-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aks4JQ3i4w+re+WvkvKgtBZU15kf8ZoHGfYNJ9LUsuctbNgkx3nRBWfszMRZ/h13 sGtEfNAwngPBkPpF8aMxvw== 0001042910-00-000891.txt : 20000517 0001042910-00-000891.hdr.sgml : 20000517 ACCESSION NUMBER: 0001042910-00-000891 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTION PRODUCTS INTERNATIONAL INC CENTRAL INDEX KEY: 0000747435 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 592095427 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-13118 FILM NUMBER: 636483 BUSINESS ADDRESS: STREET 1: 344 CYPRESS RD CITY: OCALA STATE: FL ZIP: 34472-3108 BUSINESS PHONE: 3526872202 MAIL ADDRESS: STREET 1: 344 CYPRESS ROAD CITY: OCALA STATE: FL ZIP: 34472-3108 FORMER COMPANY: FORMER CONFORMED NAME: ACTION PACKETS INC DATE OF NAME CHANGE: 19880818 10QSB 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-QSB QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2000 Commission File Number Registration Number 2-93512-A ACTION PRODUCTS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Florida 59-2095427 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 390 N. Orange Ave., Suite 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 March 31, 2000. Class Outstanding at March 31, 2000 Common Stock, $.001 par value 2,007,400 I N D E X
PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements Condensed balance sheets - March 31, 2000 and December 31, 1999 (unaudited) 3 Condensed statements of income and changes in Retained earnings - Three months ended March 31, 2000 and 1999 (unaudited) 4 Condensed statements of cash flows for the three months ended March 31, 2000 and March 31, 1999 (unaudited) 5 Condensed Statement of Stockholders' Equity from January 1, 2000 through March 31, 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 15
2 ACTION PRODUCTS INTERNATIONAL, INC. CONDENSED BALANCE SHEETS ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
March 31, 2000 December 31, 1999 Current assets: Cash and cash equivalents $ 779,200 $ 1,053,600 Accounts receivable, net of allowance of $57,300 at March 31, 2000 and December 31, 1999 1,147,800 956,700 Inventories, net 1,357,500 1,416,300 Prepaid expenses 328,000 178,800 ----------- ----------- Total Current Assets 3,612,500 3,605,400 Property, plant and equipment, net of accumulated depreciation of $806,100 at March 31, 2000 and $777,900 at December 31, 1999 953,300 972,000 Other assets 642,000 691,800 ----------- ----------- TOTAL ASSETS 5,207,800 5,269,200 =========== =========== Current liabilities: Accounts payable & accrued expenses 301,700 600,200 Deferred Revenue 25,000 25,000 Current portion of mortgage payable 18,700 19,000 Borrowings under line of credit 722,000 516,000 ----------- ----------- Total Current Liabilities 1,067,400 1,160,200 Long term liabilities: Mortgage payable 708,200 712,400 Deferred Revenue 168,800 175,000 Deferred Income Taxes 14,000 14,000 Shareholder's equity: Common stock $.001 par value authorized 15,000,000; 2,007,400 issued and outstanding at March 31,2000 and December 31, 1999 2,000 2,000 Additional paid-in capital 3,524,200 3,524,200 Retained Earnings 247,700 215,500 Stock Subscriptions Receivable (524,500) (534,100) ----------- ----------- Total Shareholders' Equity 3,249,400 3,207,600 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 5,207,800 5,269,200 =========== ===========
See Accompanying Notes 3 ACTION PRODUCTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF INCOME AND CHANGES IN RETAINED EARNINGS (UNAUDITED) Three months ended March 31, ----------------------------- 2000 1999 ---- ---- Net sales $ 1,470,200 $ 1,186,900 Cost of sales 715,800 566,200 ----------- ----------- Gross profit 754,400 620,700 Selling, general & administrative expenses 751,900 673,000 Other (expenses) income Other 77,000 40,400 Interest expense (34,200) (15,500) ----------- ----------- Total 42,800 24,900 Income (loss) before income taxes 45,300 (27,400) Provision for income taxes 13,100 -- ----------- ----------- Net income (loss) $ 32,200 $ (27,400) ----------- ----------- Beginning retained earnings 215,500 448,000 ----------- ----------- Ending retained earnings $ 247,700 $ 420,600 =========== =========== Net income (loss) per share Basic $ 0.02 $ (0.02) Diluted $ 0.01 (0.02) =========== =========== Weighted average number of common shares outstanding Basic 2,007,400 1,624,900 =========== =========== Diluted 2,785,600 1,624,900 =========== =========== See Accompanying Notes 4 ACTION PRODUCTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31, ---------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net income (loss) $ 32,200 $ (27,400) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 