-----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, GjIC8J2FFeiT3BNQl3a6mx4ln+Pmiqi4xyityjr6JJ50mWVjGl+Vcvc8Y1igqOMD kDxeHGVtmAcQQGFpuvj8bg== 0001116502-01-500152.txt : 20010409 0001116502-01-500152.hdr.sgml : 20010409 ACCESSION NUMBER: 0001116502-01-500152 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-13118 FILM NUMBER: 1590855 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 10KSB40 1 action-10ksb40.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 Commission file number 0-13118 ACTION PRODUCTS INTERNATIONAL, INC. ----------------------------------- (Name of Small Business Issuer in Its Charter) Florida 59-2095427 (State of incorporation) (IRS Employer Identification No.) 390 North Orange Avenue, Suite 2185, Orlando, Florida 32801 (Address of principal executive offices) Registrant's telephone number, including area code (407) 481-8007 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share --------------------------------------- (Title of Class) Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $7,823,700 The aggregate market value of the voting stock held by the non-affiliates of the Registrant was $1,320,009 based on the average high and low bid price reported March 27, 2001 (based on 880,006 shares). Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of December 31, 2000 Class Outstanding ----- ----------- Common Stock, $.001 2,116,436 DOCUMENTS INCORPORATED BY REFERENCE NONE TABLE OF CONTENTS
PART I ITEM 1. DESCRIPTION OF BUSINESS......................................................... 3 ITEM 2. DESCRIPTION OF PROPERTIES...................................................... 7 ITEM 3. LEGAL PROCEEDINGS.............................................................. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 7 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER............................... 8 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 8 ITEM 7. FINANCIAL STATEMENTS........................................................... 16 ITEM 8. ACCOUNTING AND FINANCIAL DISCLOSURE........................................... 16 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS....................................................................... 16 PART III ITEM 10. EXECUTIVE COMPENSATION........................................................ 18 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................................ 21 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................ 22 PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................................................. 22 EXHIBITS..................................................................... FINANCIAL STATEMENTS..........................................................
2 PART I FORWARD-LOOKING STATEMENTS Certain statements contained in the Form 10-KSB constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act. Such statements include management's expectations and objectives regarding the Company's future financial position, operating results and business strategy. These statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include those set forth under the caption "Forward-Looking Statements" set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-KSB. The Company assumes no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. ITEM 1. DESCRIPTION OF BUSINESS: General Development of Business ------------------------------- Action Products International, Inc. (the "Company") (NASDAQ: APII) is a brand-focused, educational toy company, which designs, manufactures and markets a diversified portfolio of educational and non-violent brands of toy products, to various retailing channels such as toy stores, specialty retailers, education outlets, museums, and attractions in the United States and throughout the world. The Company began its operations in 1977, originally incorporated and operated in New York. The Company relocated and re-incorporated in Florida in 1980. From 1998 through 2000, the Company demonstrated success in developing the sales of a core portfolio of brands to replace the sales of divested non-core lines. The Company's first internally-developed proprietary toy brand Space Voyagers(R) generated $1 million in its second full year on the market. During the past fiscal year, the Company developed other new proprietary products. The Company's business model is to continue expanding core brands while developing new ones through internal product development, favorable licensing agreements and prudent acquisition. The Company's growth strategy is based on diversifying distribution channels while creating and increasing brand equity. The Company is currently implementing a new software system, which will add to the already strong management systems it current has. The Company is implanting a new front office contact, inventory and data management system, which in turn should increase profitability in proportion to increasing revenues. Description of Business Products -------------------------------- The Company sells its educational toy product lines under the name "Action Products(TM)." The product lines include proprietary brands Space Voyagers(R), Climb@tron(TM), Earth Lore(R), Woodkits(TM), Drop ZoneSM, Thomas & Friends(TM) Creative Play, Play & Store(TM) and Powerballs(TM). Products include action figures, playsets, activity kits, and various other toys with a strategic emphasis on space, dinosaurs, science, nature and other educational and non-violent categories. Launched in 1998, the Space Voyagers(R) brand of educational role play toys, established the Company as a developer of proprietary product lines and helped create new channels of distribution. 3 In 2000, the Climb@tron(TM) brand's initial product release generated over $1 million in sales. Additional Climb@tron products launched later in the year helped the brand generate over $1.5 million in total sales for 2000. Other proprietary brands include the Drop ZoneSM brand of parachute toys, and a broad line of themed educational toys with the working name Play & StoreSM , scheduled for release in 2001. In addition to the further development of internal brands the company actively pursues prudent acquisition opportunities and licensing agreements. In second quarter of 1999, the Company signed an agreement with Logiblocs Ltd., a UK manufacturer of electronic building blocks, to exclusively market the Logiblocs(R) product line in North, Central, and South America. On October 15, 2000 the Company acquired assets of Earth Lore Ltd., an award-winning private Canada-based maker of popular and educational excavation kits for children. Earth Lore, in business since 1996, had annual sales of approximately $1.2 million in 2000. Earth Lore offered the Company an appropriate product line extension as well as solid channels of distribution without overlap. The Earth Lore brand, with its flagship "I Dig Dinosaurs(R)" excavation kit, generated approximately $300,000 in sales for the Company in fourth quarter 2000. Customers --------- Management focuses its efforts on increasing customers by diversifying the Company's distribution channels. Museum stores and attractions throughout the United States and around the world served as the Company's primary niche for many years. While this niche has provided a solid foundation for growth, the Company has successfully expanded its distribution to national toy stores, specialty retailers, and other available retail outlets. Certain specialty retailers emulate the mass-market retailers with multiple-outlet volume buying. This results in larger individual orders of a reduced number of SKU's (stock keeping units). Management differentiates the brands and products it offers to the specialty and mass markets when necessary for the preservation of each distribution channel and differing product life cycles. In addition, the Company's strategy of pursuing acquisitions of other toy companies could provide an entry into new mass-market retailers through established channels of distribution. The Company services customers in every state in the United States, as well as the District of Columbia. The Company exports to approximately 20 foreign countries and regions including Europe, South and Central America, Canada, Indonesia, Japan, Hong Kong, Korea, New Zealand, and Australia. Marketing and Sales ------------------- The Company sells its product lines through an internal, direct-sales department and a large network of manufacturer representative firms. The direct sales department includes a team that focuses on selling to attractions and museums, some of whom are among the Company's first customers. The sales department also has a customer service team that manages and supports the manufacturer rep firms with marketing collateral, product information, order processing and occasional customer visits. The Company exhibits its product lines at industry and related industry trade shows, as well as rep firm showrooms located across the country. The Company's biggest trade show is the American International Toy Fair held in New York City in February. At the 2001 Toy Fair, the Company launched the newly acquired Earth Lore(TM) brand and the Thomas & Friends(TM) creative play line at the 2001 show. These products had a good reception that generated approximately $250,000 in orders. 4 The Company capitalizes on strategic marketing campaigns, point of purchase displays and creative package design to build brand equity and ensure product sell through. International Sales and Manufacturing ------------------------------------- With the recent acquisition from Earth Lore LTD, the Company acquired assets including accounts receivable, inventories, equipment, patents, trademarks and a sales and manufacturing facility in Winnipeg, Canada. The Company maintains production, distribution, and Canadian sales activities in Canada, but has moved corporate and other management functions to its Orlando, Florida headquarters. Three of Earth Lore founders have entered exclusive employment agreements to join the Company. The objective is to leverage the Earth Lore distribution channels to market the Company's other brands in Canada as well as significantly increasing the Earth Lore brand's sales in the United States. Overall Revenues from the Company's international sales represented approximately 5.2% of total revenues in 2000. This included slightly less than one quarter of Canadian sales from the acquisition of Canadian based Earth Lore Ltd. Although the Company will increase sales in Canada, revenues from international sales will still represent a limited percentage of total revenues and therefore, do not expose the Company to significant risk. The Company has formal international distributor relationships for The United Kingdom, South America and Central America. The Company sells to other international territory accounts and distributors on a direct basis without formal exclusive distribution arrangements. In general, international sales are subject to inherent risks, including, but not limited to, transportation delays and interruptions, political and economic disruptions, the imposition of tariffs and import and export controls, changes in government policies, cultural differences affecting product demands and the burdens of complying with a variety of foreign laws. The Company's products are produced by approximately 30 outside manufacturing companies in the United States, Mexico, Taiwan, Hong Kong and China, and are imported directly by the Company as finished goods. While the Company to date has not experienced any material adverse effect due to such risks, there can be no assurances that such events will not occur in the future and possibly result in increases in costs and delays of, or interference with, product deliveries resulting in losses of sales and goodwill. The Company believes that it experiences minimal currency risk because all foreign transactions are conducted using US dollars. The implementation of the General Agreement on Tariffs and Trade in 1996 reduced or eliminated customs duties on many products imported by the Company. The Company believes that the capacity of its facilities and the supply of completed products which it purchases from unaffiliated manufacturers is adequate to meet the foreseeable demand for the product lines which it markets. Over a period of time, the Company's reliance on external sources of manufacturing can be shifted to alternative sources of supply should such change be necessary. However, if the Company were prevented from obtaining products from a substantial number of its current Far East suppliers due to political, labor or other factors beyond its control, the Company's operations would be disrupted while alternative sources of products were secured. The imposition of trade sanctions by the United States against a class of products imported by the Company, could significantly increase the cost of the Company's products imported into the United States. 5 Competition ----------- The Company competes against various toy manufacturers and importers, distributors such as DSI, Inc. and Learning Curve International. The Company's ability to compete successfully is based upon its core competencies, including its portfolio of proprietary brands that are themed as non-violent and educational. The Company also relies on its unique ability to offer a wide range of specialized "same day" shipment on most domestic orders and exemplary customer service. The Company's rep firms and in-house sales professionals maintain regular and close contact with direct customers. The Company's reputation, customer service, and unique brand offerings enable it to build and maintain customer loyalty. The Company believes it can further expand its customer base due to the growing recognition of its educationally themed brands within the industry and by consumers. Management plans include expanding distribution channels and increasing business with national toy retailers. The Company also plans to leverage its core competencies through the strategic acquisition of other educationally themed toy product lines. This diversification should help to solidify distribution channels already served by the Company. Intellectual Property --------------------- The Company's products are protected in as many countries as practical, by trademark, copyright and patent law to the extent that such protection is available and meaningful. The Company owns the registration and trademarks of the majority of its brands and continually applies for trademarks as part of its product development process. Government Regulation --------------------- The Company's toys are subject to the provisions of the Consumer Product Safety Act, the Federal Hazardous Substances Act and the Flammable Fabrics Act, and the regulations promulgated there under. The Consumer Product Safety Act and the Federal Hazardous Substances Act enable the Consumer Product Safety Commission (the "CPSC") to exclude from the market consumer products that fail to comply with applicable product safety regulations or otherwise create a substantial risk of injury, and the articles that contain excessive amounts of a banned hazardous substance. The Flammable Fabrics Act enables the CPSC to regulate and enforce flammability standards for fabrics used in consumer products. The CPSC may also require the repurchase by the manufacturer of articles, which are banned. Similar laws exist in some states and cities and in various international markets. The Company's products are rated according to the EN-71 safety protocol adopted by the European Community. In addition, the Company expects to certify its products according to the Japanese Toy Association ("JTA") safety criteria for consumer products. The Company also voluntarily complies with certain standards established by the American Society of Testing and Materials ("ASTM"). Although compliance with this much stricter standard is completely at the discretion of the manufacturer, it is the policy of the Company that its toys meet this superior level of safety. The Company maintains a quality control program to ensure product safety compliance with the various federal, state and international requirements. The Company's membership in the Toy Manufacturer's Association ("TMA") provides an important resource to remain informed of the latest safety guidelines. 