Filed pursuant to Rule 424(b)(3)
File Number 333-106713
PROSPECTUS
3,272,092 Shares of Common Stock Underlying Common Stock Purchase Warrants
ACTION PRODUCTS INTERNATIONAL, INC.
On June 30, 2003, we made a distribution to our shareholders one
warrant for each share of our common stock owned on June 12, 2003. Each warrant
you own entitles you to purchase one share of our common stock at an exercise
price of $2.00 per share. As a result of this warrant distribution, we may issue
up to 3,272,092 shares of common stock upon exercise of the warrants.
The warrants are exercisable until 5:00 p.m., New York City time, on
June 11, 2004.
Our common stock is listed on the Nasdaq SmallCap Market under the
symbol "APII." On July 28, 2003, the last reported sale price of the common
stock on the Nasdaq SmallCap Market was $2.98 share. There is currently no
public market for our warrants and we do not anticipate that a public market for
our warrants will develop.
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The exercise of the warrants involves substantial risk. You should
refer to the discussion of Risk Factors, beginning on page 7 of this prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this Prospectus is July 31, 2003
TABLE OF CONTENTS
PAGE
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Special Note Regarding Forward-Looking Statements............................2
Where You Can Find More Information About Us.................................2
Prospectus Summary...........................................................3
Risk Factors.................................................................7
Use of Proceeds.............................................................13
The Warrants................................................................13
Legal Matters...............................................................18
Experts.....................................................................18
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus.
References in this prospectus to "we", "us", "our", "our company" and
similar terms means Action Products International, Inc., a Florida corporation.
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors" and
elsewhere in this prospectus are forward-looking statements. These statements
involve known and unknown risks, uncertainties, and other factors that may cause
our actual results, levels of activity, performance, or achievements to be
materially different from any future results, levels of activity, performance,
or achievements expressed or implied by those forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
terms or other comparable words. We believe that the expectations reflected in
the forward-looking statements are reasonable, but we cannot guarantee future
results, levels of activity, performance, or achievements. We do not promise to
update or revise any of the forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus may not occur.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file with the Commission at the Public Reference Room at
the Commission, located at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call 1-800-SEC-0330 for further information concerning the Public
Reference Room. The Commission also makes these documents and other information
available on its web site at http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-3
under the Securities Act of 1933, as amended, relating to the common stock
offered by this prospectus. This prospectus is a part of the registration
statement but does not contain all of the information in the registration
statement and its exhibits. For further information, we refer you to the
registration statement and its exhibits.
The Commission allows us to "incorporate by reference" the information
we file with it, which means that we can disclose important information to you
by referring you to another document we have filed with the Commission. The
information incorporated by reference is an important part of this prospectus
and information that we file later with the Commission will automatically update
and supersede this information. We incorporate by reference the following:
o our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002 filed with the Commission on March 26, 2003,
as amended on March 31, 2003;
o our Proxy Statement filed with the Commission on May 7, 2003;
o our Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2003 filed with the Commission on April 30, 2003;
o our Quarterly Report on Form 10-QSB for the quarter ended June
30, 2003 filed with the Commission on July 25, 2003;
o any future filings we make with the Commission until we sell
all of the common stock offered by us by this prospectus.
You may request a copy of these filings, at no cost, by writing or
telephoning us at Action Products International, Inc., Attn: Investor Relations,
390 N. Orange Ave., Suite 2185, Orlando, Florida 32801, (407) 481-8007,
extension 723 or 718.
2
PROSPECTUS SUMMARY
Questions and answers about our company
What do we do?
We are a brand-focused, educational toy company. We design, manufacture
and market 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. Our revenues for the twelve months ended December 31, 2002 and the
six months ended June 30, 2003 were approximately $6,429,000 and $3,651,000,
respectively. We incurred net losses for the twelve months ended December 31,
2002 and the six months ended June 30, 2003 of approximately $1,306,000 and
$104,000, respectively.
We were originally incorporated, and began our operations, in New York
in 1977, and relocated and re-incorporated in Florida in 1980 as a distributor
of education oriented toys and children's books, stationery and souvenirs,
supplying museum gift shops. Under new executive leadership, a new business
model was developed and implemented. From 1997 through 2002 we successfully
developed or acquired and brought to market a core portfolio of proprietary
branded product lines to replace sales of divested non-core lines. Our first
internally-developed proprietary toy brand, Space Voyagers(R), generated
approximately $1.0 million in its first full year on the market. During the past
three fiscal years, we have continued to develop other new proprietary products
through internal development, licensing and acquisition. In October 2002 we
began shipping our newest brand, Jay Jay The Jet Plane(TM), based on a PBS
television show, videos and children's books of the same name. Our business
model is based on the expansion of core brands, while developing new brands
through internal product development, favorable licensing agreements and prudent
acquisitions. Our growth strategy is based on diversifying distribution
channels, while creating and increasing brand equity.
We sell our educational toy product lines under the umbrella name
"Action Products(TM)." Our marketing and promotion communications focus on our
individual brands such as, Space Voyagers(R), Climb@tron(TM), I DIG
DINOSAURS(R), Woodkits(TM), Drop Zone Extreme(R), Play & Store(TM) and Jay Jay
The Jet Plane(TM). Products include action figures, play-sets, activity kits and
various other toys with a strategic emphasis on non-violent and educational and
fun topics such as space, dinosaurs, science, and nature.
