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, 1999 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: $5,881,000
The aggregate market value of the voting stock held by the
non-affiliates of the Registrant was $2,283,750 based on the average high and
low bid price reported March 27, 2000 (based on 913,500 shares).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 27, 2000
Class Outstanding
----- -----------
Common Stock, $.001 2,025,333
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1. DESCRIPTION OF BUSINESS.....................................................................3
ITEM 2. DESCRIPTION OF PROPERTIES...................................................................8
ITEM 3. LEGAL PROCEEDINGS...........................................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLER.............................................9
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................................................9
ITEM 7. FINANCIAL STATEMENTS.......................................................................17
ITEM 8. ACCOUNTING AND FINCANCIAL DISCLSURE........................................................17
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS............................17
PART III
ITEM 10. EXECUTIVE COMPENSATION.....................................................................19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT..............................21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................22
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................22
EXHIBITS...................................................................................
FINANCIAL STATEMENTS.......................................................................
</TABLE>
2
<PAGE>
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.
From the beginning of 1998 through 1999, the Company demonstrated
success 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 expanded distribution channels. In 1998 the
Company launched its first internally generated branded proprietary toy
line, Space Voyagers(R). Space Voyagers(R) educational action figure
and role play toys helped establish the Company as offering proprietary
product lines in its new channels of distribution. In 1999, the first
full year in which this line was marketed, the Company sold
approximately $1 million in the Space Voyager brand. In addition to the
further internal development of proprietary lines and brands, the
Company completed its first year of a three-year renewable licensing
agreement with Discovery Communications, Inc. This agreement provides
for, among other things, the Company's right to utilize intellectual
properties surrounding the Discovery Channel(TM) brand in certain
product categories. The internal development of brands coupled with the
Company's licensing efforts has led to the broadening of a balanced
portfolio of product lines. Additionally, 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.
3
<PAGE>
(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
Space Voyagers(R), 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.
In addition to its proprietary brands, the Company also sells products
packaged under a license from Discovery Channel(TM). In second quarter
of 1999, the Company signed an agreement with Logiblocs Ltd., a UK
manufacturer of electronic building blocks, to exclusively market the
Logiblocs(R) product line in North, Central, and South America.
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 is investigating 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 markets and sells three dominant brands to
approximately 2,000 museums in its portfolio. Museum stores and
attractions throughout the United States and around the world are a
market that has 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.
Some 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 begin
to capture a mass-market customer base. Specifically, the arrangement
with Discovery Channel(TM) provides for a unique relationship with
Target Corporation, formerly known as Dayton Hudson Corporation (i.e.
Target Stores). Pursuant to this agreement, in 1999 the Company sold
approximately $750,000 in Discovery Channel(TM) branded toy
merchandise. The license agreement expires in December 31, 2001. Target
store represents 8.1% of total sales for 1999. No other customer
represents more than 4% of the Company's sales.
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. In
addition, the Company's announced strategy of pursuing
4
<PAGE>
acquisitions of other toy or publishing companies and product lines
could provide an entire into the mass-market through established
channels of distribution.
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.
Marketing and Sales
-------------------
The Company markets its product lines through its full-color catalog
and extensive Internet web sites a Network of manufacturer's
representatives and utilizes newsletters, trade publications, client
visits, and telephone contact and solicitation. The Company 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(R) 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.
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.
The annual American International Toy Fair held in New York City in
February, attracts thousands of manufacturers, importers and sales
agents from 30 countries to showcase their products. It is the most
important toy industry-marketing event of the year and is attended by
more than 15,000 commercial retail buyers and over 900 national and
international prints and broadcast reporters, and is an important sales
and marketing event for the Company. The Company's six figure sale
orders taken at the 1999 Fair represented a 48% increase over its
record - setting 1998 sales, which was the Company's fourth consecutive
record Toy Fair. The Company show cased numerous new products from its
freshest branded lines, Discovery Channel(TM) toys, Logiblocs(R)
electronic building systems, and extensions to the Company's
proprietary Space Voyagers(R) brand of authentic space action figures
and replicas, all of which contributed to record results.
5
<PAGE>
The Company continues to strengthen its sales and exposure to the
e-commerce industry. Since July 1999, many of the Company's products
are available through Amazon.com Toys and Game store, which provides a
large distribution channel though the Internet. Additionally, many more
e-commerce retailers such as E-Toys, Toysmart.com and others carry
Action Products' toys and books. Management plans to continue its
growth and monitoring of e-commerce applications, as it believes that
the global market will continue to prove favorable over time.
International Sales and Manufacturing
-------------------------------------
Revenues from the Company's international sales represented
approximately 7.0% and 6.5% of total revenues in 1999 and 1998,
respectively. Product lines marketed internationally are generally the
same as those marketed domestically and generally sold internationally
directly to retail stores. In 1999, the Company added distributors in
the United Kingdom and one in Canada. Management plans to continue to
seek broader global 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, 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. The Company's products are produced by
approximately 30 outside manufacturing companies in the United States,
Mexico, Taiwan, Hong Kong and China, and are imported directly by the
Company as finished goods. 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 were
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.
In July of 1999, the Company enlisted Benjamin Toys Ltd. to distribute
products into the UK market for an initial period though December 31,
2000. Benjamin Toys plans to distribute the Company's entire Space
Voyagers(R) line with the option of adding other lines. In late 1999 a
Canadian distributor was added. The Company also has one other formal
international distributor relationship, for South/Central America with
Century Merchandising. As mentioned elsewhere in this filing, the
Company sells to other international territory accounts and
distributors on a direct basis with out formal exclusive distribution
arrangements.
6
<PAGE>
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 Company
owns the registration of Space Voyager(R). 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 there under. 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.
The Company's products are rated according to the EN-71 safety protocol
adopted by the European Community. In addition, the Company 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.
7
<PAGE>
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, 1999, the Company had 26 full-time employees,
including four executive positions, ten sales and customer support
positions, and twelve other positions to fulfill administrative
responsibilities in marketing, product development, accounting,
logistics, etc. The employees are not represented by a union. In 1999,
the Company offered a benefits package to its employees that 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.
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,
product development, importing and graphics personnel.
The Company's other 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, 1999
was $731,400 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 $514,000 will become due. The property is currently in
usable and sellable condition.
ITEM 3. LEGAL PROCEEDINGS:
The Company is engaged in various legal and regulatory proceedings
incidental to its 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, the
Company is of the opinion that the resolution of these matters will not
result in any significant liability to the Company in relation to its
financial position or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
During the quarter ended December 31, 1999, there were no matters
submitted to a vote of the Company's security holders.
