ADVANTAGE MARKETING SYSTEMS INC/OK
10KSB/A, 1996-11-20
BUSINESS SERVICES, NEC
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<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                 FORM 10-KSB/A    

 X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---                                                                          
     ACT OF 1934 [FEE REQUIRED]
                    For fiscal year ended December 31, 1995

                                       OR
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---                                                                     
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                 For the transition period from _____ to _____.

                        Commission File Number: 33-25701

             Advantage Marketing Systems, Inc. (Formerly AMS, Inc.)
             (Exact Name of Registrant as Specified in its Charter)

                    Oklahoma                             33-0296193
              (State or other Jurisdiction of          (IRS Employer   
               Incorporation or Organization)         Identification No.)
                                         

     2601 N.W. Expressway, Suite 1210W, Oklahoma City, Oklahoma    73112
              (Address of Principal Executive Offices)          (Zip Code)

       Registrant's telephone number including area code: (405) 842-0131

        Securities registered pursuant to Section 12(b) of the Act: None

        Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                               Yes  X     No 
                                   ---       ---    

The aggregate market value of the registrant's Common Stock, $.0001 par value,
held by non-affiliates of the registrant as of March 31, 1996, was $7,905,690
based on the closing bid price on that date as reported by the National Daily
Quotation Bureau, Inc.  As of March 31, 1996, 16,985,524 shares of the
registrant's Common Stock, $.0001 par value, were outstanding.

                                      -1-
<PAGE>
 
                       ADVANTAGE MARKETING SYSTEMS, INC.
                                  FORM 10-KSB/A
                  For the Fiscal Year Ended December 31, 1995

                               TABLE OF CONTENTS
<TABLE>    
<CAPTION>
                                                                            Page
                                                                            ----
PART I
- ------
<S>                                                                         <C>
 Item  1.  Business.......................................................     3
 
 Item  2.  Properties.....................................................     9
 
 Item  3.  Legal Proceedings..............................................     9
 
 Item  4.  Submission of Matters to a Vote of Security Holders............    10
 
PART II
- -------
 Item  5.  Market for the Company's Common Equity and Related Stockholder
           Matters........................................................    10
 
 Item  6.  Management's Discussion and Analysis of
           Financial Condition and Results of Operations..................    12
 
 Item  7.  Financial Statements and Supplementary Data....................    17
 
 Item  8.  Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure.........................    17
 
PART III
- --------
 Item  9.  Directors and Executive Officers of the Registrant.............    17
 
 Item 10.  Executive Compensation.........................................    19
 
 Item 11.  Security Ownership of Certain Beneficial Owners and Management.    22
 
 Item 12.  Certain Relationships and Related Transactions.................    24
 
PART IV
- -------
 Item 13.  Exhibits, Financial Statement Schedules, and Reports on Form
           8-K............................................................    26
 
SIGNATURES................................................................    29
 
SUPPLEMENTAL INFORMATION..................................................    29
</TABLE>     

                                      -2-
<PAGE>
 
                                     PART I

ITEM 1.  BUSINESS.
         -------- 

The Company
- -----------
    
     Advantage Marketing Systems, Inc., an Oklahoma corporation (the "Company")
was organized in 1988 under the name AMS, Inc. and since that time has been a
marketer of consumer oriented services and products which are packaged together
in special programs and sold to independent sales associates who use the
products and services themselves and also sell them to others.  The programs
consist of various services which provide savings on items such as merchandise,
groceries and travel, and legal benefits furnished by certain third party
providers as well as nutritional supplements.  These programs represent the
Company's one main class of products and services and account for over 96
percent of its revenues.    

     The Company's executive offices are located at 2601 Northwest Expressway,
Suite 1210W, Oklahoma City, Oklahoma 73112-7293 with a telephone number of (405)
842-0131.

Background
- ----------
    
     Exchange.  Pursuant to an Agreement and Plan of Reorganization, dated May
     --------                                                                 
1, 1989, the shareholders of the Company exchanged their common stock for
6,406,450 shares of the common stock of Pacific Coast International, Inc., a
Delaware corporation (the "Exchange").  Prior to the Exchange, the trade or
business activities of Pacific Coast International, Inc. had been limited to
those activities associated with a public offering of its securities and
investigation of corporate acquisition alternatives as a "blank check" company.
Upon consummation of the Exchange, (i) the officers and directors of the Company
assumed management of Pacific Coast International, Inc., (ii) the Company became
a wholly owned subsidiary of the Pacific Coast International, Inc., (iii) the
Company changed its name from AMS, Inc. to Advantage Marketing Systems, Inc.,
and (iv) Pacific Coast International, Inc. changed its name to Advantage
Marketing Systems, Inc.  The Exchange was accounted for as a reverse acquisition
of the Company.    
    
     Initial Issuance of Public Warrants.  Prior to the Exchange, Advantage
     -----------------------------------                                   
Marketing Systems, Inc. (formerly Pacific Coast International, Inc. and parent
of the Company) sold, in a public offering, 1,806,876 shares of Common Stock,
Class A Common Stock Purchase Warrants (the "Class A Warrants") and Class B
Common Stock Purchase Warrants (the "Class B Warrants") in units, each unit
consisting of one share of Common Stock, one Class A Warrant and one Class B
Warrant.  The net proceeds from this offering were approximately $838,290.
Furthermore, in conjunction with such offering, the holders of 2,400,000 Class A
Warrants and Class B Warrants sold such Public Warrants.  As of the date of this
Report, there are 4,340,880 outstanding Class A Warrants and 4,206,880
outstanding the Class B Warrants (collectively, the "Public Warrants"), all
which were issued in connection with initial public offering of Pacific Coast
International, Inc. that was completed in 1989.   The Class A Warrants and the
Class B Warrants were issued pursuant to a Warrant Agreement with the Warrant
Agent dated as of January 26, 1989.  Pursuant to amendment of the Warrant
Agreement, the period of exercise of the Class A Warrants and the Class B
Warrants was extended to July 26, 1996 and July 26, 1997, respectively.  Copies
of the Warrant Agreement and the amendments thereto were filed as exhibits to
the Company's Registration Statement on Form SB-2 (Registration No. 33-80629).
Furthermore, a copy of the Warrant Agreement and the amendments thereto may be
examined at the offices of the Company or a copy may be obtained by written
request, of the Company or the Warrant Agent.  Each Class A Warrant and Class B
Warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price of $.75 and $1.00, respectively.    
    
     Merger Reincorporation.  Effective December 11, 1995, Advantage Marketing
     ----------------------                                                   
Systems, Inc., the former parent of the Company (formerly Pacific Coast
International, Inc.), merged with the Company pursuant to an Agreement and Plan
of Merger (the "Merger"), and the Company was the surviving corporation.  As a
result of the Merger, Advantage      

                                      -3-
<PAGE>
 
    
Marketing Systems, Inc., the parent of the Company (formerly Pacific Coast
International, Inc.) ceased to exist, and the Company succeeded to all of its
rights, privileges, powers, franchises, obligations, assets and properties.
Prior to the Merger, Advantage Marketing Systems, Inc. did not conduct any
operations, all operations were conducted by the Company, and its parent only
served as a holding company of the Company. The Merger was accounted for as a
reorganization of entities under common control and was recorded at historical
cost. All references to the Company include its former parent, Advantage
Marketing Systems, Inc., unless otherwise indicated.    
    