6 Personnel --------- As of December 31, 2000, the Company had 43 full-time employees worldwide, including four executive positions, ten sales and customer support positions, and twenty-nine other positions to fulfill administrative responsibilities in marketing, product development, accounting, logistics, manufacturing, etc. The employees are not represented by a union. In 2000, the Company offered a benefits package to its employees that included health and life insurance plans, an Employee Stock Ownership Plan (ESOP), a 401(k) plan, and an employee-contributed IRC Section 125 health plan. Some of these plans may have minor differences for the Canadian operations. Employees are required to sign a non-compete agreement prohibiting direct competition with the Company for a one-year period following termination of their employment. The Company believes its employee relations are good. ITEM 2. DESCRIPTION OF PROPERTY: The Company's corporate headquarters are located in Orlando, Florida. The Company leases a 3,000 square foot suite in the downtown Orlando business district which is staffed by executive, sales, marketing, product development, importing and graphics personnel. In addition to its corporate offices, the Company has another facility in Ocala, Florida and a manufacturing facility in Winnipeg, Canada. The Company owns a 35,000 square foot building and 2.5 acres of land in an industrial park in Ocala, Florida. This location is approximately one hour north of Orlando and has served as the Company's home for nearly 20 years. The Company-owned Ocala location serves as the Company's distribution center and houses its purchasing, accounting, management information systems and administrative departments. The Ocala facility also maintains a customer service call center. The Ocala property is currently encumbered by a mortgage. The principal balance as of December 31, 2000 was $713,420 and may be prepaid at any time without penalty. The mortgage is amortized over 20 years and payable in monthly installments of principal and interest until 2009, whereby a balloon payment of approximately $513,500 will become due. The property is currently in usable and saleable condition. The Company has a manufacturing facility in a 13,000 square foot building located in Winnipeg, Canada. This location is primary used for the assembly and manufacturing of the Earth Lore brand. Other then the manufacturing staff, the facility also houses the Canadian sales and product development personnel. The Company leases this facility on a month-to-month basis, with an approximate rent per month of $4,000. ITEM 3. LEGAL PROCEEDINGS: From time to time the Company is engaged in various legal and regulatory proceedings incidental to its normal business activities. Such matters are subject to many uncertainties, and outcomes are not currently predictable. Consequently, it is not practical to estimate a range of possible loss from the final disposition of these matters, and losses, if any, could be material with respect to earnings in a given period. However, the Company is of the opinion that the resolution of these matters will not result in any significant liability to the Company in relation to its financial position or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: During the quarter ended December 31, 2000, there were no matters submitted to a vote of the Company's security holders. 7 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: The Company's Common Stock is traded on The NASDAQ Small Cap Market under the respective symbol APII. The number of holders on record of the Company's Common Stock as of March 27, 2001, was approximately 1,250. The high and low bid quotations as reported by NASDAQ OnlineSM for each quarter of the fiscal years ended December 31, 1999 and 2000 are follows: Quarter Ended: High Bid Low Bid ------------- -------- ------- March 31, 1999 2.688 2.500 June 30, 1999 2.375 2.250 September 30, 1999 2.750 2.625 December 31, 1999 2.188 2.000 March 31, 2000 2.375 2.313 June 30, 2000 1.750 1.688 September 30, 2000 2.000 2.000 December 31, 2000 1.875 1.625 The quotations represent prices between dealers in securities; they do not include retail mark-ups, markdowns, or commissions, and do not necessarily represent actual transactions. Dividend Policy The Company previously distributed shares and warrants as dividends, but has not paid any cash dividends. Any payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend on, among other things, the Company's future earnings, financial condition, any contractual restrictions, capital and other cash requirements, and general business conditions. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: General ------- In 1999, management led the Company away from being a distributor of other manufacturer's toy and published products towards the development, establishment and distribution of its own proprietary brands and products. The Company's strategy is to continue broadening its collection of brands through internal development, licensing, and acquisitions. Proprietary brands allow the Company to better control costs, maintain margins and secure favorable relationships with the most prominent sales and retail organizations in the toy industry. Product Development ------------------- The Company develops brands by introducing new products based on market research and then extending its strongest product lines. In early 2000, the Company developed its best selling single product to date, the original Climb@tron(TM) robot. In fall of 2000 the Company developed four new models to support retail demand for the Climb@tron(TM) brand. 8 In 2001 the Company developed a broad line of themed educational toys with the working name Play & StoreSM to fill an overlooked niche in the specialty toy industry. In 2001, the Company also improved its consistent selling Space Voyagers(R) brand with a new series of action figures and play sets. The Company's product development objective is to continually develop a solid portfolio of proprietary brands to drive top line revenues. The Company is committed to building brands through internal development or through synergistic acquisitions. Management is focused on expanding current brands and developing new brands that create and sustain consumer interest. Licensing --------- In addition to the internal development of brands, the Company began the strategic use of licensed intellectual properties. The Company acquired the franchise license to develop and market exclusive products featuring the popular children's character "Thomas the Tank Engine(R)". The license increases the diversity of the Company's brand portfolio by providing a brand for a younger demographic of user. The brand has proven to be soundly accepted by retailers by generating strong initial sales during its launch. The Company has signed a licensing agreement with Apollo Astronaut Buzz Aldrin to further develop and promote the Space Voyagers(R) brand. The license validates the brand's exclusive market position as "the most authentic space toys on Earth(TM)," allowing for greater margins. The Company will continue to seek out appropriate licensing agreements that support the Company's objective develop exclusive brands to drive profitable top line revenue. Mergers and Acquisitions ------------------------ To supplement the internal development of brands and its licensing efforts, the Company plans to further build its portfolio of proprietary brands through the acquisition of related companies, product lines, and exclusive distribution rights. On October 15, 2000, the Company acquired specific assets of Earth Lore Ltd. Earth Lore, a developer of industry leading toy excavation kits. This Acquisition offered the Company a proven brand that complemented the Company's brand portfolio. The acquisition also created new channels of distribution for the Company's entire product offering. The Company will continue to pursue synergistic acquisitions of related companies and product lines to augment the Company's brand portfolio and expand sales channels. FORWARD-LOOKING STATEMENTS -------------------------- Forward-looking statements in this Form 10-KSB including, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: the Company's ability to successfully (i) develop its brands and proprietary products through internal development, licensing and/or mergers and acquisitions, (ii) enter the mass market through its licensing agreement with Discovery Communications, Inc., and (iii) develop its 9 E-commerce strategy. Additional factors include, but are not limited to the following: the size and growth of the market for the Company's products; competition, pricing pressures, market acceptance of the Company's product, the effect of economic conditions, intellectual property rights and the outcome of competitive products; the results of financing efforts, risks in product development and other risks identified in this and the Company's other SEC reports. Results of Operations --------------------- The Company derived and selected the following table of financial data from the financial statements, which should be read in conjunction with the audited financial statements, and related notes included elsewhere herein.
Twelve (12) Months Ended December 31, ------------------------------------ 2000 1999 ---- ---- Net Sales $7,823,700 $5,847,100 Gross Profit 3,833,100 2,459,600 Selling, General & Administrative Expenses 3,567,500 3,135,700 Income (Loss) from operations 265,600 (676,100) Income (Loss) before tax provision 199,400 (429,500) Net Income (Loss) 95,300 (232,500) Basic Net Income (Loss) per share 0.05 (0.14) Cash flow used in operations (343,600) (1,050,700) As of December 31, ------------------- 2000 1999 ---- ---- Current Assets 3,912,800 3,605,400 Total Assets 6,329,900 5,269,200 Current Liabilities 1,792,000 1,160,200 Long Term Liabilities 1,078,400 901,400 Stockholders' Equity 3,459,500 3,207,600
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999 ----------------------------------------------------------------------- Net sales increased to a new record $7,823,700 in 2000 from $5,847,100 in 1999, this represents the fifth consecutive improvement in annual sales. The increase comes as a result of management's efforts to grow its distribution channels and the growing strength of various proprietary lines and brands. Management particularly notes the replacement of "lost" sales due to the divestiture of certain product lines in December 1997. Gross profit increased from $2,459,600 in 1999 to $3,833,100 in 2000, up $1,373,500. As a percentage of sales, gross profit increase to 49.0% compared to 42.1% in the prior year. Management attributes the increase in gross profit percentage to the strategic implementation of propriety products such as Space Voyagers (R), etc.; these types of items have a higher gross margin and comprise a larger percentage of the Company's total sales. Selling, General and Administrative (SG&A) expenses were $3,567,500 and $3,135,700 in 2000 and 1999, respectively. The increase in SG&A expenses is due primarily to increased selling expenses, including marketing efforts, growth of the distribution channels, commissions to the growing network of toy reps, as well as added product development expenses and salaries. 10 Interest expense related to current and long-term debt was $193,000 and $96,000 in 2000 and 1999, respectively. The increase is due primarily to increased utilization of the line of credit and increased interest rates during 2000. (See "Liquidity and Capital Resources") Interest income was $30,900 and $172,100 in 2000 and 1999, respectively. The decrease related primarily to the collection in 1999 of notes receivable related to the divestiture of certain product lines and maintaining lower levels of cash balances during 2000. Other income and expense are netted for financial statement presentation. This amount has historically been insignificant and represented less than three-percent of net sales in each of the last two years. Liquidity and Capital Resources ------------------------------- As of December 31, 2000, current assets were $3,912,800 compared to current liabilities of $1,792,000 for a current ratio of approximately 2.2 to 1. In fiscal 1999, the Company's current ratio was 3.1 to 1. The Company had net cash flows used in operations of $343,600 in 2000 compared to net cash flows used in operations in 1999 of $1,050,700, a change of $707,100. This change was due in part to the decreases inventory and increases in accounts payable and accrued expenses. The increase in accounts payable and accrued expenses is primarily related to the acquisition of certain liabilities from Earth Lore Ltd. The Company extends credit to its customers, generally on terms, which require payment within 30 days. Some customers participate in an accounts receivable dating program pursuant to which payments for products are delayed for up to 120 days. The Company believes this is consistent with normal practices in its industry. As the Company has expanded its customer base to include more mass-market and specialty retailers, the risk of larger uncollectable accounts receivable has increased. To mitigate this risk, effective March 1, 2001 the Company obtained a business credit insurance policy to guarantee the majority of its accounts receivable through a Standard & Poors rated insurance company (see "Accounts Receivable Risks"). On November 18, 1999, the Company received full payment on its note-receivable from its 1997 divestiture of Action Snacks(R). The Company received payment of $671,504 of notes receivable. The Company maintains a line of credit with a financial institution under a revolving loan agreement, which matures in April 2001. The borrowing limit as of December 31, 2000, was $1,000,000. Borrowings are collateralized by all accounts receivable and inventories, and interest is payable monthly at the financial institution's prime rate (10.5% at December 31, 2000). The agreement provides that, among other things, the Company maintains a minimum working capital and net worth and a maximum debt to net worth ratio, as defined in the agreement. The agreement also prohibits additional indebtedness in excess of $200,000 in the aggregate. At December 31, 2000, the Company had $799,000 of borrowings under the line of credit The Company also had, at December 31, 2000, a capital lease obligation, payable in monthly installments, excluding sales tax of approximately $4,200, including interest imputed at 9.4%, secured by certain tangible equipment, maturing September 2003, in the amount of $180,500. As of December 31, 2000, the Company's long-term debt consisted of a mortgage payable to a commercial bank of $713,400. The mortgage is collateralized by real estate and improvements, bearing interest annually at 7.5% and amortized assuming a twenty-year term, with ten years of monthly principal and interest payments, then a balloon payment of approximately $514,000. In addition, through the acquisition of the Earth Lore, Ltd. liabilities, the following notes were assumed: 11