8
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
The Company's Common Stock is traded on The NASDAQ Small Cap Market
under the respective symbol APII. The number of holders on record of
the Company's Common Stock as of March 27, 2000, was approximately
1,250.
The high and low bid quotations for each quarter of the fiscal years
ended December 31, 1998 and 1999 are follows:
Quarter Ended: High Bid Low Bid
------------- -------- -------
March 31, 1998 3.250 2.250
June 30, 1998 3.188 2.563
September 30, 1998 2.875 2.000
December 31, 1998 6.438 1.750
March 31, 1999 2.688 2.500
June 30, 1999 2.375 2.250
September 30, 1999 2.750 2.625
December 31, 1999 2.188 2.000
The quotations represent prices between dealers in securities; they do
not include retail mark-ups, markdowns, 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 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.
Internal Development - The Company's continued development of its
proprietary brands, in particular its Space Voyager(R) product line;
John Glenn's return to space and certain mainstream motion pictures has
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
9
<PAGE>
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 Powerball line. New product introductions reached
their initial sales expectations and the Company plans on continuing
each of the new product lines in fiscal 2000. 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, exclusive 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 Target Corp. (i.e.
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 entire into
the mass-market. With this arrangement the Company received
approximately $700,000 in sales in 1999, however there is no guarantee
or obligation that these sales will continue.
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. 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.
The Company retained The DAK Group, Ltd. to represent interests in
certain acquisition pursuits in the toy and publishing industries.
Also, during 1999, the Company acquired the exclusive worldwide
ownership rights to the patents, patents pending, and trademarks of
Roar Knobs(TM). The Purchase / Acquisition Agreement grants the Company
the exclusive ownership rights to the Roar Knobs(TM) product line
worldwide. The Company previewed the line at the February 2000 Toy Fair
to industry buyers. The Company plans to launch and begin sales of Roar
Knobs (TM) in late 2000.
Year 2000 - The Company concluded its efforts concerning its exposure
relative to year 2000 issues for both information and non-information
technology systems. Management actively monitors the status of the
readiness program of the Company. The Company`s out of pocket cost
associated with becoming Year 2000 compliant were approximately
$15,000. These cost were expensed as incurred, and the Company does not
anticipate any additional material expenditure as a result of Year 2000
issues.
Based on operations since January 1, 2000, including the leap year date
of February 29, 2000, the Company has not experienced any significant
disruption or change, and does not expect any significant impact to its
ongoing business a result of the Year 2000 issue. Additionally, the
Company is not aware of any significant Year 2000 issues or problems
that have arisen for its significant customers, vendors or service
providers. As there can be no assurance that the Company's efforts to
achieve Year 2000 readiness have been completely successful or that
customers, vendors and service providers will not experience Year 2000
related failures in the future, the Company will continue to monitor
its exposure to Year 2000 issues and will leave its contingency plans
in place in the event that any significant Year 2000 related issues
arise.
10
<PAGE>
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., and (iii) 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,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net Sales $5,881,000 $5,868,800
Gross Profit 2,597,200 2,787,000
Selling, General & Administrative Expenses 3,260,200 2,775,800
Income (Loss) from operations (663,000) 11,200
Income (Loss) before tax provision (429,500) 202,000
Net Income (Loss) (232,500) 130,000
Basic Net Income (Loss) per share (0.14) 0.08
Cash flow used in operations (1,050,700) (289,400)
As of December 31,
------------------
1999 1998
---- ----
Current Assets 3,605,400 2,438,000
Total Assets 5,269,200 5,016,300
Current Liabilities 1,1,60,200 372,300
Long Term Liabilities 901,400 1,229,800
Stockholders' Equity 3,207,600 3,414,200
</TABLE>
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
-----------------------------------------------------------------------
Net sales increased slightly to a new record $5,881,000 in 1999 from
$5,868,800 in 1998. Although a small increase, this represents the
fifth consecutive 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.
11
<PAGE>
Gross profit decreased from $2,787,000 in 1998 to $2,597,200 in 1999,
down $189,800. As a percentage of sales, gross profit decreased to
44.2% compared to 47.5% in the prior year. Management attributes the
decline in gross profit percentage to discounting programs, aimed at
stimulating sales. Also, the profit margin on a significant new product
line was reduced down to 28% when the initial inventory shipments were
delivered airfreight.
Selling, General and Administrative (SG&A) expenses were $3,260,200 and
$2,775,800 in 1999 and 1998, 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 $96,000 and
$75,000 in 1999 and 1998, respectively. The increase is due primarily
to interest for two months and twelve months for 1998 and 1999
respectively, on the Mortgage Loan, which begin in late 1998, and an
increase in borrowing capacity in the line of credit in 1999. (See
"Liquidity and Capital Resources")
Interest income was $172,100 and $114,000 in 1999 and 1998,
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 three-percent of net sales in each of the last
two years. Other income in 1999 included approximately $113,000,
resulting from the expiration of contingencies related to a refund from
a taxing authority. Other income in 1998 included non-compete and
consulting income resulting from product line divestitures. During
1998, the Company sold or otherwise disposed of certain assets,
primarily associated with its snack food and certain silkscreen product
lines, resulting in gains of $97,100.
As a result of the forgoing, the Company had a Net Operating Loss of
$232,500 in fiscal year 1999, which was a transition year for Action
Products. The Company established a new corporate headquarters in
Orlando, Florida. A number of product lines were phased out impacting
profit margins, and a more refined and proprietary product mix was
developed. Additionally, an emphasis on mergers and acquisitions (M&A),
led to a strong increase in legal, professional and corporate expenses.
Management's emphasis on M&A in 1999 was bolstered and financed by cash
assets built both through operations and divestitures. In 2000
Management plans to continue acquisition activity but with emphasis on
minimizing up-front expenditures, primarily legal and consulting.
Liquidity and Capital Resources
-------------------------------
As of December 31, 1999, current assets were $3,605,400 compared to
current liabilities of $1,160,200 for a current ratio of approximately
3.1 to 1. In fiscal 1998, the Company's current ratio was 6.5 to 1.
The Company had net cash flows used in operations of $1,050,700 in 1999
compared to net cash flows used in operations of $289,400, a change of
$761,300. This change was due in part to the net loss for the year of
$232,500 and the increase in trade accounts receivable and inventory of
$458,000 and $325,000, respectively in 1999. Improvements in accounts
payable accrued expenses and income taxes payable make up the
difference.
