SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 0-13118
ACTION PRODUCTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2095427
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
390 North Orange Avenue, Ste #2185, Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 481-8007
Check whether the registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 2000.
Class Outstanding at November 14, 2000
Common Stock, $.001 par value 2,007,400
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
Number
<S> <C> <C>
Item 1. Financial Statements
Condensed balance sheets - September 30, 2000 (unaudited)
and December 31, 1999 3
Condensed statements of operations (unaudited)- Three months
and nine months ended September 30, 2000 and 1999 4
Condensed statements of cash flows (unaudited) for the nine
months ended September 30, 2000 and 1999 5
Condensed Statement of Changes in Stockholders' Equity from
December 31, 1999 through September 30, 2000 (unaudited) 6
Notes to unaudited condensed financial statements 7
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Liquidity and Capital Resources 8
PART II. OTHER INFORMATION
Item 4. Submission of matters to vote of security holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE PAGE 16
</TABLE>
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 690,700 $ 1,053,600
Accounts receivable, net of allowance of
$33,291 at September 30, 2000 and
$57,300 at December 31, 1999 1,809,200 956,700
Inventories, net 1,183,400 1,416,300
Prepaid expenses and other assets 282,400 178,800
----------- ----------
Total Current Assets 3,965,700 3,605,400
Property, plant and equipment, net of
accumulated depreciation of $870,800 at
Sept 30, 2000 and $777,900 at
December 31, 1999 1,095,600 972,000
Other assets 656,200 691,800
----------- ----------
TOTAL ASSETS $ 5,717,500 $ 5,269,200
============ ===========
Current liabilities:
Accounts payable & accrued expenses $ 507,000 $ 600,200
Deferred Revenue 25,000 25,000
Current portion of mortgage payable 19,900 19,000
Borrowings under line of credit 884,400 516,000
----------- ----------
Total Current Liabilities 1,436,300 1,160,200
Long term liabilities:
Mortgage payable 698,200 712,400
Deferred Revenue 156,300 175,000
Deferred Income Taxes 13,500 14,000
Commitments and contingences
Shareholders' equity:
Common stock $.001 par value authorized
15,000,000; 2,007,400 issued and
outstanding at June 30, 2000 and
December 31, 1999 2,000 2,000
Additional paid-in capital 3,524,200 3,524,200
Retained Earnings 411,500 215,500
Stock Subscriptions Receivable (524,500) (534,100)
----------- ----------
Total Shareholders' Equity 3,413,200 3,207,600
----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 5,717,500 $ 5,269,200
=========== ===========
</TABLE>
3
See Accompanying Notes
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------------
2000 1999 2000 1999
------------------------ --------------------------
<S> <C> <C> <C> <C>
Net Sales $2,313,200 $1,402,600 $5,834,100 $4,444,700
Cost of Sales 1,199,600 846,600 3,021,300 2,322,400
------------------------ --------------------------
Gross Profit 1,113,600 556,000 2,812,800 2,122,300
Selling, General & Administrative Expenses 958,800 879,500 2,555,900 2,331,800
------------------------ --------------------------
Income (Loss) from Operations 154,800 (323,500) 256,900 (209,500)
------------------------ --------------------------
Other (expenses) income
Other 46,700 23,900 70,700 111,200
Interest expense (37,000) (25,100) (51,500) (63,700)
------------------------ --------------------------
Total 9,700 (1,200) 19,200 47,500
------------------------ --------------------------
Income (Loss) before income taxes 164,500 (324,700) 276,100 (162,000)
Provision for income (benefit) taxes 47,700 (60,000) 80,100 (60,000)
------------------------ --------------------------
Net Income (Loss) $ 116,800 $ (264,700) $ 196,000 $(102,000)
======================== ==========================
Net Income (Loss) per share
Basic $ 0.06 $ ( 0.16) $ 0.10 $ ( 0.06)
======================== ==========================
Diluted $ 0.04 $ ( 0.16) $ 0.07 $ (0.06)
======================== ==========================
Weighted average number of
common shares outstanding
Basic 2,007,400 1,693,600 2,007,400 1,693,600
======================== ==========================
Diluted 2,748,800 1,693,600 2,748,800 1,693,600
======================== ==========================
</TABLE>
See Accompanying Notes
4
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 196,000 $ (102,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 249,800 190,500
Change in assets and liabilities:
Increase in current assets other
than cash and cash equivalents (773,500) (155,600)
Decrease in current liabilities (112,400) (87,900)
Increase in other assets (71,000) (228,500)
-------------------------------
Net cash used in operating activities (511,100) (383,500)