Installment note to bank, payable in monthly installments of approximately $1,500, including interest at 8.5%, secured by certain tangible property and equipment, maturing August 2002. 18,200 Installment note to bank, payable in monthly installments of approximately $4,300, including interest at 9.5%, secured by certain tangible property and equipment, maturing November 2002. 60,200 Installment note to bank, payable in monthly installments of approximately $3,400, plus interest at 11.5%, secured by certain tangible property and equipment, maturing May 2003. 66,900
An addition to the above notes, the Company assumed a line of credit with a Canadian financial institution under a revolving loan agreement. Borrowings are collateralized by substantially all of the assets of Action Products Canada, Ltd. and interest is payable monthly at the financial institution's prime rate plus 2% (9.5% at December 31, 2000). The maximum available borrowing under the credit line is approximately $350,000. At December 31, 2000, the Company had approximately $99,300 of borrowings under the line of credit. Other long term liabilities were comprised of deferred revenue of $175,000, associated with a non-compete agreement, and deferred income taxes of $37,500, During the year ended December 31, 2000, the Company collected $10,600 of stock subscription receivables from related parties. In addition, the Company had stock subscriptions receivable of approximately $523,500 due from related parties at December 31, 2000. During 2000, the Company recorded depreciation and amortization of approximately $334,600 compared to $290,900. In addition, the Company invested $327,000 and $125,700 in the acquisition of new assets in 2000 and 1999, respectively. Shareholders' equity at December 31, 2000 increased by $251,900 to $3,459,500 due primarily to net income and the issuance of shares related to the acquisition of the assets of Earth Lore, Ltd. and a decrease in stock subscription receivables. Factors That May Affect Future Results and Market Price of Stock: ----------------------------------------------------------------- The Company is operating in a rapidly changing environment, which involves a number of risks, some of these 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 are expected to decline over time and may decline at rates faster than expected. The Company's success is dependent upon the Company's ability to enhance existing product lines and develop new products and product lines. The failure of the Company's new products and product lines to achieve and sustain market acceptance and to produce acceptable margins could have a material adverse effect on the Company's financial condition and results of operations. 12 Liquidity. Effective April 18, 1998, the Company entered into an agreement with SouthTrust Bank pursuant to which SouthTrust provides a revolving line of credit for up to $1 million (the "Revolver"). Borrowings under the Revolver are utilized by the Company to finance accounts receivable, inventory, and other operating and capital requirements. The Revolver matures April 17, 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. As a result of the maturing date with SouthTrust Bank, effective March 22, 2001, the Company has entered into an agreement with Citrus Bank, to which Citrus Bank provides a revolving line of credit for up to $2 million (the "New Revolver"). The borrowings under the New Revolver are utilized by the Company to finance accounts receivable, inventory, and other operating and capital requirements. The Revolver matures June 30, 2003 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 could 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, on a minimum basis, 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 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, except for the Earth Lore (TM) brand, many of which are located in the People's Republic of China (the "PRC"), Hong Kong, Singapore and Taiwan. The Company generally does not have long-term contracts with 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. 13 General Risks of Foreign Operations. Foreign operations are generally subject to risks such as transportation delays and interruptions, political and economic disruptions, the imposition of tariffs and import and export controls, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, changes in governmental policies, restrictions on the transfer of funds, currency fluctuations and potentially adverse tax consequences. While the Company to date has not experienced any material adverse effects due to its foreign operations, there can be no assurance that such events will not occur in the future. Any growth of the Company's international operations will subject the Company to greater exposure to risks of foreign operations. The occurrence of such an event, particularly one affecting the Company's relations with its manufacturers in the PRC, would have a material adverse effect on the Company. Product Safety and Liability, Regulation. Products that have been or may be developed or sold by the Company may expose the Company to potential liability from personal injury or property damage claims by end-users of such products. The Company has never been and is not presently a defendant in any product liability lawsuit; however, there can be no assurance that such a suit will not be brought in the future against the Company. The Company currently maintains product liability insurance coverage in the amount of $1.0 million per occurrence, with a $2.0 million excess umbrella policy. There can be no assurance that the Company will be able to maintain such coverage or obtain additional coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. Moreover, even if the Company maintains adequate insurance, any successful claim could materially and adversely affect the reputation and prospects of the Company, as well as divert management time. The CPSC has the authority under certain federal laws and regulations to protect consumers from hazardous goods. The CPSC may exclude from the market goods it determines are hazardous, and may require a manufacturer to repurchase such goods under certain circumstances. Some state, local and foreign governments have similar laws and regulations. In the event that such laws or regulations change or the Company is found in the future to have violated any such law or regulation, the sale of the relevant product could be prohibited and the Company could be required to repurchase such products. Competition. The toy industry is highly competitive. Many of the Company's competitors have longer operating histories, broader product lines and greater financial resources and advertising budgets than the Company. In addition, the toy industry has nominal barriers to entry. Competition is based primarily on the ability to design and develop new toys, procure licenses for popular products, characters and trademarks, and successfully market products. Many of the Company's competitors offer similar products or alternatives to the Company's products. The Company's products compete with other products for retail shelf space. There can be no assurance that shelf space in retail stores will continue to be available 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. 14 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 several customers accounted for more than 4% of the Company's sales in 2000, 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. Concentration of Stock Ownership. The Company's present Officers and Directors beneficially own approximately 73.6% of the common stock on a fully diluted basis. 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. Anti-Takeover Provisions. The foregoing provision in the Company's Articles of Incorporation (namely the ability, without further shareholder approval) to issue additional shares of common stock and/or preferred stock with rights and preferences determined by the Board of Directors could be used as anti-takeover measures. These provisions could prevent or discourage or delay a non-negotiated change in control and result in shareholders receiving less for their common stock than they otherwise might in the event of a takeover attempt. Dependence on Key Management. The Company's 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 & Chief Executive Officer. The loss of Mr. Kaplan or any of its key executives could have a material adverse effect on the Company and its operations and prospects. Currently the Company has no key man life insurance on Mr. Kaplan. The Company believes that its future success will also depend, in part, upon its ability to attract, retain and motivate qualified personnel. There is no assurance, however, that the Company will be successful in attracting and retaining such personnel. No Dividends. The Company expects that it will retain all available earnings generated by our operations for the development and growth of our business. Accordingly, the Company does not anticipate paying any cash dividends on its common stock. 15 Dilution. As of December 31, 2000, the Company has 2,116,436 shares of its common stock issued and outstanding. The Company's Board has the ability, without further shareholder approval, to issue up to 12,883,564 additional shares of common stock. Such issuance may result in a reduction of the book value or market price, if any of the outstanding common shares. Issuance of additional common stock will reduce the proportionate ownership and voting power of the then existing shareholders. ITEM 7. FINANCIAL STATEMENTS: Financial statements and schedules are submitted in Items 13(1) and (2) on this Form 10-KSB. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: During the two years, the Company has not had any changes in or disagreements with its accountants. ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: MANAGEMENT/BOARD OF DIRECTORS The executive officers and directors of the Company are as follows:
Name Age Position ---- --- -------- Ronald S. Kaplan 35 Chairman of the Board of Directors, Chief Executive Officer (1) Ronald Tuchman 65 President & Chief Operating Officer, Director Timothy L. Young 38 Chief Financial Officer & Secretary Lawrence Bernstein 60 Director, Chair of Nominating Committee (1) (2) Judith Kaplan 62 Director Marvin Smoller 55 Director, Chair of Audit Committee (2)
-------------------- (1) Member of the Nominating Committee (2) Member of the Audit Committee Ronald S. Kaplan, Chairman of the Board and Chief Executive Officer. From January 1996 to February 2001 Mr. Kaplan held the position as President. Mr. Kaplan served as Executive Vice President and Chief Operating Officer prior to becoming President and Chief Executive Officer in January 1996. He is the son of the founder/director Judith Kaplan. Ronald Tuchman, President and Chief Operating Officer since February 2001 and Director since August 1998. Mr. Tuchman is a respected member of the toy industry with over 30 years of experience in all-retailing aspects of the toy business. As of February 2001, Mr. Tuchman has joined the Company as President. Prior to joining the Company's Board, Mr. Tuchman most recently served as Chairman of the Board, Chief Executive Officer and a Director of Imaginarium, an "upscale" educational specialty toy store chain. In addition to other professional accomplishments, Tuchman was employed by Toys "R" Us for nearly 25 years, where he held several positions, including Senior Vice President, and is widely known within the Toy Industry as one of Toys"R"Us founding fathers. Mr. Tuchman attended Roosevelt University in Chicago where he majored in advertising and marketing. 16 Timothy L. Young, Chief Financial Officer and Corporate Secretary, is a graduate of the Baylor University with Bachelor of Business Administration degrees in Accounting and Finance. Mr. Young joined the Company in February of 2000. Prior to joining the Company, Mr. Young was a financial consultant for various companies. His services included Joint Ventures, Mergers & Acquisitions, and consolidations of operations to international banking relations. From the beginning of 1994 to 1996, Mr. Young was Vice President, Chief Financial Officer & Treasurer of Brown & Brown, Inc. a $150 million publicly held NYSE listed company. He was previously with the Certified Public Accounting firm of Pricewaterhouse Coopers LLP. Lawrence Bernstein, Director since September 1999. Mr. Bernstein is a key figure in the toy industry. For twenty years Mr. Bernstein held several positions with the Hasbro Corporation. Prior to leaving Hasbro in 1995 Mr. Bernstein was the President of the flagship Hasbro Toy Division and Executive Vice President of Hasbro, Inc. Mr. Bernstein holds a Bachelor of Science degree in Business Administration from Boston University with emphasis in Marketing & Economics. Judith Kaplan, Company Founder and Director since 1980, served as Chair of the Board of Directors of the Company since its incorporation in 1980 until December 31, 1995. Ms. Kaplan was President ('80-'87), Secretary ('80-'97), Chief Executive Officer ('80-'95), Chief Financial Officer ('80-'98) and Treasurer ('80-'91) of the Company. She is the mother of Ronald Kaplan. Marvin Smoller, Director, since September 2000. Mr. Smollar is President and co-founder of Delray Capital Corporation, an investment management company specializing in derivative securities. Previously, Mr. Smollar was founder, president, CEO and Chairman of Marchon, Inc. -- an international toy manufacturing and marketing company which was acquired by Empire of Carolina, an American Stock Exchange company. Prior to that, he was founder, President and Chief Executive Officer of Kidco, Inc., a toy manufacturing and marketing company that introduced such well known lines as Matchbox(R), and was acquired by a New York Stock Exchange listed company. Nominating Committee - Lawrence Bernstein, Chair; Ronald S. Kaplan Audit Committee - Marvin Smoller, Chair; Lawrence Bernstein Director Compensation --------------------- Directors who are full-time employees of the Company receive no additional compensation for services rendered as members of the Company's Board or any committee thereof. Directors who are not full-time employees of the Company receive $2,500 per year, $500 for each Board meeting attended in person, and $250 for each Company Board meeting attended telephonically. In addition, from time to time the Company may grant incentive stock options with an exercise price greater than the market value of the underlying stock to the directors for services rendered while serving on the Board. In the past outside directors were granted 10,000 shares under Stock Option Plan, for each year of service on the Board, above the market value of the shares as listed at the time of the grant. 17 PART III ITEM 10. EXECUTIVE COMPENSATION: The following table sets forth the aggregate compensation paid to Ronald S. Kaplan (the "Named Executive Officer") by the Company. None of the other executive officers of the Company were paid a total annual salary and bonuses of $100,000 or more. Except as set forth in the table below, no bonuses or other compensation was paid during the 2000, 1999, or 1998 fiscal years.
Summary Compensation Table Long Term Compensation Other Name and Annual Restricted Principal Salary Bonus Compensation Position Year ($) ($) ($)1 ----------------------------------------------------------------------------------------- Ronald Kaplan, CEO 2000 $105,000 $0 $6,000 1999 $100,000 $0 $6,000 1998 $100,000 $35,000 $6,000 -------------------------- 1 Includes value of use of automobile, vacation pay, sick pay.