On November 18, 1999, the Company received full payment on its
significant note-receivable pursuant to its 1997 divestiture of Action
Snacks(R). The Company received early its final payment of $671,504 of
notes receivable, otherwise the note would have been amortized through
June 2003.
12
<PAGE>
As of December 31, 1999, the Company's only long-term debt was a
mortgage payable to a commercial bank of $731,400. The Mortgage is
collateralized by real estate and improvements, bearing interest
annually at 7.5% and amortized assuming a twenty-year term, with ten
years of monthly principal and interest payments, then a balloon
payment of approximately $514,000. 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 were comprised
of deferred revenue of $175,000, associated with a non-compete
agreement, and deferred income taxes of $14,000, primarily associated
with the gain, both in connection with the sale of certain food line
assets.
During the year ended December 31, 1999, the Company collected $44,500
of stock subscription receivables from related parties. In addition,
the Company had stock subscription receivables of approximately
$534,100 due from related parties at December 31, 1999.
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, 1999 was $1,000,000, against which the Company had
borrowed $516,000.
During 1999, the Company recorded normal depreciation and amortization
of its fixed assets of approximately $109,800. In addition, the Company
invested $125,700 and $116,500 in the acquisition of new assets in 1999
and 1998, respectively.
Shareholders' equity at December 31, 1999 decreased by $206,600 to
$3,207,600 due primarily to the net loss of income and the increase in
stock subscription receivables.
Factors That May Affect Future Results and Market Price of Stock:
-----------------------------------------------------------------
The Company is operating in a rapidly changing environment, which
involves a number of risk, some of these the Company controls. The
following indicate some of these risks:
Concentration of Stock Ownership. The Companies present Officers and
Directors beneficially own approximately 65 % of the outstanding common
stock. As a result, current management will be substantially able to
exercise significant influence over all matters requiring shareholder
approval, including the election of directors and approval of
significant corporate transactions
Dependence on Key Management. The Company success largely depends on a
number of key employees. The loss of services or one or more of these
employees could have a material adverse effect on the Company's
business. The Company is especially dependent upon the efforts and
abilities of certain of its senior management, particular Ronald
Kaplan, its Chairman, President & Chief Executive Officer. The loss of
Mr. Kaplan or any of its key executives could have a material adverse
effect on the Company and its operations and prospects. Currently the
Company has no key man life insurance on Mr. Kaplan. The Company
believes that its future success will also depend, in part, upon its
ability to attract, retain and motivate qualified personnel. There is
no assurance, however, that the Company will be successful in
attracting and retaining such personnel.
No Dividends. The Company expects that it will retain all available
earnings generated by our operations for the development and growth of
our business. Accordingly, the Company does not anticipate paying any
cash dividends on its common stock.
Dilution. The Company's Articles of Incorporation authorizes the
issuance of Shares of common and preferred stock. As of March 27, 2000,
the Company has 2,025,333 shares of its common stock issued and
outstanding and has not issued any preferred stock. The Company's Board
has the ability, without further shareholder approval, issue up to
12,974,667 additional shares of common stock, with preferences designed
by the Board of Directors. As such issuance may result in a reduction
of the book value or market price, if any of the
13
<PAGE>
outstanding common shares. Issuance of the additional common stock will
reduce the proportionate ownership and voting power of the then
existing shareholders.
Anti-Takeover Provisions. The foregoing provision in the Company's
Articles of Incorporation (namely the ability, without further
shareholder approval) to issue additional shares of common stock and/or
preferred stock with rights and preferences determined by the Board of
Directors could be used as anti-takeover measures. These provisions
could prevent or discourage or delay a non-negotiated change in control
and result in shareholders receiving less for their common stock than
they otherwise might in the event of a takeover attempt.
Changing Consumer Preferences, reliance on New Product Introduction. As
a result of changing consumer preferences, many toys are successfully
marketed for only one or two years, if at all. There can be no
assurance that (i) any of the Company's current successful products or
product lines will continue to be popular with consumers for any
significant period of time or (ii) new products and product lines
introduced by the Company will achieve an acceptable degree of market
acceptance, or that if such acceptance is achieved, it will be
maintained for any significant period of time. Furthermore, sales of
the Company's existing products are expected to decline over time and
may decline at rates faster than expected. The Company's success is
dependent upon the Company's ability to enhance existing product lines
and develop new products and product lines. The failure of the
Company's new products and product lines to achieve and sustain market
acceptance and to produce acceptable margins could have a material
adverse effect on the Company's financial condition and results of
operations.
Liquidity. Effective April 18, 1998, the Company entered into an
agreement with SouthTrust Bank pursuant to which SouthTrust provides a
revolving line of credit for up to $1 million (the "Revolver").
Borrowings under the Revolver are utilized by the Company to finance
accounts receivable, inventory, and other operating and capital
requirements. The Revolver matures April 17, 2000 and contains
covenants relating to the condition of the Company. If the Company
fails to maintain compliance with the financial covenants contained in
the Revolver, the maturity date will be accelerated. The Company is
currently negotiating a new line of credit.
Inventory Management. Most of the Company's largest retail customers
utilize an inventory management system to track sales of products and
rely on reorders being rapidly filled by the Company and other
suppliers rather than maintaining large product inventories. These
types of systems put pressure on suppliers like the Company to promptly
fill customer orders and also shift some of the inventory risk from the
retailer to suppliers. Production of excess products by the Company to
meet anticipated retailer demand could result in price markdowns and
increased inventory carrying costs for the Company. Similarly, if the
Company fails to predict consumer demand for a product, it may not be
able to deliver an adequate supply of products on a timely basis and
will, as a result, lose sales opportunities.
Returns and Markdowns. As is customary in the toy industry, the Company
historically has permitted certain customers to return slow-moving
items for credit or has provided price protection by making any price
reductions effective as to certain products then held by retailers in
inventory. The Company expects that it will continue to be required to
make such accommodations in the future. Any significant increase in the
amount of returns or markdowns could have a material adverse effect on
the Company's financial condition and results of operations.