Pending and Proposed Registration
- ---------------------------------

     The Company has filed a Registration Statement on Form SB-2 (Registration
No. 33-80629) (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") to redeem the outstanding Class A and Class B
Warrants at $.0001 per warrant. In connection with the redemption, the Company
will offer to reduce the exercise price of Class B Warrants to $.75 and will
offer upon exercise of each Class A and Class B Warrant a unit comprised of one
share of Common Stock and one 1996-A Warrant (the "Units") (the "Warrant
Modification Offering"). Each 1996-A Warrant will be exercisable at $1.50 per
share at any time 90 days following the effective date of the Registration
Statement on or before November 30, 1998 to purchase one share of Common Stock.
The Warrant Modification Offering will be limited to a specific time period
after the declaration of effectiveness of the Registration Statement by the
Commission.    
    
     In addition, pursuant to the Registration Statement, the Company intends to
distribute nontransferable rights (the "Rights") to it shareholders on a
specific record date (the "Rights Holders"), each Right entitling the holder
thereof to purchase one Unit (consisting of one share of Common Stock and one
new 1996-A Warrant) (the "Rights Offering").  The Rights will be distributed at
no cost to the shareholders and will allow the Rights Holder to purchase one
Unit for each share of Common Stock held on the record date.  The exercise
period of the Rights will be for a specified time period after declaration of
effectiveness of the Registration Statement by the Commission.    
    
     In connection with these offerings, the Company has incurred direct costs 
consisting primarily of legal, accounting and filing fees. These costs total 
approximately $53,000 at December 31, 1995, and are included in other assets in 
the Company's financial statements.      
    
     The Company has also signed a letter of intent with an underwriter to
effect a public offering of additional common stock in 1997.  The Company plans
to coordinate the offering with the Warrant Modification Offering and Rights
Offering.  The agreement between the Company and the underwriter includes a
provision requiring the Company to grant various options and sell various
warrants to the underwriter.    
    
     There is no assurance that there will be any net proceeds from these
offerings.    
    
Business Activities - General    
- -----------------------------    

     The Company is a marketer of consumer oriented services and products which
are packaged together in special programs and sold to independent sales
representatives and associates who use the products and services themselves and
also sell them to others. The programs consist of various services which provide
savings on items such as merchandise, groceries and travel, and legal benefits
furnished by certain third party providers as well as nutritional supplements.
These programs represent the Company's one main class of products and services
and account for over 96 percent of its revenues. The Company generates revenue
through the sale of memberships in its consumer benefit services programs and
through the sale of products in its nutritional supplement program. Membership
sales revenues are recognized when the member remits payment for the membership
and the Company provides the services under the program, generally on a monthly
basis. Revenues through the sale of products in its nutritional supplement
program are recognized when the products are paid for and shipped to the
purchaser.
    
The percentage of total revenue contributed from the Company's consumer benefit
services programs was 30 and 92.1 percent for the years ending December 31,
1995 and 1994, respectively.  The percentage of total revenue contributed
from the Company's nutritional supplement program was 89.9 and 69.3 percent
for the years ending December 31, 1995 and 1994, respectively.      

                                      -4-
<PAGE>
 
Products and Services of the Company
- ------------------------------------

     In January 1993, the Company introduced the "Infinity Plan" which is made
up of packages of consumer benefit services provided by third party providers.
In addition, in 1993, the Company began marketing of pre-paid legal services.
The consumer benefit services are provided by third party providers and consist
of (i) discount shopping service which provides access to a wide range of
merchandise at discount through a toll free "800" number, (ii) grocery coupon
service which provides access to money saving coupons on major name brand
products, (iii) discount travel service which provides access to guaranteed
lowest airfares, with five percent cash rebates on air, hotel, cruise and
vacation packages, (iv) pre-paid legal services which include four basic
benefits which provide coverage for a broad range of preventive and litigation
related legal expenses, and/or (v) a variety of other consumer benefits
including savings on prescriptions, eye care, magazines and books. The services
under these consumer benefit programs, except for the pre-paid legal services,
are provided by Consumer Benefit Services, Inc.. The pre-paid legal services are
provided by Pre-Paid Legal Services, Inc.

     Individuals purchase memberships in the Company's Infinity Plan and
normally pay for their memberships on a monthly basis. Payment of their monthly
membership fee entitles the member to have access to a variety of consumer
benefit services provided by third party providers. The Company pays these third
party providers a fee based upon the number of active memberships that are in
place each month. The Company recognizes the revenues and expenses related to
the Infinity Plan on a monthly basis as the members pay their membership fees to
the Company, and the Company in turn pays a fee to the third-party providers,
thus allowing the members to have access to the consumer benefit services.

     In October of 1993, the Company introduced the "NewTrition Plan" which
allows plan members to purchase a variety of dietary and nutritional supplements
designed to assist with healthy diet and weight management programs. Through the
"NewTrition Plan" the Company offers the following products which represent the
majority of the Company's nutritional supplement program sales:

 .    AM-300 - A weight management supplement containing a unique blend of
     specialized herbs plus the patented ingredient, Chromium Picolinate.

 .    Shark Cartilage - A nutritional supplement manufactured from 100% shark
     fin cartilage.

 .    Super Anti-Oxidant - An exclusive blend of enzyme-active and phyto-
     nutrient rich whole food and herbal antioxidant concentrates.

     These nutritional supplements are purchased from Advanced Products, Inc.
and distributed on an exclusive rights basis with certain limited exceptions.
    
     The Company and its affiliates have no other relationships with Consumer
Benefit Services, Inc., Advanced Products, Inc., or their affiliates.  Pre-Paid
Legal Services, Inc. is a shareholder of the Company and Harland Stonecipher the
founder and Chief Executive Officer of Pre-Paid Legal Services was elected to
the Company's Board of Directors on August 25, 1995.     

Other Products and Services
- ---------------------------

     As of March 31, 1996, the Company has not determined any other services and
products it may desire to market; however, it is continually searching for new
services and products to offer its members. The Company anticipates it will
continue to market the above-mentioned programs in the near term. Also,
contracts which the Company may establish with its suppliers may contain
restrictions on the other products and services the Company may sell.

                                      -5-
<PAGE>
 
Marketing
- ---------
    
     The Company markets its products and services directly to consumers through
independent sales distributors or sales associates in a multi-level direct
selling organization. The Company's multi-level marketing programs encourages
individuals to sell the various consumer products and services offered under the
program and allows individuals to recruit and develop their own sales
organizations. Commissions are paid only on sales of products and services.
Commissions are paid to the sales associate making the sale, and to other
associates who are in the line of associates who directly or indirectly
recruited the selling associate. For the years ended December 31, 1995 and 1994,
the Company paid commissions to 1,863 and 1,871 individuals in the aggregate
amount of $1,823,058 and $927,422, respectively. Each sales associate is
responsible for monitoring the progress and sales practices of the associates
recruited by the sales associate. The Company provides training materials,
organizes area training meetings and designates personnel specifically trained
to answer questions and inquiries from sales associates.      

     Multi-level marketing is primarily used for product and services marketing
based on personal sales which encourages individual or group face-to-face
meetings with prospective purchasers of the products and services of in
connection with a program and has the potential of attracting a large number of
sales personnel within a short period of time. The Company's marketing efforts
toward individuals typically target middle income families or individuals and
seek to educate potential members concerning the benefits of program membership.
    
