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 June 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 July 31, 2000.
Class Outstanding at July 31, 2000
Common Stock, $.001 par value 2,007,400
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PART I. FINANCIAL INFORMATION Page
Number
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<S> <C> <C>
Item 1. Financial Statements
Condensed balance sheets - June 30, 2000(unaudited)
and December 31, 1999 3
Condensed statements of operations - Three months and
six months ended June 30, 2000 and 1999 (unaudited) 4
Condensed statements of cash flows for the six months
ended June 30, 2000 and 1999 (unaudited) 5
Condensed Statement of Changes in Stockholders' Equity from
December 31, 1999 through June 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 6. Exhibits and Reports on Form 8-K 14
SIGNATURE PAGE 14
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2
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ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 2000 December 31, 1999
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 895,800 $ 1,053,600
Accounts receivable, net of allowance of
$64,300 at June 30, 2000 and $57,300 at
December 31, 1999 1,465,700 956,700
Inventories, net 1,214,300 1,416,300
Prepaid expenses and other assets 286,400 178,800
-------------------- ----------------------
Total Current Assets 3,862,200 3,605,400
Property, plant and equipment, net of
accumulated depreciation of $840,200 at
June 30, 2000 and $777,900 at
December 31, 1999 976,600 972,000
Other assets 610,200 691,800
-------------------- ----------------------
TOTAL ASSETS $5,449,000 $ 5,269,200
==================== ======================
Current liabilities:
Accounts payable & accrued expenses $ 447,000 $ 600,200
Deferred Revenue 25,000 25,000
Current portion of mortgage payable 19,600 19,000
Borrowings under line of credit 782,000 516,000
-------------------- ----------------------
Total Current Liabilities 1,273,600 1,160,200
Long term liabilities:
Mortgage payable 703,000 712,400
Deferred Revenue 162,500 175,000
Deferred Income Taxes 13,500 14,000
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 294,700 215,500
Stock Subscriptions Receivable (524,500) (534,100)
-------------------- ----------------------
Total Shareholders' Equity $ 3,296,400 $ 3,207,600
-------------------- ----------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 5,449,000 $ 5,269,200
==================== ======================
</TABLE>
See Accompanying Notes
3
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ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30 Six months ended June 30
------------------------------ ---------------------------------
2000 1999 2000 1999
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
Net Sales $2,050,800 $1,855,200 $3,521,000 $3,042,100
Cost of Sales 1,105,900 909,600 1,821,800 1,475,800
------------------------------ ---------------------------------
Gross Profit 944,900 945,600 1,699,200 1,566,300
Selling, General &
Administrative Expenses 845,200 779,300 1,597,000 1,452,300
Other (expenses) income
Other 4,900 46,900 82,000 87,300
Interest expense (38,300) (23,100) (72,600) (38,600)
------------------------------ ---------------------------------
Total (33,400) 23,800 9,400 48,700
Income before income taxes 66,300 190,100 111,600 162,700
Provision for income taxes 19,300 - 32,400 -
------------------------------ ---------------------------------
Net Income $ 47,000 $ 190,100 $ 79,200 $ 162,700
============================== =================================
Net Income per share
Basic $ 0.02 $ 0.12 $ 0.04 $ 0.10
============================== =================================
Diluted $ 0.02 $ 0.07 $ 0.03 $ 0.06
============================== =================================
Weighted average number of
common shares outstanding
Basic 2,007,400 1,619,500 2,007,400 1,622,200
============================== =================================
Diluted 2,727,200 2,578,400 2,727,200 2,662,900
============================== =================================
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See Accompanying Notes
4
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<CAPTION>
ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30
-----------------------------------
2000 1999
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 79,200 $ 162,700
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 167,600 96,400
Change in assets and liabilities:
Increase in current assets other
than cash and cash equivalents (414,600) (643,100)
Decrease in current liabilities (166,200) (13,500)
Increase in other assets (23,700) (90,800)
-----------------------------------
Net cash used in operating activities (357,700) (488,300)
Net cash used in investing activities (66,900) (63,300)
Net cash provided by Financing Activities 266,800 342,800
-----------------------------------
Net decrease in cash and cash equivalents (157,800) (208,800)
Cash and cash equivalents at start of period 1,053,600 339,900
-----------------------------------
Cash and cash equivalents at end of period $ 895,800 $ 131,100
===================================
Supplemental disclosures - cash paid for
Interest $ 72,600 $ 38,600
Taxes $ 101,000 $ 14,800
</TABLE>
See Accompanying Notes
5
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<TABLE>
<CAPTION>
ACTION PRODUCTS INTERNATIONAL, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
December 31, 1999 through June 30, 2000
(Unaudited)
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 - - - 79,200 - 79,200
-----------------------------------------------------------------------------------------------------
Balance - June 30, 2000 2,007,400 $ 2,000 $ 3,524,200 $ 294,700 $ (524,500) $ 3,296,400
=====================================================================================================
</TABLE>
See Accompanying Notes
6
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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 June 30, 2000 and the results of its
operations and cash flows for the three and six months ending June 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 June 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 banking institution that provides for available
borrowings of up to $1 million, with an original maturity date of May 2000. As
of June 30, 2000, there was an outstanding balance of $782,000. 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.
7
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ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking Statements:
Any statements that are not historical facts contained in this discussion are
forward looking statements. It is possible that the assumptions made by
management for purposes of such statements may not materialize. Actual results
may differ materially from those projected or implied in any forward-looking
statements. Such statements may involve risks and uncertainties, including but
not limited to those relating to product demand, pricing, market acceptance, the
effect of economic conditions, and intellectual property rights and the outcome
of competitive products, risks in product development, the results of financing
efforts, the ability to complete transactions, and other risks identified in
"Factors That May Affect Future Results and Market Price of Stock" on page 10
and the Company's other Securities and Exchange Commission filings.