Acquisition Risks. The Company may from time to time evaluate and
pursue acquisition opportunities on terms management considers
favorable to the Company. A successful acquisition involves an
assessment of the business condition and prospects of the acquisition
target, which includes factors beyond the Company's control. This
assessment is necessarily inexact and its accuracy is inherently
uncertain. In connection with such an assessment, the Company performs
a review it believes to be generally consistent
14
<PAGE>
with industry practices. This review, however, will not reveal all
existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the acquisition target to assess fully its
deficiencies. There can be no assurance that any such acquisition would
be successful or that the operations of the acquisition target could be
successfully integrated with the Company's operations. Any unsuccessful
acquisition could have a material adverse effect on the Company.
Dependence on Contract Manufacturers. The Company conducts
substantially all of its manufacturing operations through contract
manufacturers, many of which are located in the People's Republic of
China (the "PRC"), Hong Kong, Singapore and Taiwan. The Company does
not have long-term contracts with any of its manufacturers. Foreign
manufacturing is subject to a number of risks, including but not
limited to transportation delays and interruptions, political and
economic disruptions, the impositions of tariffs and import and export
controls and changes in governmental policies. While the Company to
date has not experienced any material adverse effects due to such
risks, there can be no assurance that such events will not occur in the
future and possibly result in increases in costs and delays of, or
interferences with, product deliveries resulting in losses of sales and
goodwill.
General Risks of Foreign Operations. Foreign operations are generally
subject to risks such as transportation delays and interruptions,
political and economic disruptions, the imposition of tariffs and
import and export controls, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting
accounts receivable, changes in governmental policies, restrictions on
the transfer of funds, currency fluctuations and potentially adverse
tax consequences. While the Company to date has not experienced any
material adverse effects due to its foreign operations, there can be no
assurance that such events will not occur in the future. Any growth of
the Company's international operations will subject the Company to
greater exposure to risks of foreign operations. The occurrence of such
an event, particularly one affecting the Company's relations with its
manufacturers in the PRC, would have a material adverse effect on the
Company.
Product Safety and Liability, Regulation. Products that have been or
may be developed or sold by the Company may expose the Company to
potential liability from personal injury or property damage claims by
end-users of such products. The Company has never been and is not
presently a defendant in any product liability lawsuit; however, there
can be no assurance that such a suit will not be brought in the future
against the Company. The Company currently maintains product liability
insurance coverage in the amount of $1.0 million per occurrence, with a
$2.0 million excess umbrella policy. There can be no assurance that the
Company will be able to maintain such coverage or obtain additional
coverage on acceptable terms, or that such insurance will provide
adequate coverage against all potential claims. Moreover, even if the
Company maintains adequate insurance, any successful claim could
materially and adversely affect the reputation and prospects of the
Company, as well as divert management time. The CPSC has the authority
under certain federal laws and regulations to protect consumers from
hazardous goods. The CPSC may exclude from the market goods it
determines are hazardous, and may require a manufacturer to repurchase
such goods under certain circumstances. Some state, local and foreign
governments have similar laws and regulations. In the event that such
laws or regulations change or the Company is found in the future to
have violated any such law or regulation, the sale of the relevant
product could be prohibited and the Company could be required to
repurchase such products.
Competition. The toy industry is highly competitive. Many of the
Company's competitors have longer operating histories, broader product
lines and greater financial resources and advertising budgets than the
Company. In addition, the toy industry has nominal barriers to entry.
Competition is based primarily on the ability to design and develop new
toys, procure licenses for popular products, characters and trademarks,
and successfully market products. Many of the Company's competitors
offer similar products or alternatives to the Company's products. The
Company's products compete with other products for retail shelf space.
There can be no assurance that shelf space in retail stores will
continue to be available
15
<PAGE>
to support the Company's existing products or any expansion of the
Company's products and product lines. There can be no assurance that
the Company will be able to continue to compete effectively in this
marketplace.
Possible Volatility of Stock Price. The market price of the common
stock has been and may continue to be highly volatile and has been and
could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of new products by the
Company or its competitors, changes in financial estimates by
securities analysts, or other events or factors. In the event that the
Company's operating results are below the expectations of public market
analysts and investors in one or more future quarters, it is likely
that the price of the Company's common stock will be materially
adversely affected. General market fluctuations may adversely affect
the market price of the Company's common stock.
Seasonality and Fluctuations in Quarterly Performance. The Company's
sales are seasonal in that a substantial portion of net sales is made
to retailers in anticipation of the summer and Christmas holiday
seasons. During fiscal 1999, 56% of the Company's net sales were made
during the Company's second and forth fiscal quarters in connection
with retail sales for the summer and Christmas holiday season. Adverse
business or economic conditions during these periods could adversely
affect results of operations for the full year. The Company's financial
results for a particular quarter may not be indicative of results for
an entire year, and the Company's revenues and/or expenses will vary
from quarter to quarter.
Sales tend to be lowest in the first and third quarters and highest in
the second and forth quarters of the calendar year. Products are
generally shipped as orders are received and accordingly the Company
has historically operated with little backlog. As a result, sales in
any quarter are dependent on orders booked and shipped in that quarter.
If sales or timing of orders fall below the Company's expectations,
operating results could be adversely affected for relevant quarters and
for the year if expenses based on these expectations have already been
incurred. Further, due to the seasonality of the business, cash flow
tends to be negative during the first and third quarters when inventory
and accounts receivable have historically increased in anticipation of
the seasonally higher product sales in the second and forth quarters.
Cash flow requirements during these periods are funded by the revolving
line of credit that the Company has with a bank. Should the Company not
have a sufficient line of credit available during the year, it could
have a material adverse effect on the Company's results of operations
due to its limited ability to internally finance the growth in
inventory and accounts receivables necessary to generate a positive net
income.
Governmental Regulation. In the United States, the Company is subject
to the provisions of, among other laws, the Federal Consumer Product
Safety Act and the Federal Hazardous Substances Act (the "Acts"). The
Acts empower the Consumer Product Safety Commission (the "Consumer
Commission") to protect the public against unreasonable risks of injury
associated with consumer products, including toys and other articles.
The Consumer Commission has the authority to exclude from the market
articles, which are found to be hazardous and can require a
manufacturer to repair or repurchase such toys under certain
circumstances. Any such determination by the Consumer Commission is
subject to court review. Violations of the Acts may also result in
civil and criminal penalties. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the
world. The Company maintains a quality control program (including the
retention of independent testing laboratories) to ensure compliance
with applicable laws. The Company believes it currently is in
substantial compliance with these laws. In general, the Company has not
experienced difficulty complying with such regulations, and compliance
has not had an adverse effect on the Company's business.