     Sales associates under the Company's multi-level marketing system are
generally engaged as independent contractors and are provided with training
guides and are given the opportunity to participate in Company training
programs.  All advertising, promotional and solicitation materials used by sales
associates must be approved by the Company prior to use.  A substantial number
of the Company's sales associates market the Company programs on a part-time
basis only.  At December 31, 1995, the Company had 7,617 "active" sales
associates compared to 5,650 "active" sales associates at December 31, 1994.  A
sales associate is considered to be "active" if he or she has originated at
least one new program member or participant and/or made a product purchase from
the Company within the previous 12 months.     
    
     The principal source of the Company's revenues and profits is from the sale
of products to independent sales distributors and the sale of memberships to
participants in its consumer benefit services plan. The Company derives
additional revenues from a one-time membership fee of approximately $139 from
each new sales associate and the sale of marketing supplies and promotional
materials to associates, as well as a monthly $4.00 administrative fee for
associates receiving commissions during a month. The one-time membership fee is
intended to offset the Company's direct costs of the materials contained in the
sales kit provided to the new distributor or associate. The administrative fee
is intended to offset the Company's direct and indirect costs incurred in
tracing sales activity and generating the commission checks for all of the
Company's independent distributors and associates. Amounts collected from
distributors and sales associates through these fees and the sale of marketing
supplies and promotional materials are not intended to generate material profits
for the Company. For the years ended December 31, 1995 and 1994, the Company
received one-time distributor and associate fees totaling $261,043 and $222,880,
respectively. The Company did not begin charging a monthly $4.00 administrative
fee until the second quarter of 1995. For the twelve months ended December 31,
1995, the Company received administrative fees totaling $15,018.      

     The marketing plan provides various levels of commissions based on a sales
associate's ability to produce personal sales. In addition, commissions on the
sale by other members of a sales associate's organization may be earned by the
sales associate. Sales are made through direct personal sales presentations as
well as presentations made to groups in a format known as "opportunity meetings"
which are designed to encourage individuals to subscribe for program membership
as well as to become sales associates. These new sales associates are likewise
encouraged to sell the Company's products and services to new members and are,
in turn, encouraged to become sales associates for the Company, and so on. The
effect is to create a "multi-level" sales organization. The growth of the
organization is provided for by a compensation system which provides for payment
of sales commissions not only on direct sales made by a sales associate but also
on sales made by other sales associates in his or her commission organization.
The direct

                                      -6-
<PAGE>
 
"commission organization" consists of six levels in depth and unlimited width.
Each new distributor or associate that joins the Company's sales organization is
linked to an existing distributor or associate that sponsored them into the
business. As a result each individual distributor's or associate's personal
sales organization grows based on this sponsorship by people they personally
sponsor and by people that are sponsored by people they personally sponsored and
so on. An individual distributor or associate's "commission organization"
consists of all distributors or associates they have personally sponsored into
the business and everyone that each of those people has sponsored and everyone
that each of these people has sponsored and so on until you reach six
distributor or associates away from the original distributor or associate.

     As an additional incentive for top producers, a commission override program
is available for those who meet specified qualifications. This override program
provides for the payment on sales that extend beyond the sixth level of an
individual's "commission organization."

     Sales associates are encouraged to assume responsibility for training and
motivation of other sales associates within their organization and to conduct
opportunity meetings as soon as they are trained to do so. The Company strives
to maintain a high level of motivation, morale, enthusiasm and integrity among
the members of its independent sales organization. This is done through a
combination of quality products, sales incentives, personal recognition of
outstanding achievement, and promotional materials. The Company believes that
this form of sales organization is cost efficient since direct sales expenses
are primarily limited to the payment of commissions and thus are only incurred
when a membership is sold. Under the Company's multi-level marketing system the
Company's distributors and associates purchase sales aids and brochures from the
Company and assume the costs of advertising and marketing the Company's products
to retail consumers as well as recruiting new distributors and associates.
    
     The Company's inventories consist of marketing materials and nutrition
products. The Company's marketing materials inventory consists primarily of
sales aids, training, marketing and promotional materials such as product and
marketing brochures, video and audio cassette tapes, training manuals,
distributor applications, order forms and other paper supplies that the Company
sells to its distributors and associates. At December 31, 1995 and 1994, the
Company had marketing materials and product inventories of $46,440 and $29,215
and $52,181, and $12,887, respectively.      

Operations
- ----------

     The operations of the Company involve processing membership applications,
processing data on new and existing sales associates, computing commission data,
general accounting, and other operations generally related to the maintenance
and operation of a direct sales organization. Due to the multi-level structure
of the Company's sales organization and the complexity of its sales commission
system, it is extremely important for the Company to promptly and accurately
carry out its operations.

     The Company's computerized management information system permits management
of accounts, maintenance of members, programs, and order information, inventory
control, processing of credit card orders, and calculation of and control of
sales commissions and assignments thereof, as well as maintenance of accounting
information.

     The Company's corporate office in Oklahoma City, Oklahoma, also has
departments which deal directly with sales associates, provide marketing support
and personal assistance, fulfill supply orders and communicate with state
regulatory agencies.

Contractual Arrangements
- ------------------------

     As of March 31, 1996, the consumer benefit services offered and distributed
by the Company are provided by Consumer Benefit Services, Inc. and Pre-Paid
Legal Services, Inc. The Company has non-exclusive contractual

                                      -7-
<PAGE>
 
arrangements with the providers of the consumer benefit services offered
pursuant to its Infinity Plan.  Pursuant to these arrangements the Company
provides information on its active memberships to the providers on a monthly
basis and pays a fee for each active membership.  The Company recognizes theses
costs on a monthly basis at the same time it recognizes the corresponding
revenue received from its members.  The nutritional supplement products sold and
distributed by the Company in conjunction with its "NewTrition Plan" are
provided by Advanced Products, Inc., on an exclusive distribution rights basis,
subject to limited exceptions.  The Company does not generally enter into long-
term purchase commitments with respect to the consumer benefit services of
third-party providers or the nutritional supplement products offered and
distributed by the Company; however, the Company customarily enters into
contracts with such third-party providers to establish the terms and conditions
of service and/or product sales made by the Company through its distributors and
program participants.

     Although the Company believes it would be able to obtain alternative
sources of services and products, because the Company's services and products
are only available through single source or limited source third-party
providers, any future difficulty in obtaining any of the key services or
products offered and distributed by the Company could have a material adverse
effect on the Company's results of operations.  In addition, the unavailability
of or interruptions in access to the services and products provided by third-
party providers involves certain risks, although the Company has not previously
experienced such unavailability or interruptions.  In the event any of the
third-party providers, especially the provider of nutritional supplement
products, were to become unable or unwilling to continue to provide the services
or products in required volumes, the Company would be required to identify and
obtain acceptable replacements, which could be lengthy and no assurance can be
given that any additional sources would become available to the Company on a
timely basis.  A delay or reduction in availability of the services and/or
products offered and distributed by the Company could materially and adversely
affect the Company's business, operating results and financial condition.

Competition
- -----------

     The marketing industry in which the Company is involved is highly
competitive. Some of the better known companies that have achieved significant
levels of success utilizing a form of multi-level marketing would include Amway
Corporation, Mary Kay Cosmetics, Inc., Shaklee Corporation and The A.L. Williams
Corporation. The Company is aware of several companies utilizing a multi-level
marketing organization to market services similar to that which are offered by
the Company. Many of these companies have substantially greater financial
resources than the Company. The Company competes with numerous businesses that
market products and services similar to those of the Company through direct mail
solicitations, direct sales in the field and sales out of established business
locations.