Net cash used in investing activities (216,500) (87,500)
Net cash provided by financing activities 364,700 393,900
-------------------------------
Net decrease in cash and cash equivalents (362,900) (77,100)
Cash and cash equivalents at start of period 1,053,600 339,900
-------------------------------
Cash and cash equivalents at end of period $ 690,700 $ 262,800
===============================
Supplemental disclosures - cash paid for
Interest $ 113,400 $ 63,700
Taxes $ 101,000 $ (14,800)
</TABLE>
See Accompanying Notes
5
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
December 31, 1999 through September 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Common Stock
$.001 Par Value Stock
---------------- Additional Retained Subscription Total Shareholders'
Shares Amount Paid-In Capital Earnings Receivables Equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1999 2,007,400 $ 2,000 $ 3,524,200 $ 215,500 $ (534,100) $ 3,207,600
Collection of Stock
Subscriptions -- -- -- -- 9,600 9,600
Net Income -- -- -- 196,000 -- 196,000
--------------------------------------------------------------------------------------------
Balance - September 30, 2000 2,007,400 $ 2,000 $ 3,524,200 $ 411,500 $ (524,500) $ 3,413,200
============================================================================================
</TABLE>
See Accompanying Notes
6
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Condensed Financial Statements - In the opinion of management, the
accompanying unaudited condensed financial statements contain all normal
recurring adjustments necessary to present fairly the financial position of
Action Products International, Inc. at September 30, 2000 and the results of its
operations and cash flows for the three and nine months ended September 30,
2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's report on Form 10-KSB for the year ended December 31,
1999. The results of operations for the period ended September 30, 2000 are not
necessarily indicative of the operating results for the full year.
Note 2. 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 costs associated with becoming Year 2000
compliant were approximately $15,000. These costs 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 as 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.
Note 3. Basic and Diluted Earnings Per Share - Basic earnings per share is based
upon the weighted average number of shares outstanding. Diluted earnings per
share is adjusted for the dilutive effect of stock options and warrants.
Note 4. Renewal of Line of Credit - The Company continues to have a revolving
credit facility with a national financial institution that provides for
available borrowings of up to $1 million, with an original maturity date of May
2000. As of September 30, 2000, there was an outstanding balance of $884,400.
During May 2000, the Company obtained renewal of its line of credit through
April 2001, at substantially the same terms as previously existed. The rate of
interest on funds borrowed against this underlying credit facility is prime plus
1%.
Note 5. Contingencies - The Company is not party to any legal proceedings other
than various claims and lawsuits arising in the normal course of business.
Management of the Company does not believe that any such claims or lawsuits will
have a material effect on the Company's financial condition or results of
operations.
Note 6. Subsequent Acquision - On October 15, 2000 the Company acquired certain
assets of Earth Lore, Ltd., a corporation organized under the laws of the
Canadian province of Manitoba, with its
7
<PAGE>
ACTION PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) Continued
office and manufacturing facility located at 94 Durand Road, Winnipeg, Manitoba,
Canada. Earth Lore, Ltd. is an award winning privately held maker of highly
popular educational excavation kits for children and had trailing annual sales
of approximately $2 million. Its flagship I Dig Dinosaurs(R) product line
provides children with the experience of excavating dinosaur bone fossils,
skeleton models and other "treasures" from natural glacial Dinostone(R). The
Company plans to distribute its product line through its U.S. network and
utilize its new Canadian subsidiary (Earth Lore, Ltd.'s distribution network and
personnel in Canada) to expand its presence there.
Subject to specified liabilities and after the verification of the same through
audited financial statements of Earth Lore Ltd., payment will be made by the
Company through the issuance of approximately 104,000 shares of the Company's
common stock. These shares will be restricted securities within the meaning of
Rule 144 of the Securities Act of 1933, as amended. In October 2000, the Company
advanced Earth Lore, Ltd. $75,000 CDN for working capital. On October 15, 2000
(the closing date) the Company "forgave" such loan.