The EarthLore(R) I DIG DINOSAURS(R) brand acquired in October 2000
continues to grow in popularity and contributed over $1.5 million to net sales
in 2002. The introduction of the new Jay Jay The Jet Plane(TM) brand in the
fourth quarter 2002 added another $0.4 million in net sales. Our other brands
including Drop Zone Extreme(TM), Space Voyagers(R) and Play & Store(TM)
contributed the remaining $4.5 million net sales in 2002.
In addition to the development of internal brands, we actively pursue
prudent acquisition opportunities and licensing arrangements. In October 2000,
we acquired certain assets of Earth Lore Ltd., a privately held Canada-based
maker of popular award-winning educational excavation kits for children. The
acquisition provided us with an appropriate product line extension, and channels
of distribution that complemented our existing bases. In 2001, we acquired a
license agreement with the developers of the PBS children's show Jay Jay The Jet
Plane(TM) to develop and launch our new Wooden Adventure System(TM) based on the
episodes, videos and books of this popular children's series. We launched this
product line in the fourth quarter 2002 to popular reception from trade and
consumers.
3
Where are we located?
Our mailing address and telephone number of our principal executive
offices are Action Products International, Inc., 390 N. Orange Ave., Suite 2185,
Orlando, Florida 32801, (407) 481-8007.
Questions and answers about our warrants
What is a warrant?
We have distributed to our shareholders, at no charge, one warrant for
each share of our common stock owned as of June 12, 2003. Each warrant entitles
the holder to purchase one share of our common stock at an exercise price of
$2.00 per share
When you "exercise" a warrant, you choose to purchase the common stock
that the warrant entitles you to purchase. You may exercise all or some of your
warrants, or you may choose not to exercise any of your warrants.
Why did we make a warrant distribution?
We made the warrant distribution to obtain additional working capital.
Instead of selling shares of common stock to outside parties, our board of
directors has chosen to give you the opportunity to buy more shares without
diluting your interest while providing us with additional capital.
How did we arrive at the $2.00 per share exercise price?
In determining the exercise price, our board of directors desired to
offer shares at a price that would be attractive to our shareholder base
relative to the current trading price of our common stock. Our board also
considered the following factors, among others, in no particular order of
priority:
o our desire to increase working capital at a minimal cost to us; o the historic
and current market price of our common stock; o general conditions in the
securities market; o alternatives available to us for raising capital; o the
amount of proceeds desired; o the liquidity of our common stock; and o the level
of risk to our investors.
How do I exercise my warrants?
You must properly complete the exercise notice on the back of your
warrant certificate and deliver it to our warrant agent before 5:00 p.m., New
York City time, on June 11, 2004. Your warrant certificate must be accompanied
by proper payment for each share that you wish to purchase.
How long will I have to exercise my warrants?
You will be able to exercise your warrants only during a limited
period. If you do not exercise your warrants before 5:00 p.m., New York City
time, on June 11, 2004, your warrants will expire.
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After I exercise my warrants, can I change my mind?
No. Once you send in your warrant certificate and payment, you cannot
revoke the exercise of your warrant, even if you later learn information about
us that you consider to be unfavorable. You should not exercise any of your
warrants unless you are certain that you wish to purchase additional shares of
common stock at the exercise price.
Is exercising my warrants risky?
The exercise of your warrants involves substantial risks. Exercising
your warrants means buying additional shares of our common stock, and you should
carefully consider this purchase as you would other equity investments. Among
other things, you should carefully consider the risks described under "Risk
Factors".
Do I have to exercise any of my warrants?
No.
What happens if I choose not to exercise my warrants?
You will retain your current number of shares of common stock even if
you do not exercise your warrants. However, if you do not exercise any of your
warrants and other holders of warrants do, the percentage of our common stock
that you own will diminish, and your voting and other rights will be diluted.
Can I sell or give away my warrants?
Yes. However, we have not listed the warrants on the Nasdaq Stock
Market or any other trading market. We cannot assure that any trading market
will develop for the warrants.
May the company redeem the warrants?
Yes. On 21 days prior written notice, the company may redeem all, but
not less than all, of the outstanding warrants at a redemption price of $0.001
per warrant.
Has the Board of Directors made a recommendation regarding this offering?
No.
What should I do if I want to exercise my warrants, but my warrants are held in
the name of my broker, dealer or other nominee?
If you hold your warrants through a broker, dealer or other nominee
(for example, through a custodian bank), then your broker, dealer or other
nominee is the record holder of the warrants you own. This record holder must
exercise the warrants on your behalf for shares you wish to purchase. Therefore,
you will need to have your record holder act for you. If you wish to exercise
your warrants, please promptly contact the record holder of your common stock.
What fees or charges apply if I exercise my warrants?
5
We are not charging you any fee or sales commission to issue shares to
you if you exercise any of your warrants. We may, however, pay a soliciting
broker for your exercise of your warrants. If you exercise your warrants through
a record holder of your shares, such as a broker, you are responsible for paying
any fees that person may charge.
What are the Federal income tax consequences of exercising my warrants?
The exercise of your warrants are intended to be nontaxable for
purposes of federal income tax. However, no ruling from the Internal Revenue
Service nor an opinion of counsel will be sought. You should seek specific tax
advice from your personal tax advisor.
When will I receive my new shares?
If you exercise any of your warrants, you will receive certificates
representing those shares as soon as practicable after the date of exercise.