     Not only do the companies in the direct sales segment of the industry
compete with each other as to the different products offered by each company,
these companies also compete very vigorously to recruit new sales persons and to
retain experienced and successful direct sales personnel.  Successful direct
sales persons are often attracted to sell new or different products being
distributed by companies whose compensation plans are the most lucrative, and
consequently frequently are willing to leave their existing companies (even if
these companies have a superior product) for the opportunity to earn increased
compensation.  Although the Company believes that it has been able to design an
attractive sales organization program, and will be able to recruit and retain
new and existing direct sales personnel to sell the Company's consumer services
and nutritional supplement programs, there is no guarantee that its independent
selling organization will ultimately be successful.

Government Regulation
- ---------------------

     The Company markets and sells its consumer service and nutritional
supplement programs through independent sales distributors in a multi-level
direct selling organization organized by the Company.  All multi-level direct
selling organizations are subject to careful scrutiny by various state and
federal governmental regulatory agencies to ensure compliance with various types
of laws, rules and regulations, including but not limited to securities,
franchise investment, business opportunity and criminal laws prohibiting the use
of "pyramid" or "endless chain" types of selling 

                                      -8-
<PAGE>
 
organizations. The design of the structure and implementation of the various
elements of such selling organizations, primarily relating to compensation
payable to independent sales distributors and the fees and expenses charged to
sponsoring and sponsored participants are very complex, and compliance with all
of the applicable laws may to some degree be uncertain in light of evolving
interpretation of existing laws and the enactment of new laws, rules and
regulations pertaining to this type of product distribution and these types of
selling organizations. The Company has an ongoing compliance program with
assistance from counsel experienced in the laws and regulations pertaining to
multi-level sales organizations. The Company is not aware of any legal actions
pending or threatened by any governmental authority against the Company
regarding the legality of the Company's operations.

     The Company currently has independent distributors or associates in all
fifty states. The Company has reviewed the requirements of various states as
well as sought legal advice regarding the structure and operation of its selling
organization to insure that it complies with all of the applicable laws
pertaining to multi-level sales organizations in those states in which the
Company is engaged in business. On the basis of these efforts and the experience
of its management, the Company believes that it is in compliance with all
applicable requirements. Although the Company believes that the structure and
operation of its selling organization complies with all of the applicable laws
pertaining to multi-level sales organizations in those states in which the
Company is engaged in business, the Company has not obtained any no-action
letters or advance rulings from any federal or state security regulator or other
governmental agency concerning the legality of the Company's operations, nor is
the Company relying on an opinion of counsel to such effect.

     In addition, the operations of the Company are also subject to various
federal, state and local requirements which affect businesses generally, such as
taxes, postal regulations, labor laws, and zoning ordinances.

Employees
- ---------

     As of March 31, 1996, the Company had fifteen full-time and two part-time
employees, of whom three were executive officers, seven were engaged in
administrative activities, two were engaged in marketing activities, two were
engaged in customer service activities, and one was engaged in shipping
activities. One of the part-time employee was engaged in marketing activities
and the other was engaged in shipping activities. None of the Company's
employees is represented by a labor organization. The Company considers its
employee relations to be good.

ITEM 2.  PROPERTIES.
         ---------- 

The Company presently leases 6,303 square feet of office space at 2601 Northwest
Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112.  The lease was executed
April 9, 1993, requires a monthly base rental of approximately $4,432 and
expires on May 31, 1998.  The Company believes the present space will be
adequate for the next twelve months.

ITEM 3.  LEGAL PROCEEDINGS.
         ----------------- 
    
     Other than as set forth hereinbelow, the Company does not have any pending
litigation.  The Company is currently under investigation by the Oklahoma
Department of Securities with respect to the AMS Associate Stock Pool (the
"Pool").  As of March 31, 1996, the investigation is in the discovery stage.
The Pool, under which the independent distributors of the Company's marketing
programs and products are permitted to participant on a voluntary basis, was
formed in 1990.  Participants make contributions to the Pool and, from such
contributions, the administrator of the Pool purchases on a monthly basis the
Company's Common Stock in the open market for the participants.  All purchase
transactions are executed and effected through a market maker in the Company's
Common Stock.  All records of ownership of the Common Stock held by the Pool are
maintained at the offices of the Company.  The Pool only purchases shares of
Common Stock and does not sell shares on behalf of the participants. Each
participant has sole voting rights with respect to those shares of Common Stock
held for such participant's benefit.  In the event a participant desires to sell
the Common Stock held for his benefit by the Pool, certificates representing
such shares are      

                                      -9-
<PAGE>
 
    
delivered to such participant for the purpose of effecting such sale. As of 
March 31, 1996, the Pool held 1,246,233 shares of Common Stock on behalf of the 
participants.  Although its investigation is currently general in nature, the
Oklahoma Department of Securities may take the position that the offer and sale
of participation rights in the Pool violates the registration provisions of the
Oklahoma Securities Act.     
    
     The Company is currently cooperating and intends to continue such
cooperation with the Oklahoma Department of Securities in its investigation
through the Company's legal counsel.  Because, as of the date of this Report,
the investigation is in the discovery stage, legal counsel cannot express an
opinion regarding the ultimate outcome of the investigation.    

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
              --------------------------------------------------- 

          No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended December 31, 1995.

                                    PART II

ITEM 5.       MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER 
              --------------------------------------------------------------
              MATTERS.
              -------

     The Company has a registration statement pending with the Commission. See
"Part I, Item 1. Business - Pending and Proposed Registration."

     The principal market on which the Company's Common Stock and Class A
Warrants and Class B Warrants are traded is the over-the-counter market and they
are quoted in the "Pink Sheets" maintained by the National Daily Quotation
Bureau, Inc. under the symbols "AMSO", "AMSOW" and "AMSOZ", respectively.  The
Company has $.0001 par value Common Stock and redeemable Class A and Class B
Common Stock Purchase Warrants.  Each Warrant entitles the holder to purchase
one share of Common Stock at the price of $.75 per share during the period of
April 26, 1989 to July 26, 1996 (Class A Warrants) or one share of Common Stock
at the price of $1.00 per share during the period of April 26, 1989 to July 26,
1997 (Class B Warrants).

     The range of high and low bid quotations for the Company's Common Stock and
Warrants, on a quarterly basis for the fiscal years ended December 31, 1994,
1995 and the first quarter of 1996, is shown below. Prices are inter-dealer
quotations as reported by the National Daily Quotation Bureau, Inc., and do not
necessarily reflect retail mark-ups, mark-downs or commissions, nor actual
sales.