Three of seller's principals were provided three year employment contracts to
serve in management capacities with the Company's Canadian subsidiary. The
Company formed the Canadian subsidiary to carry on the business of producing the
"Earth Lore" product line for the Company and to introduce and establish sales
of the Company's various branded products within Canada. Our Canadian subsidiary
is, at this time, still a "numbered" company. It will be named Action Products
Canada Ltd., if such name is available.
The assets acquired consisted of accounts receivable of approximately $300,000,
customer and vendor lists, equipment, inventory of approximately $130,000,
patents, trademarks, formulas and all intellectual property. The Company assumed
approximately $600,000 in trade and other payables, subject to a bulk sale
arrangement. The short term notes of Earth Lore, Ltd. were collaterized by the
collection of its accounts receivable and inventory.
There was no relationship between the Company, its officers, directors and
affiliates and the seller of the assets. The Company financed the dollar portion
of the acquisition price with cash flow generated from its working capital.
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking Statements:
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" include forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. The Act provides a safe
harbor for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify the statements
as forward-looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the projected
results.. All statements other than statements of historical fact we make in
this Form 10-QSB are forward-looking. In particular, the statements herein
regarding industry prospects and our future results of operations or financial
position are forward-looking statements. Actual results may differ materially
from those projected or implied in any forward-looking statements. Such
statements may involve risks and uncertainties, including but not limited to
those relating to product demand, pricing, market acceptance, the effect of
economic conditions,
8
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
intellectual property rights, competition, risks in product development, the
results of financing efforts, the ability to complete transactions. Other risks
and uncertainties that could cause the Company's actual results to differ
significantly from management's expectations are described in greater detail in
the section entitled "Factors That May Affect Future Results" on page 12 of this
Form 10-QSB and in the Company's other SEC filings.
Results of Operations:
Revenues. Revenues increased to $2,313,200 during the third quarter ended
September 30, 2000 compared with revenues of $1,402,600 during the third quarter
of 1999, a 64.9% increase in revenues. Revenues increased to $ 5,834,100 for the
nine months ended September 30, 2000 compared with revenues of $4,444,700 during
the same period in 1999, a 31.2% increase in revenues. This increase in revenues
is due to (1) sales from new product lines and (2) sales in additional store
outlets. Because the Company has strengthened its branding, sales to museums and
specialty retailers continue to increase.
In the third quarter the Company formed a license pact with Dr. Buzz Aldrin. Dr.
Aldin was on of the first men on the moon and will assist in the development of
the Space Voyagers(R) product line. The first product of this relationship was
the Ultimate Saturn 5 Rocket(TM) Buzz Aldrin Series. During the month of
October, 2000 the Company announced that sales of Climb@Tron(TM) surpassed $1
million during its first year of release. Climb@Tron(TM) is a battery-powered
robot that use suction cups, and an advanced system of cams, to climb up smooth
surfaces like windows, mirrors, and furniture. The Company continues to
diversify its distribution channels and reduce its dependence on any one product
or market. The continued improvements to the Company's sales systems have eased
diversification into new markets, particularly the Company's increasing
penetration into the specialty toy market.
Gross Profit. Gross profit as a percentage of total revenues increased by 8.5%
to 48.1% during the third quarter of 2000 compared to 39.6% during the third
quarter of 1999. Gross profit as a percentage of total revenue increased by 0.5%
to 48.2% for the nine months ended September 30, 2000 compared to 47.7% during
the nine months ended September 30, 1999. This increase in gross profit is due
to the normalization of sales between the specialty, museum and mass markets.
The Company continues sales to large retail chains, as well as foreign sales,
both of which resulted in lower margins, a situation which management is
addressing on a going forward basis.
Selling, General, & Administrative Expenses. Selling, general, and
administrative expenses increased to $958,800 during the third quarter of 2000
from $879,500 during the third quarter of 1999, an 9.0% increase. SG&A for the
nine months ended September 30, 2000 was $2,555,900 compared to $2,331,800 for
the same period in 1999, a 9.6% increase. This increase in SG&A is primarily a
result of an increase in freight out expense to customers, which was affected by
the increase in sales for the quarter. To reduce SG&A expenses, management
intends to reduce future costs in certain areas such as staffing, outside labor,
and bank charges.