Subject to state securities laws and regulations, we have the discretion to
delay distribution of any shares you may have elected to purchase by exercise of
your warrants in order to comply with state securities laws.
How much money will our company receive from the exercise of warrants?
The gross proceeds from the exercise of warrants depend on the number
of shares that are purchased. If all of the warrants are exercised, we will
receive gross proceeds of approximately $6.5 million.
How will our company use the proceeds from the exercise of the warrants?
We will use any proceeds generated from the exercise of the warrants
for additional working capital.
How many shares will be outstanding after the exercise of all of the warrants?
The number of shares of common stock that will be outstanding after the
exercise of all of the warrants distributed will be 6,371,362.
ADDITIONAL QUESTIONS
If you have more questions, please contact either Ronald S. Kaplan, our
President and Chief Executive Officer, or Warren Kaplan, our Chairperson of the
Board, at (407) 481-8007, extension 723 or 718.
6
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. Our business, financial condition or results of
operations could be materially adversely affected by any of these risks. The
trading price of our common stock could decline due to any of these risks and
you may lose all or part of your investment.
Risks associated with our business
We incurred significant net losses in fiscal 2002 and 2001. If we
continue to incur net losses, our ability to satisfy our cash requirements may
be more difficult. We incurred net losses of approximately $1.3 million and $0.5
million in fiscal 2002 and 2001, respectively. There can be no assurance that we
will return to profitability in the future. If we fail to generate operating
income and net income, we could have difficulty meeting our working capital
requirements.
We have substantial cash requirements and may require additional
sources of funds. Additional sources of funds may not be available or available
on reasonable terms. We have substantial cash requirements in connection with
our operations and debt service obligations. In addition, new product
development, which is key to the success of our business, is cash intensive. If
the cash we generate from our operations or from our other sources is not
available when needed or is insufficient to satisfy our requirements, we may
require additional sources of funds. We cannot assure you that such additional
sources of funds would be available on reasonable terms or at all. If we do not
generate sufficient amounts of capital to meet our cash requirements at the
times and on the terms required by us, our business will be adversely affected.
Changing consumer preferences may negatively impact our product lines.
As a result of changing consumer preferences, many toys are successfully
marketed for only one or two years, if at all. We cannot assure you that any of
our current successful products or product lines will continue to be popular
with consumers for any significant period of time, or that new products and
product lines 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. Our success is dependent upon our ability to enhance existing product
lines and develop new products and product lines. The failure of our new
products and product lines to achieve and sustain market acceptance and to
produce acceptable margins could have a material adverse effect on our financial
condition and results of operations.
We may need additional financing. We have an agreement with Mercantile
Bank, pursuant to which Mercantile Bank provides us with a revolving line of
credit for up to $2.0 million as described in the agreement. The borrowings
under the line of credit are utilized to finance accounts receivable, inventory
and other operating and capital requirements. This line of credit matures June
30, 2005 and contains covenants relating to our financial condition. If we fail
to maintain compliance with the financial covenants contained in the line of
credit, the maturity date could be accelerated.
We have received financing in the past from members of the Kaplan
family. In 2002, members of the Kaplan family, including Ronald S. Kaplan, a
director and our President and Chief Executive Officer, Warren Kaplan, our
chairperson of the board, and Judith Kaplan, a director, made an aggregate cash
infusion into our company of approximately $1.1 million. None of the members of
the Kaplan family, however, have any obligation to make any capital contribution
to our company in the future, nor have any of them indicated whether they will
exercise any of the public warrants issued to them as part of their pro rata
share of the 2003 warrant distribution.
7
Our customers' inventory management systems may cause us to produce
excess inventory that may become obsolete and increase our inventory carrying
costs. Most of our largest retail customers utilize an inventory management
system to track sales of products and rely on reorders being rapidly filled by
us and other suppliers, rather than maintaining large product inventories. These
types of systems put pressure on suppliers like us to promptly fill customer
orders and also shift some of the inventory risk from the retailer to suppliers.
Production of excess inventory by us to meet anticipated retailer demand could
result in our carrying obsolete inventory and increasing our inventory carrying
costs. Similarly, if we fail to predict consumer demand for a product, we 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 could impact our revenues. As is customary in the
toy industry, we have historically permitted, on a minimum basis, certain
customers to return slow-moving items for credit. We expect that we will
continue to make such accommodations in the future. Any significant increase in
the amount of returns could have a material adverse effect on our financial
condition and results of operations.
There are risks related to our acquisition strategy. We may, from time
to time, evaluate and pursue acquisition opportunities on terms management
considers favorable. A successful acquisition involves an assessment of the
business condition and prospects of the acquisition target, which includes
factors beyond our control. This assessment is necessarily inexact and its
accuracy is inherently uncertain. In connection with such an assessment, we
perform a review we believe to be generally consistent with industry practices.
This review, however, will not reveal all existing or potential problems, nor
will it permit us to become sufficiently familiar with the acquisition target to
assess fully its deficiencies. We cannot assure you that any such acquisition
would be successful or that the operations of the acquisition target could be
successfully integrated with our operations. Any unsuccessful acquisition could
have a material adverse effect on our financial condition and results of
operations.