Ron Kaplan was promoted to Chief Executive Officer and Chairman of the Board of Directors as of January 1, 1996. As of February 2001, Mr. Kaplan vacated his position as President of the Company to Ronald Tuchman. As of February 2001, Mr. Kaplan's annual salary is $130,000 plus the use of an automobile. Mr. Tuchman and Mr. Young's annual salary is $120,000 and $115,500, respectively plus auto allowances. Mr. Tuchman became our President and Chief Operating Officer in February 2001. Pursuant to his three-year employment agreement, Mr. Tuchman's base compensation is $120,000 per year. In addition, Mr. Tuchman also received options to purchase 125,000 shares of our common stock at an exercise price of $1.75 per share. In connection with his employment agreement, Mr. Tuchman also agreed to invest $200,000 in the Company in exchange for 114,266 shares of the Company's common stock at a purchase price of $1.75 per share. Option Grants in Last Fiscal Year --------------------------------- The Company did not grant any options to the Named Executive during the fiscal year ended December 31, 2000. 18 Aggregated Option/Warrant Exercises and Year End Option/Warrant Values ---------------------------------------------------------------------- in Last Fiscal Year ------------------- The following table sets forth the aggregate of options exercised in the year ended December 31, 2000 and the value of options held at December 31, 2000.
Option/Warrant Exercises/Option/Warrant Values Number of Securities Underlying Unexercised Value of Unexercised In- Shares Options/Warrants at Fiscal the-money Options/Warrants Acquired on Value Year End At Fiscal Year End Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable ---- ------------ ------------ ------------------------- ------------------------- Ronald S. Kaplan 0 $0 929,000/0 $1,074,384/0(1)
(1) The dollar value was calculated by determining the difference between the fair market value at fiscal year-end of the common stock underlying the options/warrants and the exercise prices of the options/warrants. The last sale price of a share of the Company's common stock on December 31, 2000 as reported by Nasdaq was $1.875. Therefore the value of the unexercised warrants has been calculated. The unexercised options are out-of-the-money, so they have been excluded from this calculation. Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent (10%) of the Company's outstanding common stock to file with the Securities and Exchange Commission (the "SEC") and NASDAQ initial reports of ownership and reports of changes in ownership of common stock. Such persons are required by the SEC regulations to furnish the Company with copies of all such reports they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company, all Section 16(a) filing requirements applicable to officers, directors and greater than ten percent (10%) beneficial owners were complied with, except that. Mr. Young inadvertently failed to file his initial statement of beneficial ownership on Form 3 on a timely basis and filed a report listing his acquisition of 2,000 shares of the Company's common stock on a Form 3 instead of a Form 4. The Company also believes that Mr. Smoller may have filed to file his initial statement of beneficial ownership on a Form 3 and Mr. Young, Mr. Tuchman and Mr. Bernstein may have failed to file Form 5's reporting the grant of options, exempt from Section 16(b) listing their acquisition of options. It also appears that Warren Kaplan and Judy Kaplan may have not timely filed Form 4's reporting their sales of common stock in December 1999. The Form 4's are dated January 8, 2001, but they were not filed electronically on EDGAR until March 2001. The Company has retained counsel to assist its officers and directors in correcting any delinquent Section 16 filings. Employee Stock Ownership Plan ----------------------------- On April 23, 1984, the Company adopted an Employee Stock Ownership Plan ("ESOP"). The ESOP qualifies for special tax benefits under the Internal Revenue Code. Under the ESOP, the Company, at the discretion of its Board of Directors, may make an annual contribution to a trust that purchases the Company's stock from the Company for the benefit of employees who have completed at least 1,000 hours of work during the fiscal year. Employer contributions under the ESOP are allocated to each employee's account on a pro-rata basis according to the total compensation paid to, and the number of years of service by, all eligible employees. An employee becomes 100% vested in the ESOP following 5 years of plan eligibility. As of December 31, 2000, there were 23,256 shares of Common Stock held by the Company's ESOP trust. 19 401(k) Plan ----------- Effective October 3, 1986, the Company adopted a Voluntary 401(k) Plan. All employees are eligible for the plan. Employees who have worked for the Company for 18 months are currently eligible for a 34% match of their subsequent contributions. Benefits are determined annually. The lowest 66% of paid employees may contribute the lesser of 15% of their salary or the applicable maximum allowed by the Internal Revenue Code. The top 1/3 of employees cannot contribute a percentage greater than 15% of their compensation or 150% of the average contribution of the lowest 66% of paid employees to the applicable maximum allowed by the Internal Revenue Code. Employer contributions vest within three months and all contributions are held in individual employee accounts with an outside financial institution. Stock Option Plan ----------------- To increase the officers', key employees' and consultants' interest in the Company and to align more closely their interests with the interests of the Company's shareholders, the Board of Directors, adopted a stock option plan called the "1996 Stock Option Plan" (the "Plan") on May 28, 1996. The Plan was subsequently ratified by a majority vote of the Company's shareholders. Under the Plan, the Company has reserved an aggregate of 900,000 shares of Common Stock for issuance pursuant to options granted under the Plan ("Plan Options"). Plan Options are either options qualifying as incentive stock options ("Incentive Options") or options that do not qualify ("Non-Qualified Options"). Any Incentive Option granted under the Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of such grant. The exercise price of Non-Qualified Options shall be determined by the Board of Directors or the Committee but shall in no event be less than 75% of the fair market value of the underlying shares on the date of the grant. As of December 31, 2000, there were 864,000 Incentive Options existing under the plan. No Non-Qualified Options have been issued. 20 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The following table sets forth information with respect to the number of shares of Common Stock beneficially owned by (i) each director of the Company, (ii) the executive officer named in the Summary Compensation Table, (iii) all directors and officers as a group and (iv) each shareholder known by the Company to be a beneficial owner of more than 5% of the Company's common stock as of December 31, 2000. Except as otherwise indicated, each of the shareholders listed below has sole voting and investment power over the shares beneficially owned and the address of each beneficial owner is c/o Action Products International, Inc., 390 North Orange Ave., 21st Floor, Orlando, Florida 32801. As of February 28, 2000, there were issued and outstanding 2,230,722 shares of Common Stock. Table of Beneficial Ownership ----------------------------- Amount and Nature of Name and Beneficial Percent Address Ownership of Class ------- --------- -------- Ronald S. Kaplan 1,202,317 1 38.1% Ronald Tuchman 319,286 2 13.1% Judith Kaplan 1,048,827 3 43.1% Warren Kaplan 1,048,827 4 43.1% Lawrence Bernstein 20,000 5 .9% Marvin Smoller 10,000 6 .4% All Directors and Officers as a Group (6 persons, Directors and 5% owners shown above) 2,756,430 7 73.6% - ------------------- 1 Includes immediately exercisable options to purchase 100,000 shares at $3.50 per share and immediately exercisable warrants to purchase 829,000 shares of Common Stock at $0.579. 2 Includes immediately exercisable options to purchase 80,000 shares at $3.50 per share and 125,000 shares at $1.75. 3 Includes immediately exercisable options to purchase 100,000 shares at $3.50 per share. Also includes 23,256 shares held as Trustee of the Company's Employee Stock Ownership Plan Trust and 411,212 shares and 100,00 options exercisable at $3.50 per share held by her husband. Ms. Kaplan disclaims beneficial ownership of her husband's shares. 4 Includes immediately exercisable options to purchase 100,000 shares at $3.50 per share. Also includes 23,256 shares held as Trustee of the Company's Employee Stock Ownership Plan Trust and 414,359 shares and 100,00 options exercisable at $3.50 per share held by his wife. Mr. Kaplan disclaims beneficial ownership of his wife's shares. 5 Includes immediately exercisable options to purchase 20,000 shares at $3.50 per share. 6 Includes immediately exercisable options to purchase 10,000 shares at $3.50 per share. 7 Includes immediately exercisable warrants to purchase 829,000 shares warrants to purchase and immediately exercisable options to purchase 685,000 shares 21 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: During 1998, Ronald S. Kaplan redeemed the conversion features of the loan due him in exchange for warrants exercisable for shares of the Company's Common Stock under substantially the same terms. The exchange, therefore, did not have a dilutive effect. Once alternative financing was arranged with a financial institution, the previous notes payable were satisfied. Accordingly, there are no notes payable to related parties as of December 31, 2000. On November 29, 1999, Ronald S. Kaplan, Judith Kaplan and Warren Kaplan exercised their options, 243,000, 58,000, and 58,000, respectively at a exercise price of $1.39 per share, the realizable gain at the time of exercise was $208,900, $49,880 and $49,880, respectively, based on a closing price of $ 2.25. In connection with stock options exercised during 1999, there were stock subscriptions receivable from related parties of $523,500 as of December 31, 2000. PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules and Exhibits 1. Financial Statements -------------------- Report of Independent Certified Public Accountants Balance Sheet - December 31, 2000 Statements of Operations - Years ended December 31, 2000 and 1999 Statements of Changes in Shareholders' Equity - Years ended December 31, 2000 and 1999 Statements of Cash Flows - Years ended December 31, 2000 and 1999 Notes to Financial Statements - Years ended December 31, 2000 and 1999 2. Financial Statement Schedules - None. ------------------------------ 3. Exhibits -------- Exhibit No. 3.1 Amended Articles of Incorporation incorporated by reference to an Exhibit to Definitive Proxy Statement filed May 22, 1998. 3.2 Amended By-laws, incorporated by reference to an Exhibit to the Definitive Proxy Statement filed May 22, 1998. 22 10.1 Employee Stock Ownership Plan incorporated by reference to an Exhibit to the Company's Registration Statement on Form S-18, dated April 23, 1984, at pages 154-208. 10.2 Incentive Stock Option Plan incorporated by reference to an Exhibit to the Company's Registration Statement on Form S-18 dated September 25, 1984, at pages 210-220. 10.3 401(k) Plan dated October 3, 1986, incorporated by reference to an Exhibit to Form 10-K filed August 15, 1987.* 10.4 Amendment to Employee Stock Ownership Plan dated February 8, 1988, incorporated by reference to an Exhibit to Form 10-K filed March 31, 1989.* 10.5 Amendment to Employee Stock Ownership Plan dated March 10, 1989, incorporated by reference to an Exhibit to Form 10-K filed March 31, 1989.* 10.6 Company's 1996 Stock Option Plan incorporated.* 10.7 Asset Purchase Agreement between the Company and American Outdoor Products, Inc. dated December 31, 1997 incorporated by reference to Exhibit 2.1 in the Company's Current Report on Form 8-K filed February 26, 1998. 10.8 Asset Purchase Agreement between the Company and Earth Lore Ltd., dated October 15, 2000 incorporated by reference to Exhibit in the Company's Current Report on Form 8-K filed November 6, 2000. 11.1 Statement re: computation of per share earnings. 21.1 List of Subsidiaries 23.1 Independent Auditors Consent Agreement --------------------------- * Indicates Management contract or compensation plan arrangement. (b) Reports on Form 8-K -------------------- On November 6, 2000, the Company filed a Form 8-K, under Item 2 and Item 7 reporting that it had acquired certain assets and liabilities of Earth Lore, Ltd. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Action Products International, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACTION PRODUCTS INTERNATIONAL, INC. a Florida corporation Date: March 30, 2001 By: /s/ RONALD S. KAPLAN -------------------- ---------------------------------- Ronald S. Kaplan, Chairman of the Board, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ RONALD S. KAPLAN Chairman of the Board/ March 30, 2001 - ----------------------------- Chief Executive Officer/ Director -------------- Ronald S. Kaplan /s/ RONALD TUCHMAN President/Chief Operating Officer/ March 30, 2001 - ----------------------------- Director -------------- Ronald Tuchman /s/ TIMOTHY L. YOUNG Chief Financial Officer/ March 30, 2001 - -------------------- Secretary (Chief Accounting Officer) --------------- Timothy L. Young /s/ LAWRENCE BERNSTEIN Director March 30, 2001 - ---------------------- -------------- Lawrence Bernstein /s/ JUDITH KAPLAN Director March 30, 2001 - ----------------------------- -------------- Judith Kaplan /s/ MARVIN SMOLLER Director March 30, 2001 - ----------------------------- -------------- Marvin Smoller
ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 1999 C O N T E N T S --------------- Page Number REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet F-2 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 MOORE STEPHENS LOVELACE, P.A. CERTIFIED PUBLIC ACCOUNTANTS AND MANAGEMENT CONSULTANTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Action Products International, Inc. Orlando, Florida We have audited the accompanying consolidated balance sheet of Action Products International, Inc. and subsidiary as of December 31, 2000, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Action Products International, Inc. and subsidiary as of December 31, 2000, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with generally accepted accounting principles. /s/ Moore Stephens Lovelace, P.A. - --------------------------------- Certified Public Accountants Orlando, Florida February 2, 2001, except for Note 12, as to which the date is March 22, 2001. F-1 ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET December 31, 2000 ASSETS CURRENT ASSETS Cash and cash equivalents $ 614,700 Accounts receivable, net of an allowance for doubtful accounts of $97,000 1,692,600 Inventories, net 1,387,900 Prepaid expenses and other assets 217,600 ----------- TOTAL CURRENT ASSETS 3,912,800 PROPERTY, PLANT AND EQUIPMENT Land 67,400 Building and building improvements 1,023,600 Equipment 919,100 Furniture and fixtures 173,200 ----------- 2,183,300 Less accumulated depreciation and amortization (963,700) ----------- NET PROPERTY, PLANT AND EQUIPMENT 1,219,600 EXCESS OF FAIR VALUE OVER COST OF ASSETS ACQUIRED 548,300 OTHER ASSETS 649,200 ----------- TOTAL ASSETS $ 6,329,900 =========== The accompanying notes are an integral part of the financial statements. F-2 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of installment notes payable and obligation under capital lease $ 139,600 Accounts payable 534,100 Accrued expenses 62,300 Accrued payroll and related expenses 32,900 Current portion of mortgage payable 19,500 Borrowings under lines of credit 898,300 Income taxes payable 80,300 Deferred revenue 25,000 ----------- TOTAL CURRENT LIABILITIES 1,792,000 INSTALLMENT NOTES PAYABLE AND OBLIGATION UNDER CURRENT LEASE 197,000 MORTGAGE PAYABLE 693,900 DEFERRED INCOME TAXES 37,500 DEFERRED REVENUE 150,000 ----------- TOTAL LIABILITIES 2,870,400 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - $.001 par value; 15,000,000 shares authorized; 2,116,400 shares issued and outstanding 2,100 Additional paid-in capital 3,670,100 Retained earnings 310,800 Stock subscription receivable (523,500) ----------- TOTAL SHAREHOLDERS' EQUITY 3,459,500 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,329,900 =========== The accompanying notes are an integral part of the financial statements. F-3 ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2000 and 1999
2000 1999 ----------- ----------- NET SALES $ 7,823,700 $ 5,847,100 COST OF SALES 3,990,600 3,387,500 ----------- ----------- GROSS PROFIT 3,833,100 2,459,600 OPERATING EXPENSES Selling 1,338,500 1,187,900 General and administrative 2,229,000 1,947,800 ----------- ----------- 3,567,500 3,135,700 ----------- ----------- INCOME (LOSS) FROM OPERATIONS 265,600 (676,100) OTHER INCOME (EXPENSE) Interest expense (193,600) (96,000) Interest income 30,900 172,100 Other income 96,500 170,500 ----------- ----------- (66,200) 246,600 ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 199,400 (429,500) PROVISION (BENEFIT) FOR INCOME TAXES 104,100 (197,000) ----------- ----------- NET INCOME (LOSS) $ 95,300 $ (232,500) =========== =========== INCOME (LOSS) PER SHARE Basic $ 0.05 $ (0.14) =========== =========== Diluted $ 0.03 $ (0.14) =========== ===========
The accompanying notes are an integral part of the financial statements. F-4 ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock $.001 Par Value Additional Stock Total ------------------------- Paid-In Retained Subscription Shareholders' Shares Amount Capital Earnings Receivable Equity ----------- ----------- ----------- ----------- ----------- ----------- BALANCE - JANUARY 1, 1999 1,642,800 $ 1,600 $ 3,008,300 $ 448,000 $ (43,700) $ 3,414,200 ISSUANCE OF COMMON SHARES UPON EXERCISE OF OPTIONS 388,000 400 534,500 -- (534,900) -- COLLECTION OF STOCK SUBSCRIPTIONS -- -- -- -- 44,500 44,500 PURCHASE OF TREASURY STOCK AND CANCELLATION OF COMMON STOCK (5,500) -- (18,600) -- -- (18,600) NET LOSS -- -- -- (232,500) -- (232,500) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE - DECEMBER 31, 1999 2,025,300 2,000 3,524,200 215,500 (534,100) 3,207,600 COLLECTION OF COMMON STOCK SUBSCRIPTIONS -- -- -- -- 10,600 10,600 ISSUANCE OF COMMON SHARES UPON PURCHASE OF SUBSIDIARY 91,100 100 145,900 -- -- 146,000 NET INCOME -- -- -- 95,300 -- 95,300 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE - DECEMBER 31, 2000 2,116,400 $ 2,100 $ 3,670,100 $ 310,800 $ (523,500) $ 3,459,500 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-5 ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2000 and 1999
2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 95,300 $ (232,500) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation 129,100 109,800 Amortization 205,500 181,100 Provision for bad debts 22,700 31,800 Deferred income tax provision (benefit) 23,500 (324,000) Changes in: Accounts receivable (463,300) (458,100) Inventories 184,800 (325,300) Prepaid expenses (29,000) (78,700) Income taxes refundable -- 37,000 Accrued interest receivable -- 36,300 Other assets (209,600) (412,200) Accounts payable (18,800) 121,800 Accrued expenses and payroll (238,100) 186,300 Income taxes payable (20,700) 101,000 Deferred revenue (25,000) (25,000) ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (343,600) (1,050,700) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment (327,000) (125,700) 17,300 -- Cash acquired in business combination Collection of note receivable -- 1,464,800 ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (309,700) 1,339,100 CASH FLOWS FROM FINANCING ACTIVITIES Collection of stock subscriptions receivable 10,600 44,500 Purchase of treasury stock -- (18,600) Repayment of mortgage principal (17,900) (16,700) Repayment of notes payable to related parties (23,000) -- Net change in borrowings under lines of credit 244,700 416,100 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 214,400 425,300 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (438,900) 713,700 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,053,600 339,900 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 614,700 $ 1,053,600 =========== ===========
The accompanying notes are an integral part of the financial statements. F-6 ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 1999 NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Action Products International, Inc. and Subsidiary (the Company) is engaged in the design, manufacture and sale of toys, books, and other educational and entertainment products. The Company also sells promotional products. The Company's products are wholesaled worldwide to educational and leisure industry retailers. Acquisition of Earth Lore, Ltd. and Basis of Presentation On September 28, 2000, the Company formed Action Products Canada, Ltd., a wholly owned Canadian subsidiary for the purpose of acquiring substantially all of the assets including, but not limited to, patents, pending patent applications, trademarks, brand names, customer lists, and inventory and assuming certain liabilities of Earth Lore, Ltd. ("Earth Lore"), a Canadian toy manufacturer located in Winnipeg, Manitoba. On October 15, 2000, the acquisition was completed and was accounted for under the purchase method of accounting for business combinations. The purchase price was approximately $978,000 and was comprised of approximately 91,100 unregistered shares of the Company's common stock valued at $146,000 and the assumption of approximately $832,000 of Earth Lore's debt and operating liabilities. Approximately $505,000 of the purchase price was allocated to tangible and identifiable intangible assets acquired based upon their estimated fair values as of the effective date of the acquisition. The excess of consideration paid, including approximately $75,300 of other costs related to the transaction, over and above the estimated fair value of the identifiable net assets acquired, has been included in the accompanying balance sheet as "excess of cost over fair value of assets acquired." The accompanying consolidated financial statements include the results of operations of Action Products International, Inc. for the year ended December 31, 2000 and its wholly owned foreign subsidiary, Action Products Canada, Ltd., for the period October 16, 2000 through December 31, 2000. All significant intercompany transactions have been eliminated. The following table of unaudited pro-forma results presents the operations of the Company as if it had owned the business of Earth Lore, Ltd. since January 1, 1999, after giving effect to certain adjustments, including amortization of excess of cost over fair value of assets acquired and salary adjustments:
2000 1999 ----------------- ----------------- Net Revenues $ 8,709,000 $ 7,122,000 Net Loss $ (329,000) $ (458,000) Net loss per share - basic and diluted $ (0.16) $ (0.29)
Cash and Cash Equivalents For financial presentation purposes, the Company considers short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. F-7 NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories Inventories, which consist of finished goods purchased for resale, are stated at the lower of cost (determined by the first-in, first-out method) or market. The inventory valuation allowance at December 31, 2000 was approximately $145,000. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the various classes of assets, as follows: Building 40 Years Furniture and fixtures 5 Years Equipment 5 - 7 Years Leasehold improvements are amortized over the estimated useful lives of the improvements, or the term of the lease, if shorter. Excess of Cost Over Fair Value of Assets Acquired The cost of acquired companies in excess of the fair value of net assets at acquisition date is recorded as "excess of cost over fair value of assets acquired" and is amortized over a 15-year period on a straight-line basis. Other Assets Other assets consist primarily of costs associated with molds and dies for form-pressed toys, purchased text for the Company's books, and license fees for the use of the Discovery Channel(R) name on the packaging of certain educational toys. These assets are amortized on a straight-line basis over their useful lives, as follows: Net Book Value At December 31, Years 2000 ------ ------------- Molds and dies 5 $ 615,000 Purchased text 3 - 10 7,100 License fees 1 27,100 ----------- $ 649,200 =========== In the event a product is discontinued and the associated costs are not fully amortized, the unamortized portion is charged to expense at the time the product is discontinued. The Company assesses the recoverability of intangible assets, including excess of cost over fair value of assets acquired, if facts and circumstances suggest that their carrying amount may have been impaired. In making its assessment, the Company gives consideration to the undiscounted cash flows from the use of such assets, the estimated fair value of such assets, and other factors that may affect the recoverability of such assets. If such an assessment indicates that the carrying value of intangible assets may not be recoverable, the carrying value of intangible assets is reduced. F-8 NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Deferred Revenue In December 1997, the Company entered into an agreement with the purchaser of certain of the Company's assets associated with its snack food product line (see Note 3). The agreement provides for, among other things, the Company to receive compensation of $250,000 in exchange for ceasing its activities related to the manufacture and sale of freeze-dried snack foods for a period of ten years. The agreement also provides for compensation of $50,000 in exchange for making certain information available to the purchaser during 1998. The Company recorded these amounts as deferred revenue at December 31, 1997 and is amortizing them into income using the straight-line method over the terms specified in the agreement. As of December 31, 2000, deferred revenue related to this agreement was $175,000. Revenue Recognition The Company recognizes revenue from the sale of its products when goods are shipped to customers. Income Taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in its financial statements or tax returns. Deferred income tax liabilities and assets are determined based on the difference between the financial statement and tax bases of liabilities and assets using enacted tax rates in effect for the year in which the differences are expected to reverse (see Note 7). Net Income Per Share Basic earnings per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is based on the sum of the weighted average number of common shares outstanding plus common share equivalents arising out of stock options, warrants, and convertible debt. Common share equivalents were not considered in the diluted earnings per share calculation for 1999 because their effect would have been anti-dilutive. As a result, both basic and diluted earnings per share for 1999 were calculated based on 1,681,000 weighted average common shares outstanding during the year. The following table is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations for 2000:
Year Ended December 31, 2000 ---------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ---------- ----------------- -------------- Basic EPS Net income $ 95,300 2,044,700 $0.05 ===== Effect of Dilutive Securities Common stock options and Warrants - 737,000 --------- --------- Diluted EPS Net income plus assumed Conversions $ 95,300 2,781,700 $0.03 ========= ========= =====