Accounts Receivable Risks. Certain of the Company's customers
participate in an accounts receivable dating program pursuant to which
payments for products are delayed for up to 120 days. Although
16
<PAGE>
Target Corporation accounted for more than 4% of the Company's sales in
1999, the insolvency or business failure of any customer with a large
account receivable could have a material adverse affect on the Company.
Inflation & Seasonality. 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.
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:
During the two years, the Company has not had any changes in or
disagreements with its accountants.
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:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ronald S. Kaplan 34 Chairman of the Board of Directors, President,
Chief Executive Officer (1)
Timothy L. Young 37 Chief Financial Officer & Secretary
Larry Bernstein 58 Director, Chair of Nominating Committee (1) (2)
Ronald Tuchman 64 Director, Chair of Audit Committee (2)
Judith Kaplan 61 Director
Pablo Savetman 34 Vice President of Sales
Robert Zumbahlen 43 Treasurer, Purchasing and Inventory Control Manager
(1) Member of the Nominating Committee
(2) Member of the Audit Committee
</TABLE>
Ronald S. Kaplan, Chairman of the Board, Chief Executive Officer and
President since January 1996. Prior to becoming President, Mr. Kaplan
was the Chief Operating Officer. Son of founder/director Judith Kaplan
(below)
Timothy L. Young, Chief Financial Officer and Corporate Secretary, is a
graduate of the Baylor University with Bachelor of Business
Administration degrees in Accounting and Finance. Mr. Young
17
<PAGE>
joined the Company in February of 2000. Prior to joining the Company,
Mr. Young was a financial consultant for various companies. His
services included Joint Ventures, Mergers & Acquisitions, and
consolidations of operations to international banking relations. From
the beginning of 1994 to 1996, Mr. Young was Vice President, Chief
Financial Officer & Treasurer of Brown & Brown, Inc. a $150 million
publicly held NYSE listed company. He was previously with the Certified
Public Accounting firm of Pricewaterhouse Coopers LLP.
Larry Bernstein, Director since September 1999. Mr. Bernstein is a key
figure in the toy industry. For twenty years Mr. Bernstein held several
positions with the Hasbro Corporation. Prior to leaving Hasbro in 1995
Mr. Bernstein was the President of the flagship Hasbro Toy Division and
Executive Vice President of Hasbro, Inc. Mr. Bernstein holds a Bachelor
of Science degree in Business Administration from Boston University
with emphasis in Marketing & Economics.
Ronald Tuchman, Director since August 1998, is a respected member of
the toy industry with over 30 years of experience in all retailing
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 Vice
President, 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 of Sales, earned an Associate degree in
Business Management from St. John's 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 proceeding
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.
Robert Zumbahlen, Treasurer & Purchasing and Inventory Control Manager,
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 - Larry Bernstein, Chair; Ronald S. Kaplan
Audit Committee - Ronald Tuchman, Chair; Larry Bernstein; Judith Kaplan
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. In the past outside
18
<PAGE>
directors were granted 10,000 shares under Stock Option Plan, for each
year of service on the Board, above the market value of the shares as
listed at the time of the grant.
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 $100,000 or more. Except as set forth in the
table below, no bonuses or other compensation was paid during the 1999,
1998, or 1997 fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Other
Name and Annual Restricted
Principal Salary Bonus Compensation
Position Year ($) ($) ($)1
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald Kaplan, CEO 1999 $100,000 $0 $6,000
1998 $100,000 $35,000 $6,000
1997 $75,000 $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. As of February 2000, Mr. Kaplan's annual
salary is $105,000 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, 1999.
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, 1999 and the value of options held at
December 31, 1999. The Named Executive exercised 243,000 shares in
November 1999 at an exercise price of $1.38.
<TABLE>
<CAPTION>
Option Exercises/Option Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In- the-money Options
Acquired on Value Options at Fiscal Year End At Fiscal Year End
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Ronald S. Kaplan 243,000 $211,410(1) 100,000/0 $0/0(2)
</TABLE>
(1) On November 29, 1999, Mr. Kaplan exercised 243,000 shares at the
exercise prices of $1.39. The value of these shares at the time of
exercise is stated in ITEM 12 "Certain Relationships and Related
Transactions", which
19
<PAGE>
indicates a realizable gain of $208,900. The Value Realized is
calculated on the last sales price of a share of the Company's Common
Stock on December 31, 1999 as reported by Nasdaq was $2.125. (2) 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, 1999 as reported
by Nasdaq was $2.125, therefore the value of the unexercised options
are out-of-the-money.
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.
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
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, 1999, 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 for 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.
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
20
<PAGE>
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, 1999,
there were 614,000 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, 2000. 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., 390 North Orange Ave., 21st Floor, Orlando, Florida 32801. As of
March 27, 2000, there were issued and outstanding 2,025,333 shares of
Common Stock.
<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 1,202,317 1 32.7%
Judith Kaplan Common 1,026,948 2 27.9%
Warren Kaplan Common 1,026,948 3 27.9%
Ronald Tuchman Common 70,000 4 1.9%
Larry Bernstein Common 10,000 5 .3%
All Directors and
Officers as a Group
(7 persons, Directors and
5% owners shown above) Common 2,389,265 6 65.0%
</TABLE>
- -------------------
1 Includes immediately exercisable options to purchase 100,000 shares at
$3.50 per share and immediately exercisable warrants to purchase
approximately 829,000 shares of Common Stock at $0.579.
2 Includes immediately exercisable options to purchase 100,000 shares at
$3.50 per share. Also includes 396,659 shares held by her husband, and
of which Ms. Kaplan disclaims beneficial ownership.
3 Includes immediately exercisable options to 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 406,212 shares owned by his
wife, and of which Mr. Kaplan disclaims beneficial ownership.
4 Includes immediately exercisable options to purchase 70,000 shares at
$3.50 per share.
21
<PAGE>
5 Includes immediately exercisable options to purchase 10,000 shares at
$3.50 per share.
6 The 1,026,048 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
During 1998, Ronald S. Kaplan and Elissa Kaplan redeemed the conversion
features of their notes due them form the Company 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, 1999.
On November 29, 1999, Ronald S. Kaplan, Judith Kaplan and Warren Kaplan
exercised their options, 243,000, 58,000, and 58,000, respectively at a
exercise price of $1.39 per share, the realizable gain at the time of
exercise was $208,900, $49,880 and $49,880, respectively, based on a
closing price of $ 2.25.
In connection with stock options exercised during 1999, there were
stock subscriptions receivable from related parties of $534,100 as of
December 31, 1999.