Interest Expense and Other Income. Interest expense related to current and
long-term debt was approximately $37,000 during the third quarter of 2000
compared with $25,100 during the third quarter of 1999. This increase is due to
the additional borrowing that was needed due to an increase in accounts
receivables. Interest expense for the nine months ended September 30, 2000 was
$51,500 compared to $63,700 for the same period in 1999, a 19.2% decrease.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Other income was $46,700 during the third quarter of 2000 and $23,900 during the
third quarter of 1999. Other income for the nine months ended September 30, 2000
was $70,700 compared to $111,200 for the same period in 1999, approximately a
36.4% decrease. This decrease is due to the reduction in capital investments and
an unrealized loss in the Company's remaining investments, cost vs. mark to
market.
Income Before Provision for Income Taxes and Net Income. The Company had income
before taxes of $164,500 during the third quarter of 2000 compared to a loss
before income taxes of $(324,700) during the third quarter of 1999. The Company
made a $47,700 provision for income taxes during the third quarter of 2000,
compared to a tax benefit of $60,000 for the third quarter of 1999.
The Company`s income before taxes for the nine months ended September 30, 2000
was $276,100 compared to a loss of $(162,000) for the same period of 1999. The
total tax provision for the nine months ended September 30, 2000 was $80,100 as
compared to a $60,000 tax benefit for the same period in 1999.
Net Income. As a result of the foregoing, the Company had net income of $
116,800 during the three months ended September 30, 2000, compared with a net
loss of $264,700 during the three months ended September 30, 1999. The Company
had net income of $196,000 for the nine months ended September 30, 2000,
compared with a net loss of $102,00 for the nine months ended September 30,
1999.
Financial Condition, Liquidity, and Capital Resources:
As of September 30, 2000, current assets were $3,965,700 compared to current
liabilities of $1,436,300 resulting in a current ratio of better than 2.8:1,
compared to almost a 5.5:1 ratio at September 30, 1999. Total assets increased
to $5,717,500 from $5,269,200 at December 31, 1999. Current liabilities
increased by $276,100. Current assets increased $360,300 due primarily to an
increase in accounts receivable and prepaid expense by $956,100 and a decrease
in inventory and cash of $595,800. At September 30, 2000, working capital
improved by $84,200 compared to December 31, 1999.
Net accounts receivable and inventories were $1,809,200 and $1,183,400,
respectively, at September 30, 2000, compared to $956,700 and $1,416,300,
respectively, at December 31, 1999. The difference between the amounts at year
end and September 30, 2000, was a result of the Company's normal business cycle
and the increase in sales in the third quarter.
Cash and cash equivalents were $690,700 at September 30, 2000, a decrease of
$362,900 from December 31, 1999, as a net result of prepayments of inventory in
transit and reductions in liabilities.
Net property, plant, and equipment increased from $972,000 at December 31, 1999
to $1,095,600 at September 30, 2000, an increase of $123,600 or 12.7%. The
Company recorded depreciation and amortization of $82,300 during the third
quarter of 2000. The Company made capital expenditures in the amount of $149,637
during the third quarter of 2000 to purchase sales and administrative computers.
Other assets at September 30, 2000 was $656,200 compared to $691,800 at
September 30, 1999, a 5.1% decrease.
Accounts payable and accrued expenses decreased $93,200 to $507,000 at September
30, 2000 from $600,200 at December 31, 1999 due primarily to payments of
liabilities to vendors. Net borrowings under the line of credit increased to
$884,400 at September 30, 2000 from $516,000 at December 31,
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
1999 due primarily to additional borrowings to carry the increase in accounts
receivable, which was driven by the increase in sales for the third quarter.
For the nine months ending September 30, 2000, cash used in operations was
$511,100, as compared to $383,500 for the comparable period in 1999, due
primarily to the increase in accounts receivable, which is driven by the
increase in sales for the three months ending September 30, 2000. Also, the
Company used cash from operations during the six months ending June 30, 2000 to
make a tax payment of $101,000 for the gain on the sale of Action Snacks(R)
which, for tax purposes, was recognized in the Company's 1999 tax return under
the installment sales provision of the Internal Revenue Code.
During May 2000, the Company obtained renewal of its line of credit through
April 2001, at substantially the same terms as previously existed. The only
significant change was an interest rate change from prime to prime plus 1%.