F-9 NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Net Income Per Share (Continued) Options to purchase 864,000 shares of common stock of the Company at approximately $3.50 per share were outstanding during 2000, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. The options expire from 2001 to 2004. Foreign Currency Translation and Comprehensive Income Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the fiscal year. Gains or losses on the translation of the financial statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, are reflected as a separate component of equity. Gains or losses on foreign currency transactions are included in the consolidated statements of earnings. During the year ended December 31, 1999, the Company incurred no gains or losses on foreign currency transactions. During the year ended December 31, 2000, the Company incurred a deminimus gain on foreign currency. The Company also has no other accumulated or current items of comprehensive income that are excluded from net income. Accordingly, the Company has not presented a statement of comprehensive income. Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Credit Risk and Fair Value of Financial Instruments Financial instruments that potentially subject the Company to concentrations of credit risk at December 31, 2000 include trade receivables and approximately $561,000 of cash deposited in money market mutual funds. The money market funds are not protected under the FDIC; however, the Company has not experienced any losses in these funds. The Company believes that it is not exposed to any significant credit risk on money market funds. Concentrations of credit risk with respect to trade receivables are limited, in the opinion of management, due to the Company's large number of customers and their geographical dispersion. The carrying values of cash and cash equivalents, mortgage payable, installment notes payable, and the line of credit approximate their fair values. Reclassifications Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentation. F-10 NOTE 2 - RELATED-PARTY TRANSACTIONS During 1998, the conversion features related to approximately $600,000 of certain notes payable to related parties were exchanged for an equivalent number of warrants. The Company has reserved from its authorized but unissued shares of common stock 1,036,300 shares for use in the event the warrants are exercised. The warrants are exercisable at $0.579 per share. The Company had stock subscriptions receivable from related parties of approximately $523,500 and $534,100 as of December 31, 2000 and 1999, respectively. NOTE 3 - NOTES RECEIVABLE In connection with the sale of certain assets during December 1997, the Company received notes aggregating $1,850,000. The notes accrued interest at a rate approximating 10% and provided for principal and interest payments of approximately $400,000 per year, with the final payment due in March 2004. During the year ended December 31, 1999, the purchaser paid off the principal amount of the notes receivable due to the Company. NOTE 4 - MORTGAGE PAYABLE In November 1998, the Company borrowed $750,000 in the form of a mortgage payable, collateralized by its warehouse facility in Ocala, Florida. The mortgage bears interest at 7.5% per annum and is due in 120 monthly payments of principal and interest of approximately $6,100 based on a 20-year amortization. A balloon payment of approximately $513,500 is due in 2009. The mortgage is collateralized by real estate and improvements and contains certain restrictive covenants, which provide that, among other things, the Company maintains a minimum working capital and net worth, and a maximum debt to net worth ratio. The proceeds from this borrowing were used to repay notes payable to related parties of $600,000 and to provide additional permanent working capital. The outstanding principal balance due on the mortgage payable at December 31, 2000, was $713,400. Maturities on long-term debt and obligations are approximately as follows: Year Ending December 31, Amount ------------ ------------- 2001 $ 19,500 2002 21,000 2003 22,700 2004 24,300 2005 26,400 Thereafter 599,500 ------------- $ 713,400 ============= Cash paid for interest on the mortgage payable during the years ended December 31, 2000 and 1999, approximated $55,500 and $56,300, respectively. Cash paid for interest on all borrowing arrangements and lease obligations was approximately $150,000 and $85,800 in 2000 and 1999, respectively. F-11 NOTE 5 - CREDIT LINEs The Company maintains a line of credit with a financial institution under a revolving loan agreement, which matures in April 2001. The borrowing limit as of December 31, 2000, was $1,000,000. Borrowings are collateralized by all accounts receivable and inventories, and interest is payable monthly at the financial institution's prime rate (10.5% at December 31, 2000). The agreement provides that, among other things, the Company maintains a minimum working capital and net worth and a maximum debt to net worth ratio, as defined in the agreement. The agreement also prohibits additional indebtedness in excess of $200,000 in the aggregate. At December 31, 2000, the Company had $799,000 of borrowings under the line of credit (see Note 12). As a result of the its acquisition of the business of Earth Lore, Ltd., the Company assumed a line of credit with a Canadian financial institution under a revolving loan agreement. Borrowings are collateralized by substantially all of the assets of Action Products Canada, Ltd. and interest is payable monthly at the financial institution's prime rate plus 2% (9.5% at December 31, 2000). Maximum available borrowings under this line of credit approximated $350,000. At December 31, 2000, the Company had approximately $99,300 of borrowings under the line of credit (see Note 12). NOTE 6 - INSTALLMENT NOTES PAYABLE AND OBLIGATION UNDER CAPITAL LEASE
Installment notes payable and obligation under capital lease as of December 31, 2000, are as follows: Capital lease obligation, payable in monthly installments, excluding sales tax of approximately $4,200, including interest imputed at 9.4%, collateralized by certain tangible equipment, with a net book value of $206,700, maturing September 2003. $ 180,500 Installment note to financial institution, payable in monthly installments of approximately $1,500, including interest at 8.5%, collateralized by certain tangible property and equipment, maturing August 2002. 18,200 Installment note to financial institution, payable in monthly installments of approximately $4,300, including interest at 9.5%, collateralized by certain tangible property and equipment, maturing November 2002. 60,200 Installment note to financial institution, payable in monthly installments of approximately $3,400, plus interest at 11.5%, collateralized by certain tangible property and equipment, maturing May 2003. 66,900 Other 10,800 --------- 336,600 Less: Current portion (139,600) --------- $ 197,000 ========
F-12 NOTE 6 - INSTALLMENT NOTES PAYABLE AND OBLIGATION UNDER CAPITAL LEASE (Continued) Maturities on installment notes payable and obligation under capital leases, are approximately as follows:
Obligations Installment Under Year Ending Notes Capital December 31, Payable Lease Totals ---------------------- --------------- --------------- --------------- 2001 $ 79,100 $ 60,500 $ 139,600 2002 64,400 66,400 130,800 2003 12,600 53,600 66,200 ------------ ------------ ------------ $ 156,100 $ 180,500 $ 336,600 ============ ============ ============
NOTE 7 - Income taxes The provision for income taxes consists of the following for the year ended December 31, 2000:
Current Deferred Total -------- -------- -------- Foreign $ 15,100 $ -- $ 15,100 Federal 59,000 20,000 79,000 State 6,000 4,000 10,000 -------- -------- -------- $ 80,100 $ 24,000 $104,100 ======== ======== ========
Significant components of the Company's deferred tax liabilities and assets at December 31, 2000, are approximately as follows:
Deferred Tax Liabilities ------------------------ Amortization $ (42,200) Depreciation (26,300) ------------- Gross deferred tax liabilities (68,500) Deferred Tax Assets ------------------- Bad debt allowance 30,100 Inventory reserves 54,600 Charitable contribution carryforward 800 ------------ Gross deferred tax assets 85,500 Valuation allowance (54,500) ------------ Net deferred tax assets 31,000 ------------ Net deferred taxes $ (37,500) ============
During 2000, deferred tax asset valuation allowance increased by $4,000. F-13 NOTE 7 - Income taxes (Continued) The difference between the Company's effective income tax rate and the federal statutory rate is reconciled below:
2000 1999 --------------- --------------- Federal provision (benefit) expected at statutory rates (34%) $ 54,600 $ (146,000) Meals and entertainment and auto lease inclusion 11,000 (13,000) Income not subject to tax -- (38,000) State income taxes 5,800 -- Increase in valuation allowance 4,000 -- Foreign income taxes 15,100 -- Other 13,600 -- --------------- --------------- Provision (benefit) for income taxes $ 104,100 $ (197,000) =============== ===============
During 1999, the Company recognized approximately $113,000 of other income, which resulted from expiration of certain contingencies related to a refund from a taxing authority. Income taxes paid in cash were approximately $-0- and $10,000 during the years ended December 31, 2000 and 1999, respectively. NOTE 8 - INTERNATIONAL SALES International sales amounted to approximately $409,000 and $412,000 in 2000 and 1999, respectively. NOTE 9 - SHAREHOLDERS' EQUITY Employee Stock Ownership Plan The Company has an Employee Stock Ownership Plan (the "ESOP"), which covers substantially all employees. The ESOP provides that, among other things, contributions to the ESOP shall be determined by the Board of Directors prior to the end of each year and that the contributions may be paid in cash, Company stock or other property at any time within the limits prescribed by the Internal Revenue Code. At December 31, 2000, the ESOP held approximately 23,000 shares of the Company's common stock. No shares were contributed in 2000 or 1999. Stock Options On May 28, 1996, the Company's Board of Directors adopted the "1996 Stock Option Plan" (the "SOP"). Under the SOP, the Company has reserved an aggregate of 900,000 shares of common stock for issuance pursuant to options. SOP options are issuable at the discretion of the Board of Directors at exercise prices of not less than the fair market value of the underlying shares on the grant date. During 2000 and 1999, a total of 300,000 and 60,000 options, respectively, were issued under the SOP at a weighted average exercise price of approximately $3.50 per share. As of December 31, 2000, there were 864,000 SOP options. F-14 NOTE 9 - SHAREHOLDERS' EQUITY (Continued) Stock Options (Continued) In connection with the acquisition of the business of Earth Lore, Ltd., the Company entered into employment agreements with certain former Earth Lore, Ltd. employees. The employment agreements provide that, among other things, the employees are to receive options to acquire up to 88,777 shares of the Company's common stock. The options vest in equal annual installments over a three-year period commencing October 2000 and are exercisable at a weighted average exercise price of $3.50. In addition to the SOP options, the Company had other options outstanding. All outstanding stock options not granted under the SOP were exercisable at $1.38 per share. As of December 31, 1998, there were 388,000 other options outstanding. During 1999, all of these stock options were exercised in 1999 at an aggregate exercise price of $534,900, all of which was in the form of subscriptions receivable. There was an aggregate of 864,000 stock options outstanding at December 31, 2000. The options expire as follows: 494,000 in 2001; 80,000 in 2003; and 290,000 in 2004. In the event of a change in the Company's control, the options may not be callable by the Company. The following table summarizes the aggregate stock option activity for the years ended December 31, 2000 and 1999:
Weighted Shares Under Average Option Exercise Price ---------------- ------------------ Outstanding at December 31, 1998 1,022,000 $2.70 Grants 70,000 $3.64 Exercises (388,000) $1.38 Cancellations (90,000) $3.72 --------- ----- Outstanding at December 31, 1999 614,000 $3.50 Grants 300,000 $3.50 Exercises -- $ -- Cancellations (50,000) $3.50 --------- ----- Outstanding at December 31, 2000 864,000 $3.50 =========
Of the 864,000 options outstanding at December 31, 2000, approximately 775,000 are currently exercisable. The weighted-average exercise price for options outstanding at December 31, 2000, was $3.50. The weighted average term over which the options may be exercised is 1.8 years. Additionally, the Company has outstanding warrants for the purchase of up to 1,036,300 of its common shares (see Note 2). Total subscriptions receivable as of December 31, 2000 and 1999, were $523,500 and $534,100 and were receivable from related parties. Payments of stock subscriptions receivable of $10,600 and $44,500 were collected in 2000 and 1999, respectively. F-15 NOTE 9 - SHAREHOLDERS' EQUITY (Continued) Stock Options (Continued) Financial Accounting Standards Board pronouncement FAS No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") requires that the Company calculate the value of stock options at the date of grant using an option pricing model. The Company has elected the "pro-forma, disclosure only" option permitted under FAS 123, instead of recording a charge to operations, as shown below:
2000 1999 ---------- ---------- Net income (loss) As reported $ 95,300 $ (232,500) Pro forma $ (271,800) $ (367,900) Income (loss) per share Basic As reported $ 0.05 $(0.14) Pro forma $ (0.12) $(0.22) Diluted As reported $ 0.03 $(0.14) Pro forma $ (0.11) $(0.22) The Company's weighted-average assumptions used in the pricing model and resulting fair values are as follows: 2000 1999 ----------- ---------- Risk-free rate 7.5% 7.5% Expected option life (in years) 4 4.40 Expected stock price volatility 129% 136% Grant date value $2.16 $2.13