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, 1999
Statements of Operations - Years ended December 31, 1999
and 1998
Statements of Changes in Shareholders' Equity - Years
ended December 31, 1999 and 1998
Statements of Cash Flows - Years ended December 31, 1999
and 1998
Notes to Financial Statements - Years ended December 31,
1999 and 1998
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
22
<PAGE>
(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
(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)
(23) Independent Auditors Consent Agreement
(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 1999.
23
<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: April 3, 2000 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ RONALD S. KAPLAN Chairman of the Board/ April 3, 2000
- ----------------------------- President/Chief Executive --------------
Ronald S. Kaplan Officer/ Director
/s/ TIMOTHY L. YOUNG Chief Financial Officer/ April 3, 2000
- -------------------- Secretary (Chief Accounting Officer) --------------
Timothy L. Young
</TABLE>
24
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
<PAGE>
C O N T E N T S
---------------
Page
Number
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance Sheet F-2-3
Statements of Operations F-4
Statements of Changes in Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors
Action Products International, Inc.
Orlando, Florida
We have audited the accompanying balance sheet of Action Products International,
Inc. as of December 31, 1999, 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, 1999. 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, 1999, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
MOORE STEPHENS LOVELACE, P.A.
Certified Public Accountants
Orlando, Florida
February 4, 2000
F-1
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
BALANCE SHEET
December 31, 1999
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,053,600
Accounts receivable, net of an allowance
for doubtful accounts of $57,300 956,700
Inventories, net 1,416,300
Prepaid expenses and other assets 178,800
-----------
TOTAL CURRENT ASSETS 3,605,400
-----------
PROPERTY, PLANT AND EQUIPMENT
Land 67,400
Building and building improvements 1,020,300
Equipment 499,300
Furniture and fixtures 162,900
-----------
1,749,900
Less accumulated depreciation and amortization (777,900)
-----------
NET PROPERTY, PLANT AND EQUIPMENT 972,000
OTHER ASSETS 691,800
-----------
TOTAL ASSETS $ 5,269,200
===========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 165,900
Accrued expenses 306,100
Accrued payroll and related 27,200
Current portion of mortgage payable 19,000
Borrowings under line of credit 516,000
Income taxes payable 101,000
Deferred revenue 25,000
-----------
TOTAL CURRENT LIABILITIES 1,160,200
MORTGAGE PAYABLE 712,400
DEFERRED INCOME TAXES 14,000
DEFERRED REVENUE 175,000
-----------
TOTAL LIABILITIES 2,174,400
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $.001 par value; 15,000,000
shares authorized; 2,007,400 shares
issued and outstanding 2,000
Additional paid-in capital 3,524,200
Retained earnings 215,500
Stock subscription receivable (534,100)
-----------
TOTAL SHAREHOLDERS' EQUITY 3,207,600
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,269,200
===========
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 5,881,000 $ 5,868,800
COST OF SALES 3,283,800 3,081,800
----------- -----------
GROSS PROFIT 2,597,200 2,787,000
OPERATING EXPENSES
Selling 1,394,500 1,149,000
General and administrative 1,865,700 1,626,700
----------- -----------
3,260,200 2,775,800
----------- -----------
INCOME (LOSS) FROM OPERATIONS (663,000) 11,200
OTHER INCOME (EXPENSE)
Interest expense (96,000) (75,000)
Gain on disposition of assets -- 97,100
Interest income 172,100 114,000
Other income 157,400 54,700
----------- -----------
233,500 190,800
----------- -----------
INCOME (LOSS) BEFORE
PROVISION fOR INCOME TAXES (429,500) 202,000
PROVISION (BENEFIT) FOR INCOME TAXES
Current 127,000 --
Deferred (324,000) 72,000
----------- -----------
(197,000) 72,000
----------- -----------
NET INCOME (LOSS) $ (232,500) $ 130,000
=========== ===========
INCOME (LOSS) PER SHARE
Basic $ (0.14) $ 0.08
=========== ===========
Diluted $ (0.14) $ 0.06
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
$.001 Par Value Additional Stock Total
-------------------- Paid-In Retained Subscription Shareholders'
Shares Amount Capital Earnings Receivable Equity
------ ------ ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 1,624,900 $ 1,600 $ 3,008,300 $ 318,000 $ (113,200) $ 3,214,700
COLLECTION OF STOCK
SUBSCRIPTIONS -- -- -- -- 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
COLLECTION OF STOCK
SUBSCRIPTIONS -- -- -- -- 44,500 44,500
ISSUANCE OF COMMON
SHARES UPON EXERCISE 388,000 400 534,500 -- (534,900) --
OF OPTIONS
CANCELLATION OF COMMON (5,500) -- (18,600) -- -- (18,600)
STOCK
NET LOSS -- -- -- (232,500) -- (232,500)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 1999 2,007,400 $ 2,000 $ 3,524,200 $ 215,500 $ (534,100) $ 3,207,600
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (232,500) $ 130,000
Adjustments to reconcile net income (loss) to net cash
Depreciation 109,800 83,800
Amortization 181,100 109,100
Provision for bad debts 31,800 --
Deferred income tax provision (benefit) (324,000) 72,000
Gain on disposal of fixed assets -- (97,100)
Changes in:
Accounts receivable (458,100) 189,600
Inventories (325,300) (5,000)
Prepaid expenses and other assets (78,700) (41,500)
Income taxes refundable 37,000 (37,000)
Accrued interest receivable 36,300 (36,300)
Other assets (412,200) (419,700)
Accounts payable 121,800 (53,600)
Accrued expenses and payroll 186,300 (71,700)
Income taxes payable 101,000 (37,000)
Deferred revenue (25,000) (75,000)
----------- -----------
NET CASH used in OPERATING ACTIVITIES (1,050,700) (289,400)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (125,700) (116,500)
Proceeds from sale of assets -- 97,100
Collection of note receivable 1,464,800 385,200
----------- -----------
NET CASH provided by INVESTING ACTIVITIES 1,339,100 365,800
CASH FLOWS FROM FINANCING ACTIVITIES
Collection of stock subscriptions receivable 44,500 69,500
Purchase of treasury stock (18,600) --
Proceeds from borrowings on mortgage -- 750,000
Repayment of mortgage principal (16,700) (1,900)
Repayment of notes payable to related parties -- (600,000)
Net change in borrowings under line of credit 416,100 (491,900)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 425,300 (274,300)
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 713,700 (197,900)
CASH AND CASH EQUIVALENTS AT BEGINNING OF year 339,900 537,800
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF year $ 1,053,600 $ 339,900
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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, 1999 was approximately $136,000.