We are dependent on contracts with manufacturers, most of which are
short-term. We conduct substantially all of our manufacturing operations through
contract manufacturers, many of which are located in the People's Republic of
China (PRC), Hong Kong, Singapore and Taiwan. We generally do not have long-term
contracts with our manufacturers. Foreign manufacturing is subject to a number
of risks including, but not limited to, o transportation delays and
interruptions, o political and economic disruptions, o the impositions of
tariffs and import and export controls, and o changes in governmental policies.
While we have not experienced any material adverse effects due to such
risks to date, we cannot assure you 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.
We are dependent on intellectual property rights and cannot ensure that
we will be able to successfully protect such rights. We rely on a combination of
trademark, copyright, patent and other proprietary rights laws to protect our
rights to valuable intellectual property related to our brands. We also rely on
license and other agreements to establish ownership rights and to maintain
confidentiality. We cannot assure you that such intellectual property rights can
be successfully asserted in the future or that they will not be invalidated,
circumvented or challenged. In addition, laws of certain foreign countries in
which our products are sold, or in which we operate, do not protect intellectual
property rights to the same extent as the laws of the U.S. The failure to
protect our proprietary information and any successful intellectual property
challenges or infringement proceedings against us could have a material adverse
affect on our business, financial condition or results of operations.
8
There are specific risks associated with international sales. We have
sold products to customers in the United Kingdom, Canada, Korea, Japan,
Australia and New Zealand. We expect to augment our presence in international
markets. Accordingly, our business, and our ability to expand our operations
internationally, is subject to various risks inherent in international business
activities. We may have difficulty in safeguarding our intellectual property in
countries where intellectual property laws are not well developed or are poorly
enforced. General economic conditions and political conditions of various
countries may be subject to severe fluctuations at any time. Such fluctuations
could hinder our performance under contracts in those countries or could hinder
our ability to collect for product and services delivered in those countries.
Unexpected changes in foreign regulatory requirements could also make it
difficult or too costly for us to conduct business internationally.
In addition, although we have normally been successful in stipulating
that our foreign customers pay in U.S. dollars, any payment provisions involving
foreign currencies may result in less revenue than expected due to foreign
currency rate fluctuations. Other risks associated with international operations
include
o import and export licensing requirements,
o trade restrictions,
o changes in tariff rates,
o overlapping tax structures,
o transportation delays,
o currency fluctuations,
o potentially adverse tax consequences, and
o compliance with a variety of foreign laws and regulations.
Any of the foregoing factors could have a material adverse effect on
our ability to expand our international sales. Increased exposure to
international markets creates new areas with which we may not be familiar and
could place us in competition with new vendors. We cannot assure you that we
will be successful in our efforts to compete in these international markets.
We face potential liability from product safety claims. Products that
have been or may be developed or sold by us may expose us to potential liability
from personal injury or property damage claims by end-users of such products. We
have never been and are not presently a defendant in any product liability
lawsuit; however, we cannot assure you that such a suit will not be brought
against us in the future. We currently maintain product liability insurance
coverage in the amount of $1.0 million per occurrence, with a $2.0 million
excess umbrella policy. We cannot assure you that we 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 we maintain adequate insurance, any successful claim could materially
and adversely affect our reputation and prospects, and divert management's time
and attention. The U.S. Consumer Products Safety Commission, or 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 we are found
in the future to have violated any such law or regulation, the sale of the
relevant product could be prohibited and we could be required to repurchase such
products.
We may become subject to burdensome governmental regulation. In the
U.S., we are subject to the provisions of, among other laws, the Federal
Consumer Product Safety Act and the Federal Hazardous Substances Act. These acts
empower the CPSC to protect the public against unreasonable risks of injury
9
associated with consumer products, including toys and other articles. The CPSC
has the authority to exclude from the market articles, which are found to be
hazardous and can require a manufacturer to repair or repurchase such toys under
certain circumstances. Any such determination by the CPSC is subject to court
review. Violations of these acts may also result in civil and criminal
penalties. Similar laws exist in some states and cities in the U.S. and in many
jurisdictions throughout the world. We maintain a quality control program,
including the retention of independent testing laboratories, to ensure
compliance with applicable laws. We believe we are currently in substantial
compliance with these laws. In general, we have not experienced difficulty
complying with such regulations, and compliance has not had an adverse effect on
our business.
There are risks related to our customers' payment terms. The majority
of our customers receive trade terms to which payments for products are delayed
for up to 30 days and some receive up to 90 days, pursuant to various sales
promotion programs. To reduce our exposure to uncollectible accounts receivable,
in March 2001 we secured a business credit insurance policy to guarantee the
majority of our accounts receivable. Although we have secured such a policy, the
insolvency or business failure of one or more of our customers with large
accounts receivable could have a material adverse affect on our future sales.
Seasonality may affect our results of operations. Our sales have
historically been seasonal in nature, reflecting peak sales in the third and
fourth quarters and slower sales in the first and second quarters.
Risks associated with our warrants
The warrants have been historically "out-of-the-money". Until recently,
the warrant exercise price has been higher than the past trading prices of our
common stock. From February 2001 through June 2003, our common stock has been
trading almost exclusively below $2.00. Our Board of Directors determined the
warrant exercise price and approved the distribution of warrants to give our
shareholders a fixed opportunity to buy additional shares without brokerage
fees. However, there is no assurance that the market price of our common stock
will continue to equal or exceed the exercise price of the warrants until the
expiration time or thereafter.
The offering price was determined by our Board of Directors and bears
no direct relationship to the value of our assets, financial condition or other
established criteria for value. Our common stock may trade at prices above or
below this price.