<TABLE>
<CAPTION>
 
                                                                   
                                                                              
                                                 Common Stock Purchase Warrants
                                  Common         ------------------------------ 
                                  Stock           Class A             Class B
                               ------------      ---------           ----------
Fiscal Year Ended              High     Low      High  Low           High   Low
December 31, 1994              Bid      Bid      Bid   Bid           Bid    Bid
- -----------------              ---      ---      ---   ---           ---    ---
<S>                            <C>      <C>      <C>   <C>           <C>    <C>
First Quarter                  .19      .13      .02  .02            .01   .005
Second Quarter                 .25      .19      .02  .02            .01   .01
Third Quarter                  .25      .19      .02  .02            .01   .01
Fourth Quarter                 .31      .19      .02  .02            .01   .01
</TABLE>

                                      -10-
<PAGE>
 
<TABLE>
<CAPTION>
                                                                   
                                                                     
                                                    Common Stock Purchase Warrants
                                  Common            ------------------------------
                                  Stock              Class A          Class B
                               ------------         ---------        ----------
Fiscal Year Ended              High     Low         High  Low        High   Low
December 31, 1995              Bid      Bid         Bid   Bid        Bid    Bid
- -----------------              ---      ---         ---   ---        ---    --- 
<S>                            <C>      <C>         <C>   <C>        <C>     <C>
First Quarter                  .25      .22         .02   .02        .01    .005
Second Quarter                 .47      .25         .02   .02        .01    .01
Third Quarter                  1.25     .45         .02   .02        .01    .01
Fourth Quarter                 .94      .56         .02   .02        .01    .01
 
<CAPTION>                                                            
                                                                  
                                                    Common Stock Purchase Warrants
                                  Common            ------------------------------
                                  Stock              Class A          Class B
                               ------------         ---------        -----------
Fiscal Year Ending             High     Low         High  Low        High    Low
December 31, 1996              Bid      Bid         Bid   Bid        Bid     Bid
- -----------------              ---      ---         ---   ---        ---     ---
<S>                            <C>      <C>         <C>   <C>        <C>     <C> 
First Quarter                  .81      .63         .03   .01        .03    .01
</TABLE>

     The number of holders of record of the Company's Common Stock as of March
31, 1996, was approximately 693. This number does not include an indeterminate
number of shareholders whose shares are held in "street accounts" of securities
brokers.

     The Company has not paid a dividend with respect to its common stock. The
Company expects to reinvest any earnings for expansion of its operations and
does not intend to pay a dividend in the foreseeable future.

Penny Stock Trading Rules
- -------------------------

     The Common Stock, Class A Warrants and Class B Warrants are classified as
"penny stocks" and are subject to the "penny stock" trading rules. The penny
stock trading rules impose additional duties and responsibilities upon broker-
dealers recommending the purchase of a penny stock (by a purchaser that is not
an accredited investor as defined by Rule 501(a) promulgated by the Commission
under the 1933 Act) or the sale of a penny stock. Among such duties and
responsibilities, with respect to a purchaser who has not previously had an
established account with the broker-dealer, the broker-dealer is required to (i)
obtain information concerning the purchaser's financial situation, investment
experience, and investment objectives, (ii) make a reasonable determination that
transactions in the penny stock are suitable for the purchaser and the purchaser
(or his independent adviser in such transactions) has sufficient knowledge and
experience in financial matters and may be reasonably capable of evaluating the
risks of such transactions, followed by receipt of a manually signed written
statement which sets forth the basis for such determination and which informs
the purchaser that it is unlawful to effectuate a transaction in the penny stock
without first obtaining a written agreement to the transaction. Furthermore,
until the purchaser becomes an established customer (i.e., have had an account
with the dealer for at least one year or, the dealer had effected three sales of
penny stocks on three different days involving three different issuers), the
broker-dealer must obtain from the purchaser a written agreement to purchase the
penny stock which sets forth the identity and number of shares or units of the
security to be purchased prior to confirmation of the purchase. A dealer is
obligated to provide certain information disclosures to the purchaser of a penny
stock, including (i) a generic risk discloser document which is required to be
delivered to the purchaser before the initial transaction in a penny stock, (ii)
a transaction-related disclosure prior to effecting a transaction in the penny
stock (i.e., confirmation of the transaction) containing bid and asked
information related to the penny stock and the dealer's and salesperson's
compensation (i.e., commissions, commission equivalents, markups and markdowns)
in connection with the transaction, and (iii) the purchaser-customer must be
furnished account statements, generally on a monthly basis, which include
prescribed information relating to market and price information concerning the
penny stocks held in his account. The penny stock trading rules do not apply to
those transactions in which a broker-dealer or salesperson does not make any
purchase or sale recommendation to the purchaser or seller of the penny stock.

                                      -11-
<PAGE>
 
     Compliance with the penny stock trading rules affect the ability to
resell the Common Stock, Class A Warrants and Class B Warrants by a holder
principally because of the additional duties and responsibilities imposed upon
the broker-dealers and salespersons recommending and effecting sale and purchase
transactions in such securities.  In addition, many broker-dealers will not
effect transactions in penny stocks, except on an unsolicited basis, in order to
avoid compliance with the penny stock trading rules.  The penny stock trading
rules consequently may materially limit or restrict the liquidity typically
associated with other publicly traded equity securities.  In this connection,
the holder of Common Stock, Class A Warrants or Class B Warrants may be unable
to obtain on resale the quoted bid price because a dealer or group of dealers
may control the market in such securities and may set prices that are not based
on competitive forces.  Furthermore, at times there may be a lack of bid quotes
which may mean that the market among dealers is not active, in which case a
holder of Common Stock, Class A Warrants or Class B Warrants may be unable to
sell such securities.  Because market quotations in the over-the-counter market
are often subject to negotiation among dealers and often differ from the price
at which transactions in securities are effected, the bid and asked quotations
of the Common Stock, Class A Warrants or Class B Warrants may not be reliable.


ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
              ---------------------------------------------------------------
              THE RESULTS OF OPERATIONS.
              -------------------------

     This analysis of the Company's financial condition and results of
operations should be read in conjunction with the financial statements and
footnotes, description of the Company's business and other information included
elsewhere in this report.
    
     The following table sets forth selected results of operations for (i) the
fiscal years ended December 31, 1994 and 1995, which are derived from the
audited consolidated financial statements of the Company. The results of
operations for the periods presented are not necessarily indicative of the
Company's future operations.      
<TABLE>    
<CAPTION>
 
                                                         For the Year Ended December 31,
                                                 ----------------------------------------------
                                                     1994                            1995
                                                 ------------------       ---------------------
                                                   Amount         %          Amount         %
                                                 -----------    -----     -------------   -----
<S>                                              <C>            <C>       <C>              <C>
Revenues:                                                                                
 Programs......................................   $2,564,542    95.8%        $4,382,935    97.0%
 Promotional material..........................       82,780     3.1            109,733     2.4
 Other.........................................       30,625     1.1             25,535      .6
                                                   ---------   -----          ---------   ----- 
  Total revenues...............................    2,677,947   100.0          4,518,203   100.0
                                                   ---------   -----          ---------   -----
Costs and Expenses                               
 Programs......................................      684,128    25.6          1,094,157    24.2
 Promotional material..........................       83,964     3.1             92,087     2.1
 Selling.......................................    1,289,616    48.2          2,201,510    48.7
 General & administrative......................      515,158    19.2            857,743    19.0
 Interest expense..............................       25,075      .9             22,998      .5
                                                   --------     ----          ---------    ----
  Total expenses...............................    2,597,941    97.0          4,268,495    94.5
                                                   ---------    ----          ---------    ----
Income (loss) from                               
 operations before                               
 extraordinary item............................       80,006     3.0            249,708     5.5
Extraordinary item - gain on                     
 conversion of liabilities                       
 to common stock...............................            -       -                  -       -
                                                  ----------    -----        ----------    ----
Net income.....................................   $   80,006     3.0%        $  249,708     5.5%
                                                  ==========    ====         ==========    ====
</TABLE>     
    
     During 1995, the Company experienced increases in revenues from programs
and net income, compared to 1994. The increases were principally the result of
introduction of the Company's New/Trition Plan in October 1993 and expansion of
the Company's network of its independent sales representatives and associates,
which      

                                      -12-
<PAGE>
 
resulted in achieving substantial increased sales volume of the New/Trition
Plan. The Company expects to continue to expand its network of independent sales
representatives and associates, which is in part dependent upon the market
demand for the consumer products and services offered by the Company through its
various purchasing programs, and such expansion should result in increased sales
volume. However, there is no assurance that increased sales volume will be
achieved through expansion of the selling network of the Company's programs, or
that, if sales volume increases, the Company will realize increased
profitability due to the costs and expenses associated with increased sales and
the general and administrative expenses.