84,900 65,700 Changes in assets and liabilities: Current assets, other than cash and cash equivalents (281,500) (264,800) Other assets (6,900) (53,900) Current liabilities and deferred taxes (304,700) 14,000 ----------- ----------- Net cash used in operating activities (476,000) (266,400) =========== =========== Net cash used in investing activities (9,500) (40,300) =========== =========== Net cash provided by (used in) financing activities 211,100 316,800 =========== =========== Net decrease in cash and cash equivalents (274,400) 10,100 Cash and cash equivalents at beginning of period 1,053,600 339,900 ----------- ----------- Cash and cash equivalents at end of period $ 779,200 $ 350,000 =========== =========== Supplemental disclosures - cash paid for Interest $ 34,200 $ 15,500 Taxes $ 101,000 $ 10,000
See Accompanying Notes 5 ACTION PRODUCTS INTERNATIONAL, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY December 31, 1999 through March 31, 2000 (Unaudited)
Common Stock $.001 Par Value Additional Stock Total -------------------- Paid-In Retained Subscription Shareholders' Shares Amount Capital Earnings Receivable Equity ------ ------ ------- -------- ---------- ------ BALANCE - 2,007,400 $ 2,000 $3,524,200 $ 215,500 $ (534,100) $3,207,600 DECEMBER 31, 1999 COLLECTION OF STOCK -- -- -- -- 9,600 9,600 SUBSCRIPTIONS NET INCOME -- -- -- 32,200 -- 32,200 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE - MARCH 31, 2000 2,007,400 $ 2,000 $3,524,200 $ 247,700 $ (524,500) $3,249,400 ========== ========== ========== ========== ========== ==========
See Accompanying Notes 6 ACTION PRODUCTS INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 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 March 31, 2000 and the results of its operations and cash flows for the first quarter ending March 31, 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 March 31, 2000 are not necessarily indicative of the operating results for the full year. 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 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. 3. Renewal of Line of Credit During May 2000, the Company obtained an extension of the maturing date of its line of credit though May 2001, unsubstantially the same terms as previously existed. The only significant change was an interest rate change from prime to prime plus 1%. 4. Earnings per share Common stock equivalents were not included in the presentation of diluted earnings per share for the period ending March 31, 1999, as their effect would have been anti-dilutive. 7 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" and the Company's other Securities and Exchange Commission filings. Results of Operations: Three Months Ended March 31, 2000 Compared with Three Months Ended March 31, 1999 Revenues. Revenues increased to $1,470,200 during the first quarter ended March 31, 2000 compared with revenues of $1,186,900 during the first quarter of 1999. Management attributes the 23.9% increase in revenues to a diversification of product lines and the success of the Company's products at the 2000 Toy Fair in New York City. With the strengthening of the Companies branding, sales to museums 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. In addition to sales growth generated within certain target markets, management credits its proprietary brands with generating improved margins. There was a slight decrease in gross margins to 51.3% during the first quarter of 2000, compared with 52.3% for the first quarter of 1999. Selling, General & Administrative Expenses. Selling, general and administrative expenses increased to $751,9000 during the first quarter of 2000 from $673,000 during the first quarter of 1999, an 11.7% increase. This increase in SG&A is primarily as result of the Company's headquarters moving from Ocala, Florida to Orlando, Florida, and the relocation of staff. Management's planned efforts to decrease selling, general and administrative expenses include reducing future costs in certain areas such as staffing, outside labor, bank charges. Interest Expense and Other Income. Interest expense related to current and long-term debt was approximately $34,200 during the first quarter of 2000 compared with $15,500 during the first quarter of 1999. This increase is due primarily to the additional borrwings that were need for in-tranist inventories and the build up of inventory levels. Other income was $77,000 during the first quarter of 2000 and $40,400 during the first quarter of 1999. This increase is due to investment income received. 