Your interest in us may be diluted to the extent other warrant holders
exercise warrants and you do not. If you do not exercise your warrants in full,
your percentage ownership and voting rights will decrease to the extent that
warrants are exercised by others. After submitting your warrant certificate and
exercise price, you may not revoke your exercise and could be committed to buy
shares above the prevailing market price.
As of July 28, 2003, the trading price of the common stock was $2.98.
The warrant exercise price is $2.00 per share. We can give no assurance that the
trading price of our common stock will continue to meet or exceed the warrant
exercise price and, consequently, whether it will continue to be profitable for
the holders of warrants to exercise the warrants. If you exercise your warrants
while the trading price of our common stock is less than the warrant exercise
price, then you will have committed to buy shares of our common stock at a price
above the prevailing market price. Once you have exercised your warrants, you
may not revoke your exercise. Moreover, you may be unable to sell your shares of
common stock at a price equal to or greater than the warrant exercise price you
pay.
10
The exercise price determined for this offering is not a indication of
our value. Our board of directors set the exercise price. The exercise price
does not necessarily bear any relationship to the book value of our assets, past
operations, cash flows, losses, financial condition or any other established
criteria for value. You should not consider the exercise price as an indication
of our value.
There has been no prior market for our warrants and a public market for
our warrants may not develop or be sustained. We have not applied for listing of
our warrants on the Nasdaq Stock Market or any other market or exchange. We can
not assure you that a public market for our warrants will ever develop. If a
public market for our warrants does not develop, or if a public market does
develop but is not sustained, the liquidity of your warrants may be
significantly harmed.
Risks associated with investing in us
We expect our stock price to be volatile. The market price of the
shares of our common stock has been, and will likely continue to be, subject to
wide fluctuations in response to several factors, such as o actual or
anticipated variations in our results of operations, o new services or product
introductions by us or our competitors, o changes in financial estimates by
securities analysts, and o conditions and trends in the consumer toy industry.
The stock markets generally, and the Nasdaq SmallCap Market in
particular, have experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many companies
and that often have been unrelated or disproportionate to the operating
performance of those companies. These market fluctuations, as well as general
economic, political and market conditions such as recessions, interest rates or
international currency fluctuations may adversely affect the market price of our
common stock.
If our common stock is delisted from Nasdaq, liquidity in our common
stock will likely be adversely affected. Our common stock is listed for trading
on the Nasdaq SmallCap Market. In order to continue to be listed on Nasdaq,
however, we must meet certain criteria, including one of the following o
maintaining $2,500,000 in shareholders' equity, o having a market capitalization
of at least $35,000,000, or o generating net income of $500,000.
In addition, the minimum bid price of our common stock must be at least
$1.00 per share and the market value of the public float must be at least
$1,000,000. On July 28, 2003, our bid price was $2.98. The dilution to our
shareholders which could be caused by the additional shares of our common stock
being sold into the market could cause the per share value of our common stock
to drop below the minimum bid price of $1.00. As of June 30, 2003, we had
shareholders' equity of $2,782,000 but did not satisfy the requirements for
market capitalization or net income. The failure to meet Nasdaq's maintenance
criteria may result in the delisting of our common stock from Nasdaq, and
trading, if any, in our securities would thereafter be conducted in the
non-Nasdaq over-the-counter market. As a result of such delisting, you could
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, our securities.
If our common stock is delisted from Nasdaq, our common stock may
become subject to the penny stock rules. Broker-dealer practices in connection
with transactions in "penny stocks" are regulated by certain rules adopted by
the Securities
11
and Exchange Commission. Penny stocks generally are equity
securities with a price of less than $5.00 other than securities registered on
certain national securities exchanges or quoted on Nasdaq provided that current
price and volume information with respect to transactions in such securities is
provided by the exchange or system. The rules require that, prior to a
transaction in a penny stock not otherwise exempt from the rules, the
broker-dealer must
o deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny
stock market,
o provide the customer with current bid and offer quotations for
the penny stock,
o disclose the compensation of the broker-dealer and its
salesperson in connection with the transaction,
o provide the customer monthly account statements showing the
market value of each penny stock held in the customer's
account, and
o make a special written determination that the penny stock is a
suitable investment for the customer and receive the
customer's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the
liquidity of penny stocks. If our securities are subject to the penny stock
rules, you may find it more difficult to sell your shares of our common stock.
Our officers and directors control a large percentage of outstanding
stock and may be able to exercise significant control. Our current officers and
directors beneficially own approximately 59% of our common stock on a fully
diluted basis. As a result, current management will be able to exercise
significant influence over all matters requiring shareholder approval, including
the election of directors and approval of significant corporate transactions.
We have implemented anti-takeover provisions that could prevent an
acquisition of us at a premium price. Certain provisions of our articles of
incorporation and bylaws may be deemed to have anti-takeover effects and may
delay, defer or prevent a take-over attempt of us. We are subject to the
"affiliated transactions" and "control share acquisition" provisions of the
Florida Business Corporation Act. These provisions require, subject to certain
exceptions, that an "affiliated transaction" be approved by the holders of
two-thirds of the voting shares other than those beneficially owned by an
"interested shareholder" or by a majority of disinterested directors. Voting
rights must also be conferred on "control shares" acquired in specific control
share acquisitions. Lastly, our articles of incorporation authorize the issuance
of up to 10,000,000 shares of preferred stock with such rights and preferences
as may be determined form time to time by our board, of which all shares remain
without designation and available for issuance. We include such preferred stock
in our capitalization in order to enhance our financial flexibility. However,
the issuance of large blocks of preferred stock may have a dilutive effect with
respect to existing holders of our common stock.