Comparison of Fiscal 1994 and 1995
- ----------------------------------

          During 1995, total revenues increased $1,840,256 (a 68.7 percent
increase) as compared to 1994.  The increase was principally attributable to the
increased sales volume of the Company's NewTrition Plan, which was introduced in
October 1993, and expansion of the Company's network of its independent sales
representatives and associates.  During 1995 the Company made aggregate sales
under its NewTrition Plan of $4,064,216 to 5,783 distributors, compared to
aggregate sales in 1994 of $1,817,947 to 2,650 distributors.  Promotional
material revenue increased $26,953 (a 32.6 percent increase) to $109,733 in 1995
from $82,780 in 1994.  In addition, other revenue decreased by $5,090 (a 16.6
percent decrease) from $30,625 in 1994 to $25,535 in 1995, as a result of a
special promotion during 1994 that was not repeated in 1995.

          Total costs and expenses of programs, promotional material and selling
during 1995 increased by $1,330,046 (a 64.6 percent increase) to $3,387,754 from
$2,057,708 during 1994.  This increase was attributable to an increase of (i)
$410,029 (a 59.9 percent increase) in costs of programs and (ii) $911,894 (a
70.7 percent increase) in selling expenses, while promotional material expenses
increased $8,123 (a 9.7 percent increase).  The costs and expenses of programs,
promotional materials and selling, as a percentage of program sales revenue,
decreased from 80.2 percent during 1994 to 77.3 percent during 1995 which
resulted from a decrease in the costs of programs as a percentage of program
sale revenue from 26.7 percent to 25.0 percent due to  increased program costs
associated with the Company's NewTrition Plan, offset by a decline in selling
costs as a percentage of program sale revenue from 50.3 percent to 50.2 percent.
The Company achieved a net profit on sales of promotional materials of $17,646
during 1995 compared to a net loss of $1,184 during 1994 as a result of the
Company's curtailed practice of providing promotional materials at reduced cost
during special promotions periods.

          The Company's gross profit on program and promotional material
revenues (program and promotional material revenue less program costs,
promotional material costs and selling expenses) increased $515,300 (an 87.4
percent increase) to $1,104,914 in 1995 from $589,614 in 1994.  The gross profit
on program and promotional material revenues increased as a percentage of total
revenue from 22 percent in 1994 to 24.5 percent in 1995.  The increase in the
Company's gross profit margin on program and promotional material revenues
resulted from the combination of an increase in program and promotional
materials costs as a percentage of programs and promotional material revenues,
offset by a decrease in selling costs and expenses as a percentage of programs
and promotional material revenues.

          General and administrative expenses increased $342,585 (a 66.5 percent
increase) to $857,743 during 1995 from $515,158 during 1994.  This increase was
attributable to the Company's administrative infra-structure necessary to
support increased levels of sales.  The Company expanded its administrative
infra-structure by hiring eight additional employees.  Consequently, payroll and
employee costs increased by $208,169 during 1995 as the Company increased its
number of employees from six to 14.  The balance of the increase resulted from
increases in supplies, postage and other operating expenses associated with the
increased sales levels.  Interest expense during 1995 decreased $2,077 (an 8.3
percent decrease) to $22,998 from $25,075 during 1994.

          Net income increased $169,702 (a 212.1 percent increase) to $249,708
during 1995 from $80,006 during 1994.  Net income as a percentage of total
revenue increased from three percent during 1994 to 5.5 percent during 1995.

                                      -13-
<PAGE>
         
Quarterly Results of Operations
- -------------------------------

          The Company's operations appear not to be significantly affected by
seasonal trends.  No pattern of seasonal fluctuations exists due to the growth
patterns that the Company is currently experiencing.

Income Taxes
- ------------

          The Company has net operating loss carryforwards at December 31, 1995,
of approximately $1,780,000 which are available to reduce federal income tax in
future periods and which will begin to expire in 2003.  During 1995, the

                                      -15-
<PAGE>
     
Company's deferred tax assets and valuation allowance were decreased by
approximately $120,700 and $116,200, respectively. Management has determined 
that it is not more likely than not that the Company will be able to realize the
tax benefits from the net operating loss carryforwards and has therefore, 
provided a valuation allowance of approximately $570,000 to reduce the net 
deferred tax assets to zero.      
         

Liquidity and Capital Resources
- -------------------------------
         
    
          The Company had a deficit working capital of approximately $170,700 at
December 31, 1995, as compared to a deficit of approximately $338,500 at
December 31, 1994.  Of this $170,700 deficit, approximately $81,900 represents
amounts owed to the Company's chief executive officer and major stockholder
which is classified as a current liability, however, the Company makes payments
on this loan only when there is sufficient working capital.  Management believes
that cash flows from operations will be sufficient to fund its working capital
needs over the next  twelve months.  During 1995, net cash provided by operating
activities was $337,241 of which $99,561 was used for investing activities, and
$125,593 was used in financing activities (consisting primarily of repayments to
the Company's Chief Executive Officer and major stockholder). The Company had a
net increase in cash during this period of $112,087. The Company's working
capital needs over the next twelve months consist primarily of administrative
and operating overhead. For the three months ended March 31, 1996, the Company's
administrative and operating overhead averaged approximately $80,000 per month.
The Company anticipates that this level of administrative and operating overhead
will continue over the next twelve months.     
         
    
          The Company had a note payable to its major stockholder and Chief 
Executive Officer in the outstanding principal amount of $81,929 and $125,775 as
of December 31, 1995 and 1994, respectively. Pursuant to this note the Company
received advances totaling $31,963 and $46,374 during 1995 and 1994,
respectively, and made repayments totaling $127,615 and $79,138 during 1995 and
1994, respectively. During 1995, the Company combined interest payable on the
note of approximately $52,000 with the outstanding principal and began making
weekly payments of principal and interest. The note is unsecured and due on
demand and bears interest at 12 percent per annum on the outstanding principal
amount of the note.     
    
          On November 6, 1990, John W. Hail, Chief Executive Officer and 
Chairman of the Board of Directors of the Company, formed the John Hail Agency, 
Inc. ("JHA"). Mr. Hail is the sole director and shareholder of JHA. Pursuant to 
an unwritten agreement, the Company provided office space, utilities and 
supplies, as well as an occasional part-time administrative staff person, 
through June 30, 1996, to JHA for a monthly payment of $1,000 as reimbursement 
of the Company's costs. In addition, the Company made advances to JHA of $87,684
and $66,026 during the years ended December 31, 1995 and 1994, respectively. JHA
has made repayments of these advances of $67,401 and $9,069 during the fiscal
years ended December 31, 1995 and 1994, respectively. At December 31, 1995, JHA
was indebted to the Company in the amount of $51,963.    