Subsquent Acquisition after 3rd quarter - 2000 ended:
On October 15, 2000 the Company acquired certain assets of Earth Lore, Ltd., a
corporation organized under the laws of the Canadian province of Manitoba, with
its office and manufacturing facility located at 94 Durand Road, Winnipeg,
Manitoba, Canada. Earth Lore, Ltd. is an award winning privately held maker of
highly popular educational excavation kits for children and had trailing annual
sales of approximately $2 million. Its flagship I Dig Dinosaurs(R) product line
provides children with the experience of excavating dinosaur bone fossils,
skeleton models and other "treasures" from natural glacial Dinostone(R). The
Company plans to distribute its product line through its U.S. network and
utilize its new Canadian subsidiary (Earth Lore, Ltd.'s distribution network and
personnel in Canada) to expand its presence there.
Subject to specified liabilities and after the verification of the same through
audited financial statements of Earth Lore Ltd., payment will be made by the
Company through the issuance of approximately 104,000 shares of the Company's
common stock. These shares will be restricted securities within the meaning of
Rule 144 of the Securities Act of 1933, as amended. In October 2000, the Company
advanced Earth Lore, Ltd. $75,000 CDN for working capital. On October 15, 2000
(the closing date) the Company "forgave" such loan.
Three of seller's principals were provided three year employment contracts to
serve in management capacities with the Company's Canadian subsidiary. The
Company formed the Canadian subsidiary to carry on the business of producing the
"Earth Lore" product line for the Company and to introduce and establish sales
of the Company's various branded products within Canada. Our Canadian subsidiary
is, at this time, still a "numbered" company. It will be named Action Products
Canada Ltd., if such name is available.
The assets acquired consisted of accounts receivable of approximately $300,000,
customer and vendor lists, equipment, inventory of approximately $130,000,
patents, trademarks, formulas and all intellectual property. The Company assumed
approximately $600,000 in trade and other payables, subject to a bulk sale
arrangement. The short term notes of Earth Lore, Ltd. were collaterized by the
collection of its accounts receivable and inventory.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
There was no relationship between the Company, its officers, directors and
affiliates and the seller of the assets. The Company financed the dollar portion
of the acquisition price with cash flow generated from its working capital.
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 risks, some of which the Company controls. The following indicate some
of these risks:
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 could possibly 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 May 8, 2000, 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 2001 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.
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
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 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.
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 CPSC to
protect the public against unreasonable risks of injury associated with consumer
products, including toys and other articles. The CPSC 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 CPSC 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.
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
13
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
any product liability lawsuit; however, there can be no assurance that such a
suit will not be brought against the Company in the future. 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 Consumer Product Safety Commission (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 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.
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. 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.
Dependence on Key Management. The Company's success largely depends on a number
of key employees. The loss of services of 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, particularly 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.
Concentration of Stock Ownership. The Company's 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.
14
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
No Dividends. The Company expects that it will retain all available earnings
generated by operations for the development and growth of its business.
Accordingly, the Company does not anticipate paying any cash dividends on its
common stock.
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.
Dilution. The Company's Articles of Incorporation authorize the issuance of
Shares of common and preferred stock. As of September 30, 2000, the Company has
2,007,400 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, to issue up to 12,974,667 additional shares of common
stock, with preferences designed by the Board of Directors. Such an issuance may
result in a reduction of the book value or market price of the 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.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on September 7,
2000.
The following nominees were elected as directors, each to hold office
until his or her successor is elected and qualified, by the vote set forth
below:
Class I Directors - to serve a 1 year term until the Annual Meeting of
Shareholders in 2001
<TABLE>
<CAPTION>
Nominee For Against Withheld Abstentions Broker-Nonvotes
---------- ----------- ------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Larry Bernstein 1,427,885 500 0 4,115 0
</TABLE>
Class II Directors - to serve a 2 year term until the Annual Meeting of
Shareholders in 2002
<TABLE>
<CAPTION>
Nominee For Against Withheld Abstentions Broker-Nonvotes
---------- ----------- ------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Ronald Kaplan 1,427,685 700 0 4,115 0
Ronald Tuchman 1,427,885 500 0 4,115 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
27.1 Financial Data Schedule
B. Reports on Form 8-K
None.
Items 1, 2, 3 and 5 are inapplicable and have been omitted.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Action Products International, Inc.
Date: November 14, 2000 By: /s/ Ronald Kaplan
------------------- ----------------------------------
Ronald Kaplan, President & CEO
Date: November 14, 2000 By: /s/ Timothy L. Young
------------------- ----------------------------------
Timothy L. Young, Chief Financial Officer &
Treasurer (Chief Accounting Officer)