We depend on key personnel. Our success largely depends on a number of
key employees. The loss of services of one or more of these employees could have
a material adverse effect on our business. We are especially dependent upon the
efforts and abilities of certain of our senior management, particularly Ronald
S. Kaplan, our President and Chief Executive Officer. Currently, we do not
maintain key man life insurance on Mr. Kaplan or any other executive officer. We
believe that our future success will also depend, in part, upon our ability to
attract, retain and motivate qualified personnel. We cannot assure you, however,
that we will be successful in attracting and retaining such personnel.
We do not plan to pay cash dividends. We expect that we will retain all
available earnings generated by our operations for the development and growth of
our business. Accordingly, we do not anticipate paying any cash dividends on our
common stock.
The issuance of additional shares of common stock or the exercise of
outstanding options and warrants will dilute the interests of our shareholders.
As of July 28, 2003, we had 3,099,270 shares of our common stock outstanding.
Our board has the ability, without further shareholder approval, to
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issue up to approximately 11.9 million additional shares of common stock. Such
issuance may result in a reduction of the book value or market price of our
outstanding common shares. Issuance of additional common stock will reduce the
proportionate ownership and voting power of the then existing shareholders.
Further, if all our outstanding options and warrants are exercised, we will have
approximately 7 million shares outstanding. Thus, the percentage of shares owned
by all existing shareholders will be reduced proportionately as options and
warrants are exercised. The table below summarizes our current outstanding
common shares, options and warrants:
- ------------------------------------------- -------------------- ----------------------- -------------
Common Shares, Options and Warrants Number of Common Number of Common Total
Shares Shares underlying
Options and Warrants
- --------------------------- --------------- -------------------- ----------------------- -------------
Common shares issued as issued 3,272,092
of July 28, 2003
--------------- -------------------- ----------------------- -------------
less treasury (172,822)
shares
- --------------------------- --------------- -------------------- ----------------------- -------------
Options outstanding as of currently 400,942
July 28, 2003 under our exercisable
stock option plan
--------------- -------------------- ----------------------- -------------
currently 120,334
unexercisable
- --------------------------- --------------- -------------------- ----------------------- -------------
Warrants outstanding as issued to 60,000
of July 28, 2003 (all CEOcast
warrants are currently
exercisable)
--------------- -------------------- ----------------------- -------------
public 3,272,092
warrants
- --------------------------- --------------- -------------------- ----------------------- -------------
TOTAL 3,099,270 3,853,368 6,952,638
- --------------------------- --------------- -------------------- ----------------------- -------------
USE OF PROCEEDS
The maximum net proceeds that we may receive from this offering,
assuming payment of 10% of the gross exercise proceeds to broker-dealers for
soliciting the exercise, could be up to approximately $5.85 million if all
warrants are exercised.
However, all of the warrants may not be exercised and no assurance can
be given as to when or whether any warrants will be exercised, nor as to the
timing of receipt or the amount of proceeds. The warrants are intended to
provide shareholders an opportunity to acquire additional shares of our common
stock. We are not dependent upon, nor do we expect, any material amount of
proceeds from the warrants at any given time, if ever. Although there is no
accurate way to determine the number of warrants that will be exercised, if any,
we will use any net proceeds of the sale of our common stock from this offering
for general corporate purposes.
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THE WARRANTS
Below is a summary of the material terms of the warrants, as more fully
described in the Warrant Agreement by and between our company and the warrant
agent. The Warrant Agreement is an exhibit to the registration statement of
which this prospectus is a part. A copy of the Warrant Agreement may also be
obtained from our company.
General
On June 30, 2003, we distributed to holders of our common stock, one
warrant for each share of our common stock that they own on the record date of
June 12, 2003. As a warrant holder, you may purchase shares of our common stock
through exercise of your warrants. To purchase shares of our common stock, you
must deliver one warrant for each share of our common stock you intend to
purchase.
Exercising Your Warrants
Each warrant entitles the holder to purchase one share of our common
stock. You may exercise your warrants by properly completing and signing the
exercise notice on the back of your warrant certificate, including, if required,
a signature guarantee from an eligible institution and delivering the properly
executed warrant certificate to the warrant agent, together with payment of the
aggregate warrant exercise price in full. There is no minimum amount of shares
that you must purchase. You may exercise your warrants in whole or in part, but
no warrants may be exercised for fractional shares. A holder of warrants will
not have any rights, privileges or liabilities as a shareholder prior to
exercise of the warrants.
Warrant Exercise Price
The exercise price for the warrants is $2.00 per share, payable in
cash. To exercise your warrants to purchase shares of our common stock, you must
deliver a properly completed and signed exercise notice on the back of your
warrant certificate together with payment of the aggregate warrant exercise
price to the warrant agent prior to expiration.
We may pay a solicitation fee under certain circumstances to brokers
who solicit the exercise of the warrants. If you exercise your warrant, please
indicate on the exercise notice whether your exercise was solicited by a broker,
and, if so, the name and firm of the broker.