NOTE 10 - EMPLOYEE BENEFIT PLAN The Company has a 401(k) Employee Benefit Plan (the "Plan"), which covers substantially all employees. Under the terms of the Plan, the Company may make a discretionary contribution to the Plan, as determined annually by the Company's Board of Directors. The Company charged approximately $16,300 and $14,800 in 2000 and 1999, respectively, to operations for its contributions to the Plan. NOTE 11 - OTHER COMMITMENTS AND CONTINGENCIES Operating Leases During 1998, the Company entered into a noncancellable-operating lease for office space, which expires in November 2003. In addition, the Company leases certain vehicles under noncancellable operating leases expiring through 2002. Approximate minimum future lease payments due under these operating leases, are as follows: Year Ending December 31, Amount ------------- ------------ 2001 $ 86,000 2002 82,100 2003 60,100 ----------- $ 228,200 =========== F-16 NOTE 11 - OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED) Operating Leases (Continued) In addition, the Company rents a warehouse facility in Winnipeg, Canada, on a month-to-month basis. Monthly rents on the warehouse facility approximate $4,000. During 2000 and 1999, approximately $71,300 and $66,000, respectively, were charged to operations for rent expense related to the operating leases. Legal and Regulatory Proceedings The Company is engaged in various legal and regulatory proceedings incidental to its normal business activities. Such matters are subject to many uncertainties, and outcomes are not currently predictable. Consequently, it is not practical to estimate a range of possible loss from the final disposition of these matters, and losses, if any, could be material with respect to earnings in a given period. However, management is of the opinion that the resolution of these matters will not result in any significant liability to the Company in relation to its financial position or liquidity. Licensing and Distribution Agreements During 1998, the Company entered into a three-year licensing agreement with Discovery Communications, Inc., which provides for, among other things, the Company's right to utilize intellectual properties surrounding the Discovery Channel(R) brand. As defined in the agreement, the Company agreed to pay royalties totaling a minimum of $300,000 over the term of the agreement based on the expected sales of the product line bearing the Discovery Channel(R) name. Royalty expense was approximately $65,000 and $100,000 in 2000 and 1999, respectively. The Company also has entered into licensing agreements related to its Thomas The Tank Engine and Space Voyages product lines. These agreements provide, among other things, for the Company to pay royalties based on a percentage of sales of these products. In addition, the Company has entered into exclusive distribution agreements related to its Climb@Tron product line. The agreements contain provisions for the exclusive arrangement through December 2002, if certain minimum quantities of products are purchased. The minimum order requirement for the year ended December 2000, is $300,000. NOTE 12 - SUBSEQUENT EVENTS On March 22, 2001, the Company entered into an agreement with a financial institution for a working capital line of credit. The agreement stipulated, among other things, a borrowing limit of the lesser of $2,000,000 or the sum of 85% of eligible accounts receivable and 50% of eligible inventory, as further defined in the agreement. Borrowings are collateralized by all accounts receivable and inventories. Interest is payable at the financial institution's prime rate. The agreement also requires, among other things, that the Company maintain a 1.5-to-1 current ratio and a 1.75-to-1 debt to net worth ratio. The initial term of the agreement expires June 30, 2003. Proceeds from this new $2,000,000 line of credit were used to repay outstanding borrowings on the Company's previous line of credit in the approximate amount of $966,000. F-17 EX-10.6 2 ex10-6.txt STOCK OPTION PLAN EXHIBIT 10.6 ACTION PRODUCTS INTERNATIONAL, INC. 1996 STOCK OPTION PLAN 1. Grant of Options; Generally. In accordance with the Provisions hereinafter set forth in this stock option plan, the name of which is the ACTION PRODUCTS INTERNATIONAL, INC. 1996 STOCK OPTION PLAN (the "Plan"), the Board of Directors (the "Board") or, the Compensation Committee (the "Stock Option Committee") of Action Products International, Inc. (the "Corporation") is hereby authorized to issue from time to time on the Corporation's behalf to any one or more Eligible Persons, as hereinafter defined, options to acquire shares of the Corporation's $.001 par value common stock (the "Stock"). 2. Type of Options. The Board or the Stock Option Committee is authorized to issue options which meet the requirements of Section ss.422 of the Internal Revenue Code of 1986, as amended (the "Code"), which options are hereinafter referred to collectively as ISOs, or singularly as an ISO. The Board or the Stock Option Committee is also, in its discretion, authorized to issue options which are not ISOs, which options are hereinafter referred to collectively as NSOs, or singularly as an NSO. The Board or the Stock Option Committee is also authorized to issue "Reload Options" in accordance with Paragraph 8 herein, which options are hereinafter referred to collectively as Reload Options, or singularly as a Reload Option. Except where the context indicates to the contrary, the term "Option" or "Options" means ISOs, NSOs and Reload Options. 3. Amount of Stock. The aggregate number of shares of Stock which may be purchased pursuant to the exercise of Options shall be 900,000 shares. Of this amount, the Board or the Stock Option Committee shall have the power and authority to designate whether any Options so issued shall be ISOs or NSOs, subject to the restrictions on ISOs contained elsewhere herein. If an Option ceases to be exercisable, in whole or in part, the shares of Stock underlying such Option shall continue to be available under this Plan. Further, if shares of Stock are delivered to the Corporation as payment for shares of Stock purchased by the exercise of an Option granted under this Plan, such shares of Stock shall also be available under this Plan. If there is any change in the number of shares of Stock on account of the declaration of stock dividends, recapitalization resulting in stock split-ups, or combinations or exchanges of shares of Stock, or otherwise, the number of shares of Stock available for purchase upon the exercise of Options, the shares of Stock subject to any Option and the exercise price of any outstanding Option shall be appropriately adjusted by the Board or the Stock Option Committee. The Board or the Stock Option Committee shall give notice of any adjustments to each Eligible Person granted an Option under this Plan, and such adjustments shall be effective and binding on all Eligible Persons. If because of one or more recapitalizations, reorganizations or other corporate events, the holders of outstanding Stock receive something other than shares of Stock then, upon exercise of an Option, the Eligible Person will receive what the holder would have owned if the holder had exercised the Option immediately before the first such corporate event and not disposed of anything the holder received as a result of the corporate event. 4. Eligible Persons. ----------------- (a) With respect to ISOs, an Eligible Person means any individual who has been employed by the Corporation or by any subsidiary of the Corporation, for a continuous period of at least sixty (60) days. (b) With respect to NSOs, an Eligible Person means (i) any individual who has been employed by the Corporation or by any subsidiary of the Corporation, for a continuous period of at least sixty (60) days, (ii) any director of the Corporation or by any subsidiary of the Corporation or (iii) any consultant of the Corporation or by any subsidiary of the Corporation. 5. Grant of Options. The Board or the Stock Option Committee has the right to issue the Options established by this Plan to Eligible Persons. The Board or the Stock Option Committee shall follow the procedures prescribed for it elsewhere in this Plan. A grant of Options shall be set forth in a writing signed on behalf of the Corporation or by a majority of the members of the Stock Option Committee. The writing shall identify whether the Option being granted is an ISO or an NSO and shall set forth the terms which govern the Option. The terms shall be determined by the Board or the Stock Option Committee, and may include, among other terms, the number of shares of Stock that may be acquired pursuant to the exercise of the Options, when the Options may be exercised, the period for which the Option is granted and including the expiration date, the effect on the Options if the Eligible Person terminates employment and whether the Eligible Person may deliver shares of Stock to pay for the shares of Stock to be purchased by the exercise of the Option. However, no term shall be set forth in the writing which is inconsistent with any of the terms of this Plan. The terms of an Option granted to an Eligible Person may differ from the terms of an Option granted to another Eligible Person, and may differ from the terms of an earlier Option granted to the same Eligible Person. 6. Option Price. The option price per share shall be determined by the Board or the Stock Option Committee at the time any Option is granted, and shall be not less than (i) in the case of an ISO, the fair market value, (ii) in the case of an ISO granted to a ten percent or greater stockholder, 110 percent of the fair market value, or (iii) in the case of an NSO, not less than 75% of the fair market value (but in no event less than the par value) of one share of Stock on the date the Option is granted, as determined by the Board or the Stock Option Committee. Fair market value as used herein shall be: (a) If shares of Stock shall be traded on an exchange or over-the-counter market, the mean between the high and low sales prices of Stock on such exchange or over-the-counter market on which such shares shall be traded on that date, or if such exchange or over-the-counter market is closed or if no shares shall have traded on such date, on the last preceding date on which such shares shall have traded. (b) If shares of Stock shall not be traded on an exchange or over-the-counter market, the value as determined by a recognized appraiser as selected by the Board or the Stock Option Committee. 2 7. Purchase of Shares. An Option shall be exercised by the tender to the Corporation of the full purchase price of the Stock with respect to which the Option is exercised and written notice of the exercise. The purchase price of the Stock shall be in United States dollars, payable in cash or by check, or in property or Corporation stock, if so permitted by the Board or the Stock Option Committee in accordance with the discretion granted in Paragraph 5 hereof, having a value equal to such purchase price. The Corporation shall not be required to issue or deliver any certificates for shares of Stock purchased upon the exercise of an Option prior to (i) if requested by the Corporation, the filing with the Corporation by the Eligible Person of a representation in writing that it is the Eligible Person's then present intention to acquire the Stock being purchased for investment and not for resale, and/or (ii) the completion of any registration or other qualification of such shares under any government regulatory body, which the Corporation shall determine to be necessary or advisable. 8. Grant of Reload Options. In granting an Option under this Plan, the Board or the Stock Option Committee may include a Reload Option provision therein, subject to the provisions set forth in Paragraphs 20 and 21 herein. A Reload Option provision provides that if the Eligible Person pays the exercise price of shares of Stock to be purchased by the exercise of an ISO, NSO or another Reload Option (the "Original option") by delivering to the Corporation shares of Stock already owned by the Eligible Person (the "Tendered Shares"), the Eligible Person shall receive a Reload Option which shall be a new Option to purchase shares of Stock equal in number to the tendered shares. The terms of any Reload Option shall be determined by the Board or the Stock Option Committee consistent with the provisions of this Plan. 9. Stock Option Committee. The Stock Option Committee may be appointed from time to time by the Corporation's Board of Directors. The Board may from time to time remove members from or add members to the Stock Option Committee. The Stock Option Committee shall be constituted so as to permit the Plan to comply in all respects with the provisions set forth in Paragraph 20 herein. The members of the Stock Option Committee may elect one of its members as its chairman. The Stock Option Committee shall hold its meetings at such times and places as its chairman shall determine. A majority of the Stock Option Committee's members present in person shall constitute a quorum for the transaction of business. All determinations of the Stock Option Committee will be made by the majority vote of the members constituting the quorum. The members may participate in a meeting of the Stock Option Committee by conference telephone or similar communications equipment by means of which all members participating in the meeting can hear each other. Participation in a meeting in that manner will constitute presence in person at the meeting. Any decision or determination reduced to writing and signed by all members of the Stock Option Committee will be effective as if it had been made by a majority vote of all members of the Stock Option Committee at a meeting which is duly called and held. 10. Administration of Plan. In addition to granting Options and to exercising the authority granted to it elsewhere in this Plan, the Board or the Stock Option Committee is granted the full right and authority to interpret and construe the provisions of this Plan, promulgate, amend and rescind rules and procedures relating to the implementation of the Plan and to make all other determinations necessary or advisable for the administration of the Plan, consistent, however, with the intent of the 3 Corporation that Options granted or awarded pursuant to the Plan comply with the provisions of Paragraph 20 and 21 herein. All determinations made by the Board or the Stock Option Committee shall be final, binding and conclusive on all persons including the Eligible Person, the Corporation and its stockholders, employees, officers and directors and consultants. No member of the Board or the Stock Option Committee will be liable for any act or omission in connection with the administration of this Plan unless it is attributable to that member's willful misconduct. 