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. These assets are amortized
on a straight-line basis over their useful lives as follows:
Molds and dies 5 Years
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.
F-7
<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.
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 for,
among other things, 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, 1999, deferred revenue was
$200,000.
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.
Revenue Recognition
The Company recognizes revenue from the sale of its products when
goods are shipped to customers.
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).
Net Income Per Share
Basic earnings per share are 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 share equivalents arising
out of stock options, warrants, and convertible debt. Common
share equivalents were not considered in the diluted earnings per
share calculation for 1999 because their effect would have been
anti-dilutive. As a result, both basic and diluted earnings per
share for 1999 were calculated based on 1,681,000 weighted
average common shares outstanding during the year.
F-8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table is a reconciliation of the numerator and
denominator of the basic and diluted earnings per share
computations for 1998:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- --------------------- ----------------
<S> <C> <C> <C>
Basic EPS
Net Income $ 130,000 1,624,900 $0.08
================
Effect of Dilutive Securities
Common Stock Options and
Warrants - 300,500
9% Convertible Notes Due to
Related Parties 29,700 863,600
----------------- ---------------------
Diluted EPS
Net Income Plus Assumed
Conversions $ 159,700 2,789,000 $0.06
================= ===================== ================
</TABLE>
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.
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, 1999, include trade
receivables and approximately $1,055,000 of cash deposited in
money market mutual funds. The money market funds are not
protected under the FDIC; however, the Company has not
experienced any losses in these funds. The Company believes that
it is not exposed to any significant credit risk on 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 geographical
dispersion.
The carrying values of cash and cash equivalents, mortgage
payable and the line of credit approximate their fair values.
Reclassifications
Certain reclassifications have been made to the 1998 financial
statements to conform to the 1999 presentation.
F-9
<PAGE>
NOTE 2 - RELATED-PARTY TRANSACTIONS
During 1998, the conversion features related to approximately
$600,000 of certain notes payable to related parties were
exchanged for an equivalent number of warrants. The Company has
reserved from its authorized but unissued shares of common stock
1,036,300 shares for use in the event the warrants are exercised.
The warrants are exercisable at $0.579 per share.
Cash paid for interest on notes payable to related parties during
the year ended December 31, 1998, was approximately $49,900.
The Company had stock subscriptions receivable from related
parties of approximately $534,100 and $43,700 as of December 31,
1999 and 1998, respectively.
NOTE 3 - NOTES RECEIVABLE
In connection with the sale of certain assets during December
1997, the Company received notes aggregating $1,850,000. The
notes accrued interest at a rate approximating 10% and provided
for principal and interest payments of approximately $400,000 per
year, with the final payment due in March 2004. During the year
ended December 31, 1999, the purchaser paid off the principal
amount of the notes receivable due to the Company.
NOTE 4 - MORTGAGE PAYABLE
In November 1998, the Company borrowed $750,000 in the form of a
mortgage payable. The mortgage bears interest at 7.5% per annum
and is due in 120 monthly payments of principal and interest of
approximately $6,100 based on a 20-year amortization. A balloon
payment of approximately $513,500 is due in 2009. The mortgage is
collateralized by real estate and improvements and contains
certain restrictive covenants, which provide that, among other
things, the Company maintains a minimum working capital and net
worth, and a maximum debt to net worth ratio. The proceeds from
this borrowing were used to repay notes payable to related
parties of $600,000 and to provide additional permanent working
capital. The outstanding principal balance due on the mortgage
payable at December 31, 1999 was $731,400.
Maturities on long-term debt and obligations are approximately as
follows:
Year Ending
December 31, Amount
--------------------- ---------------
2000 $ 19,000
2001 20,500
2002 22,100
2003 23,800
2004 25,700
Thereafter 620,300
---------------
$ 731,400
===============
Cash paid for interest on the mortgage payable during the years
ended December 31, 1999 and 1998, approximated $56,300 and
$4,200, respectively.
Cash paid for interest on all borrowing arrangements were
approximately $85,800 and $75,000 in 1999 and 1998, respectively.
F-10
<PAGE>
NOTE 5 - CREDIT LINE
The Company maintains a line of credit with a financial
institution under a revolving loan agreement, which matures in
April 2000. The borrowing limit as of December 31, 1999 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 (8.5% at December 31,
1999). The agreement provides that, among other things, the
Company maintains a minimum working capital and net worth and a
maximum debt to net worth ratio as defined in the agreement. The
agreement also prohibits additional indebtedness in excess of
$200,000 in aggregate. At December 31, 1999, the Company had
$516,000 of borrowings under the line of credit.
NOTE 6 - GAIN ON DISPOSITION OF ASSETS
During 1998, the Company sold assets related to its silkscreen
product line, which had been abandoned in 1997.
NOTE 7 - INCOME TAXES
Significant components of the Company's deferred tax liabilities
and assets at December 31, 1999, are approximately as follows:
Deferred Tax Liabilities
------------------------
Amortization $ (31,000)
Deferred Tax Assets
-------------------
Bad debt allowance 17,000
Inventory reserves 40,000
Depreciation 11,000
--------------
Gross deferred tax assets 68,000
Valuation allowance (51,000)
--------------
Net deferred tax assets 17,000
--------------
Net deferred taxes $ (14,000)
==============
During 1999, deferred tax asset valuation allowance decreased by
$39,000.
The difference between the Company's effective income tax rate
and the federal statutory rate is reconciled below:
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
Federal provision (benefit) expected at
statutory rates $ (146,000) $ 70,000
Alternative minimum tax, depreciation, meals
Income not subject to tax (38,000) -
Tax effects of net operating loss - (3,000)
--------------- --------------
Provision for income taxes $ (197,000) $ 72,000
=============== ==============
</TABLE>
The Company had no foreign operations subject to foreign income
taxes. During 1999, the Company recognized approximately
$113,000, which resulted from expiration of certain contingencies
related to a refund from a taxing authority. This amount is
reflected in other income in the statements of operations.
Income taxes paid in cash were approximately $10,000 and $37,000
during the years ended December 31, 1999 and 1998, respectively.
F-11
<PAGE>
NOTE 8 - INTERNATIONAL SALES
International sales amounted to approximately $412,000 and
$382,000 in 1999 and 1998, respectively. All foreign transactions
are transacted in U.S. dollars.
