covers
substantially all employees. Under the terms of the 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 charged approximately $17,700 in 1998 and 1997 to operations for its
contributions to the Plan.
NOTE 11 - OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases
During 1998, the Company entered into a noncancelable operating lease
for office space which expires in November 2003. In addition, the Company
leases certain vehicles under noncancelable operating leases expiring through
2001. The operating leases provide for minimum lease payments aggregating to
approximately $93,800 in 1999; $84,900 in 2000; $70,900 in 2001; $68,600 in
2002 and $52,200 in 2003. During 1998, approximately $64,000 was charged to
operations for rent expense related to the operating leases.
<PAGE>
NOTE 11 - OTHER COMMITMENTS AND CONTINGENCIES (Continued)
Legal and Regulatory Proceedings
The Company is engaged in various legal and regulatory proceedings
incidental to it's normal business activities. Such matters are subject to many
uncertainties, and outcomes are not currently predictable. Consequently, it is
not practical to estimate a range of possible loss from the final disposition of
these matters, and losses, if any, could be material with respect to earnings in
a given period. However, management is of the opinion that the resolution of
the matters will not result in any significant liability to the Company in
relation to it's financial position or liquidity.
Licensing Agreement
During 1998, the Company entered into a three-year licensing agreement
with Discovery Communications, Inc. which provides for, among other things, the
Company's right to utilize intellectual properties surrounding the Discovery
Channel(r) brand. As defined in the agreement, the Company agreed to pay
royalties totaling a minimum of $300,000 over the term of the agreement based on
the expected sales of the product line bearing the Discovery Channel(r) name.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 340
<SECURITIES> 0
<RECEIVABLES> 530
<ALLOWANCES> 0
<INVENTORY> 1091
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<PP&E> 1759
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<TOTAL-ASSETS> 5016
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<OTHER-SE> 3412
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<INCOME-TAX> 72
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