11. Provisions Applicable to ISOs. The following provisions shall apply to all ISOs granted by the Board or the Stock Option Committee and are incorporated by reference into any writing granting an ISO: (a) An ISO may only be granted within ten (10) years from May 8, 1996, the date that this Plan was originally adopted by the Corporation's Board of Directors. (b) An ISO may not be exercised after the expiration of ten (10) years from the date the ISO is granted. (c) The option price may not be less than the fair market value of the Stock at the time the ISO is granted. (d) An ISO is not transferrable by the Eligible Person to whom it is granted except by will, or the laws of descent and distribution, and is exercisable during his or her lifetime only by the Eligible Person. (e) If the Eligible Person receiving the ISO owns at the time of the grant stock possessing more than ten (10%) percent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation (as those terms are defined in the Code), then the option price shall be at least 110% of the fair market value of the Stock, and the ISO shall not be exercisable after the expiration of five (5) years from the date the ISO is granted. (f) The aggregate fair market value (determined at the time the ISO is granted) of the Stock with respect to which the ISO is first exercisable by the Eligible Person during any calendar year (under this Plan and any other incentive stock option plan of the Corporation) shall not exceed $100,000. (g) Even if the shares of Stock which are issued upon exercise of an ISO are sold within one year following the exercise of such ISO so that the sale constitutes a disqualifying disposition for ISO treatment under the Code, no provision of this Plan shall be construed as prohibiting such a sale. (h) This Plan was adopted by the Corporation on May 8, 1996 by virtue of its approval by the Corporation's Board of Directors. Approval by the shareholders of the Corporation is to occur prior to May 8, 1997. 4 12. Determination of Fair Market Value. In granting ISOs under this Plan, the Board or the Stock Option Committee shall make a good faith determination as to the fair market value of the Stock at the time of granting the ISO. 13. Restrictions on Issuance of Stock. The Corporation shall not be obligated to sell or issue any shares of Stock pursuant to the exercise of an Option unless the Stock with respect to which the Option is being exercised is at that time effectively registered or exempt from registration under the Securities Act of 1933, as amended, and any other applicable laws, rules and regulations. The Corporation may condition the exercise of an Option granted in accordance herewith upon receipt from the Eligible Person, or any other purchaser thereof, of a written representation that at the time of such exercise it is his or her then present intention to acquire the shares of Stock for investment and not with a view to, or for sale in connection with, any distribution thereof; except that, in the case of a legal representative of an Eligible Person, "distribution" shall be defined to exclude distribution by will or under the laws of descent and distribution. Prior to issuing any shares of Stock pursuant to the exercise of an Option, the Corporation shall take such steps as it deems necessary to satisfy any withholding tax obligations imposed upon it by any level of government. 14. Exercise in the Event of Death or Termination of Employment. ------------------------------------------------------------ (a) If an optionee shall die (i) while an employee of the Corporation or a Subsidiary or (ii) within thirty days after termination of his employment with the Corporation or a Subsidiary because of his disability, or retirement, his Options may be exercised, to the extent that the optionee shall have been entitled to do so on the date of his death or such termination of employment, by the person or persons to whom the optionee's right under the option pass by will or applicable law, or if no such person has such right, by his executors or administrators, at any time, or from time to time. In the event of termination of employment because of his death while an employee or because of disability, his Options may be exercised not later than the expiration date specified in Paragraph 5 or thirty days after the optionee's death, whichever date is earlier, or in the event of termination of employment because of retirement, not later than the expiration date specified in Paragraph 5 hereof or thirty days after the optionee's death, whichever date is earlier. (b) If an optionee's employment by the Corporation or a Subsidiary shall terminate because of his disability and such optionee has not died within the following thirty days, he may exercise his Options, to the extent that he shall have been entitled to do so at the date of the termination of his employment, at any time, or from time to time, but not later than the expiration date specified in Paragraph 5 hereof or thirty days after termination of employment, whichever date is earlier. (c) If an optionee's employment shall terminate by reason of his retirement in accordance with the terms of the Corporation's tax-qualified retirement plans or with the consent of the Board or the Stock Option Committee, and such optionee has not died within the following thirty days, he may exercise his Option to the extent he shall have been entitled to do so at the date of the termination of his employment, at any time and from to time, but not later than the expiration date 5 specified in Paragraph 5 hereof or thirty (30) days after termination of employment, whichever date is earlier. (d) Notwithstanding anything to the contrary contained herein, if an optionee's employment shall terminate for any reason other than death, disability or retirement, all right to exercise his Option shall terminate at the date of such termination of employment. 15. Corporate Events. In the event of the proposed dissolution or liquidation of the Corporation, a proposed sale of all or substantially all of the assets of the Corporation, a merger or tender for the Corporation's shares of Common Stock the Board of Directors may declare that each Option granted under this Plan shall terminate as of a date to be fixed by the Board of Directors; provided that not less than thirty (30) days written notice of the date so fixed shall be given to each Eligible Person holding an Option, and each such Eligible Person shall have the right, during the period of thirty (30) days preceding such termination, to exercise his Option as to all or any part of the shares of Stock covered thereby, including shares of Stock as to which such Option would not otherwise be exercisable. Nothing set forth herein shall extend the term set for purchasing the shares of Stock set forth in the Option. 16. No Guarantee of Employment. Nothing in this Plan or in any writing granting an Option will confer upon any Eligible Person the right to continue in the employ of the Eligible Person's employer, or will interfere with or restrict in any way the right of the Eligible Person's employer to discharge such Eligible Person at any time for any reason whatsoever, with or without cause. 17. Nontransferability. No Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the optionee, an Option shall be exercisable only by him. 18. No Rights as Stockholder. No optionee shall have any rights as a stockholder with respect to any shares subject to his Option prior to the date of issuance to him of a certificate or certificates for such shares. 19. Amendment and Discontinuance of Plan. The Corporation's Board of Directors may amend, suspend or discontinue this Plan at any time. However, no such action may prejudice the rights of any Eligible Person who has prior thereto been granted Options under this Plan. Further, no amendment to this Plan which has the effect of (a) increasing the aggregate number of shares of Stock subject to this Plan (except for adjustments pursuant to Paragraph 3 herein) , or (b) changing the definition of Eligible Person under this Plan, may be effective unless and until approval of the stockholders of the Corporation is obtained in the same manner as approval of this Plan is required. The Corporation's Board of Directors is authorized to seek the approval of the Corporation's stockholders for any other changes it proposes to make to this Plan which require such approval, however, the Board of Directors may modify the Plan, as necessary, to effectuate the intent of the Plan as a result of any changes in the tax, accounting or securities laws treatment of Eligible Persons and the Plan, subject to the provisions set forth in this Paragraph 19, and Paragraphs 20 and 21. 6 20. Compliance with Rule 16b-3. This Plan is intended to comply in all respects with Rule 16b-3 ("Rule 16b-3") promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act") , with respect to participants who are subject to Section 16 of the Exchange Act, and any provision(s) herein that is/are contrary to Rule 16b-3 shall be deemed null and void to the extent appropriate by either the Stock Option Committee or the Corporation's Board of Directors. 21. Compliance with Code. The aspects of this Plan on ISOs is intended to comply in every respect with Section 422 of the Code and the regulations promulgated thereunder. In the event any future statute or regulation shall modify the existing statute, the aspects of this Plan on ISOs shall be deemed to incorporate by reference such modification. Any stock option agreement relating to any Option granted pursuant to this Plan outstanding and unexercised at the time any modifying statute or regulation becomes effective shall also be deemed to incorporate by reference such modification and no notice of such modification need be given to optionee. If any provision of the aspects of this Plan on ISOs is determined to disqualify the shares purchasable pursuant to the Options granted under this Plan from the special tax treatment provided by Code Section 422, such provision shall be deemed null and void and to incorporate by reference the modification required to qualify the shares for said tax treatment. 22. Compliance With Other Laws and Regulations. The Plan, the grant and exercise of Options thereunder, and the obligation of the Corporation to sell and deliver Stock under such options, shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. The Corporation shall not be required to issue or deliver any certificates for shares of Stock prior to (a) the listing of such shares on any stock exchange or over-the-counter market on which the Stock may then be listed and (b) the completion of any registration or qualification of such shares under any federal or state law, or any ruling or regulation of any government body which the Corporation shall, in its sole discretion, determine to be necessary or advisable. Moreover, no Option may be exercised if its exercise or the receipt of Stock pursuant thereto would be contrary to applicable laws. 23. Disposition of Shares. In the event any share of Stock acquired by an exercise of an Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution within two years of the date such Option was granted or within one year after the transfer of such Stock pursuant to such exercise, the optionee shall give prompt written notice thereof to the Corporation or the Stock Option Committee. 24. Name. The Plan shall be known as the "Action Products International, Inc. 1996 Stock Option Plan." 25. Notices. Any notice hereunder shall be in writing and sent by certified mail, return receipt requested or by facsimile transmission (with electronic or written confirmation of receipt) and when addressed to the Corporation shall be sent to it at its office, 344 Cypress Road, Ocala, Florida 34472, and when addressed to the Committee shall be sent to it at 344 Cypress Road, Ocala, 7 Florida 34472, subject to the right of either party to designate at any time hereafter in writing some other address, facsimile number or person to whose attention such notice shall be sent. 26. Headings. The headings preceding the text of Sections and subparagraphs hereof are inserted solely for convenience of reference, and shall not constitute a part of this Plan nor shall they affect its meaning, construction or effect. 27. Effective Date. This Plan, the Actions Products International, Inc. 1996 Stock Option Plan, was adopted by the Board of Directors of the Corporation on May 8, 1996. The effective date of the Plan shall be the same date. 28. Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms and the singular form of nouns and pronouns shall include the plural and vice versa. 29. Waiver of Jury Trial. An Eligible Person who receives Options under this Plan waives trial by jury in any litigation in any court with respect to, in connection with, or arising out of this Plan or the validity, interpretation or enforcement thereof. Dated as of May 28, 1996. ACTION PRODUCTS INTERNATIONAL, INC. By: /s/ Ronald S. Kaplan Its: President 8 EX-11.1 3 ex11-1.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE For the Years Ended December 31, 2000 and 1999
2000 (Note 1) 1999 Basic EPS Diluted EPS Basic EPS Diluted EPS Net income $ 95,300 $ 95,300 ($ 232,500) ($ 232,500) Add assumed interest savings on debt, Net of tax effect $ -- $ -- $ -- $ -- ----------- ----------- ----------- ----------- Adjusted net income $ 95,300 $ 95,300 ($ 232,500) ($ 232,500) =========== =========== =========== =========== Weighted average number of Common shares outstanding 2,044,700 2,044,700 1,681,000 1,681,000 Dilutive effect of common stock Options and warrants -- 737,000 -- -- ----------- ----------- ----------- ----------- Weighted average common shares used in EPS calculation 2,044,700 2,781,700 1,681,000 1,681,000 =========== =========== =========== =========== Earnings per share $ .05 $ .03 $ (0.14) $ (0.14) =========== =========== =========== ===========
Note 1: Common Shares Equivalents were not considered in the diluted earnings per share calculation for 1999 because their effect would have been anti-dilutive. EX-21.1 4 ex21-1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 LIST OF SUBSIDIARIES State or Country Percentage Name Incorporation Owed Action Products Canada Ltd. Canada 100% EX-23.1 5 ex23-1.txt CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Action Products International, Inc. on Form S-8 for the registration of 900,000 shares of its common stock issuable pursuant to its 1996 Stock Option Plan (SEC File Number 333-76675) and in the related prospectus of our report dated February 2, 2001, except for Note 12, as to which the date is March 22, 2001, with respect to the consolidated financial statements of Action Products International, Inc. and subsidiary included in this Annual Report on Form 10-KSB for the year ended December 31, 2000. /s/ MOORE STEPHENS LOVELACE, P.A. - --------------------------------- MOORE STEPHENS LOVELACE, P.A. CERTIFIED PUBLIC ACCOUNTANTS Orlando, Florida March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----