Results of Operations:
Revenues. Revenues increased to $2,050,800 during the second quarter ended June
30, 2000 compared with revenues of $1,855,200 during the second quarter of 1999.
Revenues increased to $3,521,000 for the six months ended June 30, 2000 compared
with revenues of $3,042,100 during the same period in 1999. Management
attributes the 10.5% and 15.7%, respective increases in revenue to the
diversification of product lines and the success of the Company's continued
increase in product support and expansion. With the strengthening of the
Companies branding, sales to museums and specialty retailers continue to
increase.
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 decreased by 4.9%
to 46.1% during the second quarter of 2000 compared to 51.0% during the second
quarter of 1999. Gross profit as a percentage of total revenue decreased by 3.2%
to 48.3% for the six months ended June 30, 2000 compared to 51.5% during the six
months ended June 30, 1999. This decrease in gross profit is primarily due to
the Company's increased sales to large retail chains, as well as foreign sales,
both of which resulted in lower margins, a situation which management is
addressing going forward.
Selling, General, & Administrative Expenses. Selling, general, and
administrative expenses increased to $845,200 during the second quarter of 2000
from $779,300 during the second quarter of 1999, an 8.5% increase. SG&A for the
six months ended June 30, 2000 was $1,597,000 compared to $1,452,300 for the
same period in 1999, a 10% increase. This increase in SG&A is primarily as
result the increase in Freight Out expense to customers, which was affected by
the increase in sales for the quarter. Management's planned efforts to decrease
selling, general, and administrative expenses include reducing 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 $38,300 during the second quarter of 2000
compared with $23,100 during the second quarter of 1999. Interest expense for
the six months ended June 30, 2000 was $72,600 compared to $38,600 for the same
period in 1999, a 88% increase. This increase is due primarily to the additional
borrowings that were needed due to the reduced cash flows primarily related to a
decrease in net profits coupled with an increase in receivables.
8
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ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Other income was $4,900 during the second quarter of 2000 and $46,900 during the
second quarter of 1999. Other Income for the six months ended June 30, 2000 was
$82,000 compared to $87,300 for the same period in 1999, a 6% decrease. This
decrease is due to a reduction in an unrealized loss in the Company's
investments, cost vs. mark to market.
Other income and expenses are netted for financial statement purposes. During
the second quarter of 2000, other expenses were $33,400 and in the second
quarter of 1999, other income was $23,800. This amount of other income or
expenses has historically been insignificant and represented less then three
percent of net sales in each of the last two fiscal years.
Income Before Provision for Income Taxes and Net Income. As a result of the
foregoing, the Company had income before taxes of $66,300 during the second
quarter of 2000 compared to $190,100 during the second quarter of 1999. The
Company made a $19,300 provision for income taxes during the second quarter of
2000, Compared to no provision for the second quarter of 1999. As a result of
the foregoing, the Company's net income for the second quarter of 2000 was
$47,000. Income before taxes for the six months ended June 30, 2000 was $79,200
compared to $162,700 for the same period of 1999, a 51.3% decrease. The total
tax provision for the six months ended June 30, 2000 was $32,400 compared to no
provision for the same period in 1999.
Financial Condition, Liquidity, and Capital Resources:
As of June 30, 2000, current assets were $3,862,200 compared to current
liabilities of $1,273,600 resulting in a current ratio of better than 3:1,
compared to almost a 5:1 ratio at June 30, 1999. Total assets increased to
$5,449,000 from $5,269,200 at December 31, 1999. Current liabilities increased
by $113,400. Current assets increased $256,800 due primarily to an increase in
accounts receivable and prepaid expense by $616,600 and a decrease in inventory
and cash of $359,800. At June 30, 2000, working capital improved by $351,200
compared to December 31, 1999.
Net accounts receivable and inventories were $1,465,700 and $1,214,300,
respectively, at June 30, 2000, compared to $956,700 and $1,416,300,
respectively, at December 31, 1999. The difference between the amounts at year
end and June 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 $895,800 at June 30, 2000, a decrease of $157,800
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 $976,600 at June 30, 2000, a increase of $4,600 or .5%. The Company recorded
depreciation and amortization of $82,700 during the second quarter of 2000. The
Company made capital expenditures in the amount of $57,400 during the second
quarter of 2000 to purchase sales and administrative computers. Other assets at
June 30, 2000 was $610,200 compared to $691,800 at June 30, 1999, a 11.8%
decrease.
Accounts payable and accrued expenses decreased $153,200 to $447,000 at June 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 $782,000 at
June 30, 2000 from $516,000 at December 31, 1999 due primarily to additional
borrowings for prepayments of "in-transit" inventory during the quarter.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
For the six months ending June 30, 2000, cash used in operations was $357,700,
as compared to $488,300 for the comparable period in 1999, due primarily to
better collection of accounts receivable in 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%.
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:
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.
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.
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.
Dilution. The Company's Articles of Incorporation authorize the issuance of
Shares of common and preferred stock. As of June 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
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
control and result in shareholders receiving less for their common stock than
they otherwise might in the event of a takeover.
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 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
11
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ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 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.
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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.
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.
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.
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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
27.1 Financial Data Schedule
A. Reports on Form 8-K
None.
Items 1, 2, 3, 4 and 5 are inapplicable and have been omitted.
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: August 4, 2000 By: /s/ Timothy L. Young
---------------- -------------------------------------
Timothy L. Young, Chief Financial
Officer & Treasurer (Chief Accounting
Officer)
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