Expiration Time
The warrants will expire at 5:00 p.m., New York City Time, on June 11,
2004, the expiration time. After expiration of the warrants, all unexercised
warrants will be null and void and no longer exercisable by the holder. We will
not be obligated to honor any purported exercise of warrants received by the
warrant agent after the expiration time, regardless of when the documents
relating to such exercise were sent.
Redemption
The warrants are redeemable by us at any time prior to their expiration
date. We may redeem the warrants by giving all of the holders of our warrants 21
days' prior written notice at $0.001 per warrant.
Transfer and Warrant Agent and Registrar
Our transfer and warrant agent and registrar for our securities is
Registrar and Transfer Company. The address to which you must make any required
deliveries is:
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Registrar and Transfer Company
P.O. Box 1010
Cranford, New Jersey 07016-1010
Distribution of Warrants
We have distributed the warrants at no cost to those persons who were
holders of outstanding shares of our common stock on June 12, 2003. No warrants
will be exercisable unless at the time of exercise there is a current prospectus
covering the shares of common stock issuable upon exercise of such warrants
under an effective registration statement filed with the Securities and Exchange
Commission and such shares have been qualified for sale or are exempt from
qualification under the securities laws of the state or residence of the holder
of such warrants. Although we intend to seek to have the shares of our common
stock so qualified in the states where the warrants are being offered and to
maintain a current prospectus relating thereto, until the expiration of the
warrants, there can be no assurance that we will be able to do so.
Warrant Payments
You must pay the warrant exercise price in full for all shares you
intend to purchase by:
o check or bank draft drawn upon a U.S. bank, or postal,
telegraphic or express money order, payable to Registrar and
Transfer Company, as warrant agent; or
o wire transfer of immediately available funds to an account
which the warrant agent maintains for this purpose. Please
contact the warrant agent at (800) 368-5948 to obtain
appropriate wiring instructions.
The warrant exercise price will be deemed to have been received by the
warrant agent only upon:
o clearance of any uncertified check;
o receipt by the warrant agent of any certified check or bank
draft drawn upon a U.S. bank or of a postal, telegraphic or
express money order; or
o receipt of good funds in the warrant agent's account
designated in the wiring instructions provided by the warrant
agent.
Anti-Dilution Protection
The warrant exercise price and the number of shares of common stock
issuable upon exercise of the each warrant will be subject to adjustment to
protect against dilution in the event of stock dividends, stock splits,
combinations, subdivisions, reclassifications, reorganizations, mergers, and
similar corporate transactions. However, the warrants are not subject to
adjustment for issuance of shares of our common stock (or securities convertible
into or exercisable for our common stock) at prices below the exercise price of
the warrants. Any adjustment required by the foregoing events will be determined
by our Board of Directors.
Warrant Amendments
We reserve the right to make any modification to the terms of the
warrants that is not materially adverse to the holders of the warrants. Any such
modification will be determined by
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our Board of Directors and we will cause written notice of any such modification
to be sent to all record holders of the warrants which describes the
modification and its effective date.
Nominee Holders
Holders on the record date who hold shares of our common stock for the
account of others, such as brokers, trustees or depositories for securities,
should contact the respective beneficial owners of such shares to ascertain the
intentions of the beneficial owners of such shares and to obtain instructions
with respect to their warrants. If a beneficial owner so instructs, the nominee
should properly complete the applicable warrant certificate and submit it to the
warrant agent with the proper payment. In addition, beneficial owners of our
common stock or warrants held through such nominee should contact the nominee
and request the nominee to effect transactions in accordance with the beneficial
owner's instructions.
Ambiguities in Exercise of the Warrants
If you do not specify the number of warrants being exercised on your
warrant certificate, or if your payment is not sufficient to pay the total
warrant exercise price for all of the shares that you indicate you wish to
purchase, you will be deemed to have exercised the maximum number of warrants
that could be exercised for the amount of the payment that the warrant agent
receives from you.
If your payment exceeds the number of warrants you specify are being
exercised on your warrant certificate, you will be deemed to have exercised the
maximum number of warrants that could be exercised for the amount of payment the
warrant agent receives from you, up to the aggregate number of warrants
exercisable by your warrant certificate.
Any excess payment remaining after the foregoing allocation will be
returned to you by mail as soon as practicable following processing of your
warrant certificate, without interest or deduction.
Interpretation
All questions concerning the timeliness, validity, form and eligibility
of any exercise of warrants will be determined by us and our determinations will
be final and binding. We reserve the right, in our sole discretion, to waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine, or reject the purported exercise of any
warrant. Warrants will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as we determine in our
sole discretion. We reserve the right, in our sole discretion, to reject any
exercise or related documents or payment not properly submitted or the
acceptance of which would, in the opinion of our counsel, be unlawful. Neither
we nor the warrant agent will be under any duty to give notification of any
defect or irregularity in connection with the exercise of warrant certificates
or incur any liability for failure to give such notification.
Risk of Loss on Delivery of Warrant Certificates and Payments
The instructions contained in the warrant certificate should be read
carefully and followed in detail. The method of delivery of warrant certificates
and payment of the warrant exercise price to the warrant agent will be at the
election and risk of the warrant holders but, if sent by mail it is recommended
that warrant certificates and payments be sent by registered mail, properly
insured, with return receipt requested, and that a sufficient number of days be
allowed
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to ensure delivery to the warrant agent and clearance of payment at or prior to
the expiration time. In addition, if you request reissuance of a warrant
certificate, the delivery will be at your risk.