          The Company received advance annual payment for certain program
memberships.  Receipts representing payment for future months programs services
are deferred and recognized over the 12 month period covered by the 

                                      -16-
<PAGE>
     
membership. The Company recorded a liability representing the deferred revenue
associated with annual prepayments of $40,852 at December 31, 1994. At December
31, 1995, the Company did not have any deferred revenues requiring recording of
a liability for deferred revenues associated with annual prepayments.     

          The Company's primary source of liquidity is net cash provided by
operating activities.  During 1995, the Company had net cash provided by
operating activities of $316,958.  Other than loans made available to the
Company by its Chief Executive Officer and major shareholder, the Company does
not have any outside liquidity sources.  As of December 31, 1995, the Company
did not have any material commitments for capital expenditures.
         
          During the 12 months ended December 31, 1995, the Company had an
average monthly positive cash flow from operating activities of approximately
$26,400, and an average monthly net positive cash flow of approximately $9,300,
after investing and financing activities.

Effect of Inflation
- -------------------

          As the costs of products and services and other expenses of the
Company have increased, the Company has been generally able to increase the
selling prices of the products and services marketed by the Company; therefore,
in the view of management, inflation has not had a significant effect on gross
margins.  In periods of high inflation, the costs and expenses of the products
and services marketed by the Company could adversely affect the Company's
profitability.

ITEM 7.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
              ------------------------------------------- 

The financial statements of the Company prepared in accordance with Regulation
S-B are set forth beginning on page F-1 hereof.

ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              ---------------------------------------------------------------
              FINANCIAL DISCLOSURE.
              -------------------- 

          There have been no disagreements concerning matters of accounting
principle or financial statement disclosure between the Company and its
independent accountants of the type requiring disclosure hereunder.

                                    PART III

ITEM 9.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
              --------------------------------------------------

Current Directors and Executive Officers
- ----------------------------------------

          The following table sets forth certain information with respect to
each executive officer and director of the Company.  The Company's Bylaws
authorize the Board of Directors to be constituted of not less than one and such
number as the Board of Directors may from time to time determine by resolution
or election.  The Board currently consists of five members.  Directors are
elected for three year terms, with approximately one-third of the Board standing
for election each year.  The term of office of one class of directors expires
each year in rotation so that one class is elected at each annual meeting of
shareholders for a full three-year term.  The terms of John W. Hail and Roger P.
Baresel expire in 1998, the terms of Curtis H. Wilson, Sr. and R. Terren Dunlap
expire in 1997, and the term of 

                                      -17-
<PAGE>
 
Harland C. Stonecipher expires in 1996. Executive officers are elected by the
Board of Directors and serve at its discretion.
<TABLE>
<CAPTION>
 
NAME                         AGE  POSITION
- ----                         ---  --------
<S>                          <C>  <C>
 
John W. Hail(1)(2)            65  Chief Executive Officer, Chairman of the
                                  Board of
                                  Directors
 
Curtis H. Wilson, Sr.(3)      69  Vice-Chairman of the Board of Directors
 
Roger P. Baresel(1)(2)        40  President, Chief Financial Officer, Secretary
                                  and Director
 
R. Terren Dunlap(3)           50  Vice President - International Development
                                  and Director
Harland C. Stonecipher(4)     56  Director
- --------------------------
</TABLE>

(1)  Member of the Stock Option committee.
(2)  Term as a Director expires in 1998.
(3)  Term as a Director expires in 1997.
(4)  Term as a Director expires in 1996.

          Messrs. Hail, Wilson and Baresel devote their full-time to business of
the Company.  Mr. Dunlap devotes approximately 20 percent of his time to the
business of the Company.  Mr. Dunlap devotes the balance his time to other
business interests that are not believe to constitute a conflict of interest
with his employment by the Company.

          The following is a brief description of the business background of the
executive officers and directors of the Company:

          John W. Hail is the founder of Advantage Marketing Systems, Inc. and
has served as its Chief Executive Officer and Chairman of the Board of Directors
since its inception in June, 1988.  During 1987 and through June 1, 1988, Mr.
Hail served as Executive Vice President, Director and Agency Director of Pre-
Paid Legal Services, Inc.  During this period Mr. Hail also served as Chairman
of the Board of TVC Marketing, Inc., Pre-Paid's exclusive marketing agent.

          Curtis H. Wilson, Sr. has served as Vice-Chairman of the Board of
Directors of the Company since June, 1988.  From January, 1984 to June, 1988,
Mr. Wilson was Executive Vice President for TVC Marketing, Inc.  From March,
1983 to January, 1984, Mr. Wilson was a sales associate for TVC Marketing, Inc.
Mr. Wilson retired in April, 1982 after having been employed for 26 years as a
salesman, vice president, and later president of V. J. McGanahan, Inc., a
television and appliance wholesale distributor in Dayton, Ohio.
    
          Roger P. Baresel has served as Vice President, Chief Financial
Officer, Secretary, and a Director since June 1, 1995, and on July 1, 1995, Mr.
Baresel became President. Mr. Baresel is a Certified Public Accountant and holds
a Master of Business Administration. He has maintained an accounting practice
since 1985 specializing in providing consulting services to small and growing
businesses. Since 1988, he has provided consulting services on a part-time basis
to the Company. Effective June 1, 1995, Mr. Baresel became a full time employee
of the Company.     

          R. Terren Dunlap has served as Vice President-International
Development and a Director since June 1, 1995.  Mr. Dunlap is the co-founder and
a Director since 1984 and until March 1994 served as Chief Executive Officer and
Chairman of the Board, of Go-Video, Inc., an American Stock Exchange company,
and developer and distributor of consumer electronics products.  He is an
inventor and has received several patents for consumer electronics products,
including the Dual Deck VCR, and is a member of the Electronics Industry
Association and the Arizona State 

                                      -18-
<PAGE>
 
University West Advisory Board, and has served on the national board of the
American Electronics Association. Mr. Dunlap holds a Juris Doctorate from Ohio
Northern University and a Bachelor of Science Degree in Business Administration
from Ashland University.

          Harland C. Stonecipher has served as a Director since August 25, 1995.
Mr. Stonecipher has been Chairman of the Board and Chief Executive Officer of
Pre-Paid Legal Services, Inc. since its inception in 1972.  Pre-Paid Legal
Services, Inc., an American Stock Exchange company, is the first company in the
United States organized solely to design, underwrite and market legal expense
plans.

ITEM 10.      EXECUTIVE COMPENSATION.
              ---------------------- 
    
          The following table sets forth certain information relating to
compensation paid to or accrued for the Chief Executive Officer for services
rendered during the years ended December 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
 
                                                                                     
                                                                                          Long-Term   
                                                 Annual compensation                   Compensation(4)
                                   ------------------------------------------------   Award of Options 
Name & Principal Position          Year        Salary(1)  Bonus(2)     Other(3)       Number of Shares
- -------------------------          ----        ---------  --------     --------      -------------------
<S>                                <C>         <C>        <C>          <C>           <C>
John W. Hail                       1995        $  -       $  -         $20,283       3,000,000(5)
 Chief Executive Officer           1994        $  -       $  -         $56,957          -
                                   1993        $  -       $  -         $  -             -
- ------------------------
</TABLE>
(1)       Dollar value of base salary (both cash and non-cash) earned during the
          year.
(2)       Dollar value of bonus (both cash and non-cash) earned during the year.
(3)       The Company furnishes the use of an automobile to Mr. Hail, the value
          of which is not greater than $5,000 annually. During 1995, 1994, and
          1993, the Company made advances to the John Hail Agency, Inc., an
          affiliate of Mr. Hail, of $87,684, $66,026 and $36,960, respectively,
          and the John Hail Agency, Inc. made repayments to the Company of
          $67,401, $9,069 and $3,281, respectively. See "Part III, Item 12.
          Certain Relationships and Related Transactions." For purposes of this
          table, the advances made by the Company to the John Hail Agency, Inc.
          during each year presented were reduced by the repayments made by the
          John Hail Agency, Inc. to the Company during such year.
(4)       No awards of restricted stock or payments under long-term incentive
          plans were made by the Company to the Chief Executive Officer during
          1993 and 1994.
(5)       During 1995, Mr. Hail transferred by gift 1,800,000 of the stock
          options.     