NOTE 9 - SHAREHOLDERS' EQUITY
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (the ESOP),
which covers substantially all employees. The ESOP provides that,
among other things, 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, 1999, the ESOP held approximately
24,077 shares of the Company's common stock. No shares were
contributed in 1999 or 1998.
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 1999 and 1998, a total of 60,000 and 130,000
options, respectively, were issued under the SOP at a weighted
average exercise price of approximately $3.50 per share. As of
December 31, 1999, there were 614,000 SOP options.
Other Stock Options
In addition to the SOP options, the Company had other options
outstanding. All outstanding stock options not granted under the
SOP were exercisable at $1.38 per share. As of December 31, 1998,
there were 388,000 other options outstanding. During 1999, all of
these stock options were exercised at an aggregate exercise price
of $534,900, all of which was in the form of subscriptions
receivable.
There was an aggregate of 614,000 stock options outstanding at
December 31, 1999. The options expire as follows: 504,000 in
2001; 70,000 is 2003; and 40,000 in 2004. 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 options activity for the years ended December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Weighted
Shares Under Average
Option Exercise Price
---------------- ------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1997 897,000 $2.58
Grants 130,000 $3.58
Cancellations (5,000) $3.50
---------------- ------------------
Outstanding at December 31, 1998 1,022,000 $2.70
Grants 70,000 $3.64
Exercises (388,000) $1.38
Cancellations (90,000) $3.72
---------------- -----------------
Outstanding at December 31, 1999 614,000 $3.50
================
</TABLE>
F-12
<PAGE>
NOTE 9 - SHAREHOLDERS' EQUITY (Continued)
Other Stock Options (Continued)
The exercise price for options outstanding at December 31, 1999,
was $3.50. The weighted average term over which the options may
be exercised is 2.2 years.
Additionally, the Company has outstanding warrants for the
purchase of up to 1,036,300 of its common shares (see Note 2).
Total subscriptions receivable as of December 31, 1999, were
$534,100 and were receivable from related parties. Payments of
stock subscriptions receivable of $44,500 and $69,500 were
collected in 1999 and 1998, respectively.
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:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C> <C>
Net income (loss) As reported $(232,500) $ 130,000
Pro forma $(367,900) $(166,700)
Income (loss) per share Basic
-----
As reported $ (0.14) $ 0.08
Pro forma $ (0.22) $ (0.10)
Diluted
-------
As reported $ (0.14) $ 0.06
Pro forma $ (0.22) $ (0.10)
</TABLE>
The Company's weighted-average assumptions used in the pricing
model and resulting fair values were as follows:
1999 1998
----- -----
Risk-free rate 7.5% 6.50%
Expected option life (in years) 4.40 4.25
Expected stock price volatility 136% 152%
Grant date value $2.13 $2.08
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 may make a discretionary contribution to the Plan, as
determined annually by the Company's Board of Directors. The
Company charged approximately $14,800 and $17,700 in 1999 and
1998, respectively, to operations for its contributions to the
Plan.
F-13
<PAGE>
NOTE 11 - OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases
During 1998, the Company entered into a noncancellable-operating
lease for office space, which expires in November 2003. In
addition, the Company leases certain vehicles under
noncancellable operating leases expiring through 2002.
Approximate minimum future lease payments due under these
operating leases, are as follows:
Year Ending
December 31, Amount
-------------------------- ---------------
2000 $ 107,500
2001 86,000
2002 82,100
2003 60,100
---------------
$ 335,700
===============
During 1999 and 1998, approximately $66,000 and $64,000,
respectively, were charged to operations for rent expense related
to the operating leases.
Legal and Regulatory Proceedings
The Company is engaged in various legal and regulatory
proceedings incidental to its 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 these matters will not result in
any significant liability to the Company in relation to its
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(TM)
brand. As defined in the agreement, the Company agreed to pay
royalties totaling a minimum of $300,000 over the term of the
agreement based on the expected sales of the product line bearing
the Discovery Channel(TM) name.
F-14
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 (Note 1) 1998
--------------------------- ---------------------------
Basic EPS Diluted EPS Basic EPS Diluted EPS
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net income ($ 232,500) ($ 232,500) $ 130,000 $ 130,000
Add assumed interest savings on debt,
Net of tax effect $ -- $ -- $ -- $ 29,700
----------- ----------- ----------- -----------
Adjusted net income ($ 232,500) ($ 232,500) $ 130,000 $ 159,700
=========== =========== =========== ===========
Weighted average number of
Common shares outstanding 1,681,000 1,681,000 1,624,900 1,624,900
Dilutive effect of common stock
Options and warrants -- -- --
300,500
Dilutive effect of 9% convertible debt
due to related parties (a) -- -- -- 863,600
----------- ----------- ----------- -----------
Weighted average common shares
used in EPS calculation 1,681,000 1,681,000 1,624,900 2,789,000
=========== =========== =========== ===========
Earnings per share $ (0.14) $ (0.14) $ 0.08 $ 0.06
=========== =========== =========== ===========
</TABLE>
(a) Convertible debt is considered an other potentially dilutive security. The
conversion feature of the debt was exchanged for warrants in November 1998.
Note 1: Common Shares Equivalents were not considered in the diluted earnings
per share calculation for 1999 because their effect would have been
anti-dilutive.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 333-76675) pertaining to the 1996 Stock Option Plan of Action Products
International, Inc. and in the related Prospectus of our report dated February
4, 2000, with respect to the financial statements of Action Products
International, Inc. included in the Annual Report (Form 10-KSB) for the year
ended December 31, 1999.
MOORE STEPHENS LOVELACE, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
Orlando, Florida
April 4, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,536
<SECURITIES> 0
<RECEIVABLES> 956
<ALLOWANCES> 0
<INVENTORY> 1,416
<CURRENT-ASSETS> 3,605
<PP&E> 1,749
<DEPRECIATION> 777
<TOTAL-ASSETS> 5,269
<CURRENT-LIABILITIES> 1,160
<BONDS> 0
2
0
<COMMON> 0
<OTHER-SE> 3,205
<TOTAL-LIABILITY-AND-EQUITY> 5,269
<SALES> 5,881
<TOTAL-REVENUES> 5,881
<CGS> 3,283
<TOTAL-COSTS> 3,283
<OTHER-EXPENSES> 3,260
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> (429)
<INCOME-TAX> (197)
<INCOME-CONTINUING> (232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (232)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