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other income and expenses are netted for financial statement purposes. This amount has historically been. Insignificant and represented less than 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 $45,300 during the first quarter of 2000 compared with a net loss of $27,400 during the first quarter of 1999. The Company made a $13,100 provision for income taxes during the first quarter of 2000, so the Company's net income for the first quarter of 2000 was $32,200. Financial Condition, Liquidity and Capital Resources: As of March 31, 2000, current assets were $3,612,500 compared to current liabilities of $1,067,400 resulting in a current ratio of better than 3.4:1. Total assets decreased to $5,207,800 from $5,269,200 at December 31, 1999. Current liabilities decreased $92,800. Current assets increased $7,100 due primarily to increases in accounts receivable. Net accounts receivable and inventories were $1,147,800 and $1,357,500, respectively, at March 31, 2000, compared to $956,700 and $1,416,300, respectively, at December 31, 1999. The difference between the three months ending March 31, 2000, was a result of the Company's normal business cycle. Cash and cash equivalents were $779,200 at March 31, 2000, a decrease of $274,400 from December 31, 1999, as a net result of prepayments of inventory in transit and other reductions in liabilities. Net property, plant and equipment decreased from $972,000 at December 31, 1999 to $953,300 at March 31, 2000, a decrease of $18,700 or 1.9%. The Company recorded depreciation of $28,200 during the first quarter of 2000. The Company made capital expenditures in the amount of $9,500 during the first quarter of 2000 to purchase networking computers for the accounting and art departments. Other assets decreased from $691,800 at December 31, 1999 to $642,000 at March 31, 2000, a decrease of $49,000 or .1% Accounts payable and accrued expenses decreased $298,500 to $301,700 at March 31, 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 $722,000 at March 31, 2000 from $516,000 at December 31, 1999 due primarily to the receipt of and payment for in-transit inventory during the quarter. Cash used in operations was $476,000 for the three months ended March 31, 2000, as compared to $266,400 for the comparable period in 1999, due primarily to sales on credit and the increase of inventory levels in anticipation of the upcoming seasonal spike in business. Also, the Company used cash from operations during this period to make a tax payment of $101,000 for the gain on the sale of Action SnacksTM. 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) During May 2000, the Company obtained an extension of the maturing date of its line of credit though May 2001, at substantially the same terms as previously existed. The only significant change was an interest rate change from prime to prime plus 1%. Shareholders' equity at March 31, 2000 increased by $41,800 as a combined result of the net income and collections of stock subscriptions receivable. 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 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 authorizes the issuance of Shares of common and preferred stock. As of March 27, 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, 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, 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. 10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 17, 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. 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 with industry practices. This ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 12 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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. 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 its 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 13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 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. 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. 14 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: May 12, 2000 By: /s/ Ronald Kaplan -------------- ---------------------------------- Ronald Kaplan, President Date: May 12, 2000 By: /s/ Timothy L. Young -------------- ------------------------------------- Timothy L. Young, Chief Financial Officer (Chief Accounting Officer) 15 EX-27 2 FDS --
5 This schedule contains summary financial information extracted from the accompanying financial statements and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-2000 JAN-1-2000 MAR-31-2000 779 0 1147 0 1357 3612 1759 (806) 5207 1067 0 2 0 0 3249 5207 1470 1470 715 715 751 0 34 45 13 32 0 0 0 32 0.02 0.02
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