Exercise of Less Than All Warrants
If you exercise your warrants for fewer than all of the shares
represented by your warrant certificate, you may receive from the warrant agent
a new warrant certificate representing the unexercised warrants. A new warrant
certificate for the remaining warrants will be issued to you only if the warrant
agent receives a properly endorsed warrant certificate from you no later than
5:00 p.m., New York City Time, on the fifth business day prior to the expiration
time. The warrant agent will not issue new warrant certificates for partially
exercised warrant certificates submitted after that date and time.
Unless you make other arrangements with the agent, a new warrant
certificate issued after 5:00 p.m., New York City Time, on the fifth business
day before the expiration time will be held for pick-up by you at the offices of
the warrant agent.
Transferability of Warrants
In the event you desire to present your warrant certificate for
registration of transfer, the assignment form included therein shall be duly
endorsed, or be accompanied by a written instrument or instruments of transfer,
in form satisfactory to us and the warrant agent, duly executed by you or your
attorney-in-fact duly authorized in writing. Moreover, your signature on your
warrant certificate must be guaranteed by an Eligible Guarantor Institution.
Please see "Signature Guarantees" below for a discussions regarding Eligible
Guarantor Institutions and guaranteed signatures. The warrant agent may impose a
reasonable service charge against you for any registration of transfer of your
warrant certificate. You may also be required you to pay a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any such transfer.
In addition, we do not intend to apply, and are not obligated to apply,
for listing of the warrants on any securities exchange, the Nasdaq Stock Market,
or any other market.
Signature Guarantees
Signatures on your warrant certificate do not need to be guaranteed
unless you desire to transfer any or all of your warrants in a manner permitted
in this offering. If your shares are being transferred in a manner permitted,
then your signature on each warrant certificate must be guaranteed by an
Eligible Guarantor Institution, as defined in Rule 17Ad-15 of the Securities
Exchange Act of 1934, and required under the standards and procedures adopted by
the warrant agent. Eligible Guarantor Institutions include banks, brokers,
dealers, credit unions, national securities exchanges and savings associations,
each as defined.
No Revocation
Once you exercise your warrants, you may not revoke that exercise.
Warrants not exercised prior to their expiration will be null and void as of and
after such time.
No Board Recommendation
17
Our Board of Directors does not make any recommendation to you about
whether you should exercise any warrants. If you exercise warrants, you risk
investment loss on money invested. We cannot assure you that anyone purchasing
shares of our common stock will be able to sell those shares in the future at a
higher price. An investment in our common stock must be made in accordance with
your evaluation of your own best interest.
Issuance of Stock Certificates
Stock certificates for shares purchased in the offering will be issued
to you as soon as practicable after your due exercise of your warrants.
Registrar & Transfer Company will deliver payment of the warrant exercise price
to us only after the issuance of stock certificates to those exercising
warrants.
If you exercise warrants, you will have no rights as a shareholder
until certificates representing the shares you purchased are issued. Shares
purchased by the exercise of warrants will be registered in the name of the
person exercising the warrants.
State and Foreign Securities Law
The warrants may not be exercised by any person, and neither this
prospectus nor the warrant certificate shall constitute an offer to sell or a
solicitation of an offer to purchase any shares of our common stock, in any
jurisdiction in which such transactions would be unlawful. We believe that no
action has been taken in any jurisdiction outside the United States to permit
offers and sales of the warrants or the offer, sale or distribution of the
shares of our common stock outside the United States. Consequently, we may
reject the exercise of warrants by any holder of warrants outside the United
States. We may also reject the exercise of warrants by holders in jurisdictions
within the United States, and we may refuse to distribute warrants to any
person, if we should determine that we may not lawfully issue securities to such
person. We may do so even if we could qualify the securities for sale or
distribution by taking other actions or modifying the terms of the offering or
the distribution in such jurisdictions, which we may decline to do in our sole
discretion. In such event, warrant holders who are residents of these
jurisdictions will not be eligible to exercise the warrants.
Regulatory Limitation
We will not be required to issue shares pursuant to this offering to
anyone who, in our opinion, would be required to obtain prior clearance or
authorization from any state or federal regulatory authorities to own or control
such shares if such clearance or authorization has not been obtained at the
expiration of this offering.
Questions or Requests for Assistance
If you have questions about this offering, including questions about
the procedure for exercising warrants or requests for additional copies of this
prospectus, please contact the warrant agent toll free at (800) 368-5948.
LEGAL MATTERS
The validity of the issuance of shares of common stock offered by this
prospectus will be passed upon for us by Raice Paykin & Krieg, LLP. Elissa
Paykin, the spouse of one of the partners of the firm, owns 237,254 shares of
our common stock. Ms. Paykin is the sister of Ronald Kaplan, a director and our
President and Chief Executive Officer, and is the daughter of two of our
directors, Warren and Judith Kaplan.
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EXPERTS
Our consolidated balance sheet as of December 31, 2002 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, 2002 have been
incorporated by reference in this prospectus and in the registration statement
in reliance on the report of Moore Stephens Lovelace, P.A., independent
auditors, given upon the authority of that firm as experts in accounting and
auditing.
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ACTION PRODUCTS INTERNATIONAL, INC.
3,272,092 Shares of Common Stock Underlying
Common Stock Purchase Warrants
Prospectus
July 31, 2003