Aggregate Option Grants and Exercises in 1995 and Year-End Option Values
- ------------------------------------------------------------------------

          Stock Options and Option Values.  The following table sets forth
          -------------------------------                                 
information related to options granted to the Chief Executive Officer during
1995.
<TABLE>
<CAPTION>
 
                                              Individual Grants
                          -------------------------------------------------------
                                                                                    Potential Realizable Value
                                          Percent                                   at Assumed Rates of Stock
                                          of Total                                  Price Appreciation for
                                           Options       Exercise                           Option Term(1)
                             Number       Granted to       or                       --------------------------
                           of Options     Employees     Base Price   Expiration        Five            Ten
Name                         Granted       in 1995      Per Share       Date         Percent         Percent
- ----------                  ---------      -------      ----------  -------------   --------------------------
<S>                         <C>            <C>          <C>         <C>             <C>            <C> 
John W. Hail                3,000,000       50.3%          $.25     Feb. 23, 2005    $375,000      $1,500,000
- ----------------------------------------
</TABLE>
(1)       The potential realizable value portion of the foregoing table
          illustrates the value that might be realized upon exercise of the
          options immediately prior to the expiration of their term, assuming
          the specified compound 

                                      -19-
<PAGE>
 
          rates of appreciation of the Common Stock over the term of the
          options. These amounts do not take into consideration provisions
          restricting transferability and represent certain assumed rates of
          appreciation only. Actual gains on stock option exercises are
          dependent on the future performance of the Common Stock and overall
          stock market conditions. There can be no assurance that the potential
          values reflected in this table will be achieved. All amounts have been
          rounded to the nearest whole dollar amount.
    
          Aggregate Stock Option Exercise and Year-End and Option Values.  The
          --------------------------------------------------------------      
following table sets forth information related to the number of options
exercised in 1995 and the value realized by the Chief Executive Officer, as well
as, information related to the number and value of options held by the Chief
Executive Officer at the end of 1995.  During 1995, there were no options to
purchase Common Stock exercised by the Chief Executive Officer.


                           Number of                   Value of Unexercised
                       Unexercised Options           In-the-Money Options as of 
                      as of December 31, 1995         of December 31, 1995(1) 
                    ----------------------------   ---------------------------- 
Name                Exercisable    Unexercisable   Exercisable    Unexercisable
- ----                -----------    -------------   -----------    ------------- 
John W. Hail        1,200,000(2)       --          $636,000          $   --
- ------------
(1)       The closing highest bid price of the Common Stock as quoted on
          National Quotation Bureau, Incorporated on December 29, 1995, the last
          trading day of 1995, was $.78. Value is calculated on the basis of the
          remainder of $.78 minus the exercise price multiplied by the number of
          shares of Common Stock underlying the options.
(2)       During 1995, Mr. Hail transferred by gift 1,800,000 stock options.
    
    
Board of Directors
- ------------------

          Pursuant to the terms of the Company's Bylaws, the directors are
divided into three classes. Class I Directors hold office initially for a term
expiring at the annual meeting of shareholders to be held in 1996, Class II
Directors hold office initially for a term expiring at the annual meeting of
shareholders to be held in 1997, and Class III Directors hold office initially
for a term expiring at the annual meeting of shareholders to be held in 1998.
Each director will hold office for the term to which he is elected and until his
successor is duly elected and qualified. Mr. Stonecipher is serving as a Class I
Director under a term expiring in 1996, Messrs. Wilson and Dunlap are serving as
Class II Directors under terms expiring in 1997, and Messrs. Hail and Baresel
are serving as Class III Directors under terms expiring in 1998. At each annual
meeting of the shareholders of the Company, the successor to a member of the
class of directors whose term expires at such meeting will be elected to hold
office for term expiring at the annual meeting of shareholders held in the third
year following the year of his election.     

Compensation of Directors
- -------------------------

          Directors who are not employees of the Company receive $250 for each
Board meeting attended. Directors who are also employees of the Company receive
no additional compensation for serving as Directors. The Company reimburses its
Directors for travel and out-of-pocket expenses in connection with their
attendance at meetings of the Board of Directors. The Company's Bylaws provide
for mandatory indemnification of directors and officers to the fullest extent
permitted by Oklahoma law.

Stock Option Plan
- -----------------

          The Company established the Advantage Marketing Systems, Inc. 1995
Stock Option Plan (the "Stock Option Plan" or the "Plan") in June 1995. The Plan
provides for the issuance of incentive stock options ("ISO Options") with or
without stock appreciation rights ("SARs") and nonincentive stock options ("NSO
Options") with or without SARs to employees and consultants of the Company,
including employees who also serve as Directors of the Company. The 

                                      -20-
<PAGE>
 
total number of shares of Common Stock authorized and reserved for issuance
under the Plan is 9,000,000. As of March 31, 1996, options have not been granted
under the Plan.

          The Stock Option Committee, which is currently comprised of Messrs.
Hail and Baresel, administers and interprets the Plan and has authority to grant
options to all eligible employees and determine the types of options, with or
without SARs, granted, the terms, restrictions and conditions of the options at
the time of grant, and whether SARs, if granted, are exercisable at the time of
exercise of the Option to which the SAR is attached.

          The option price of the Common Stock is determined by the Stock Option
Committee, provided such price may not be less than the fair market value of the
shares on the date of grant of the option.  The fair market value of a share of
the Common Stock is determined by averaging the closing high bid and low asked
quotations for such share on the date of grant of the option as reported by the
National Quotation Bureau, Incorporated or, if not quoted, is determined by the
Stock Option Committee.  Upon the exercise of an option, the option price must
be paid in full, in cash or with an SAR.  Subject to the Stock Option
Committee's approval, upon exercise of an option with an SAR attached, a
participant may receive cash, shares of Common Stock or a combination of both,
in an amount or having a fair market value equal to the excess of the fair
market value, on the date of exercise, of the shares for which the option and
SAR are exercised, over the option exercise price.

          Options granted under the Plan may not be exercised until six months
after the date of the grant and rights under an SAR may not be exercised until
six months after the SAR is attached to an option, if not attached at the time
of the grant of the option, except in the event of death or disability of the
participant. ISO Options and any SARs are exercisable only by participants while
actively employed as an employee or a consultant by the Company, except in the
case of death, retirement or disability. Options may be exercised at any time
within three months after the participant's retirement or within one year after
the participant's disability or death, but not beyond the expiration date of the
option. No option may be granted after April 30, 2005. Options are not
transferable except by will or by the laws of descent and distribution.

Officer and Director Liability
- ------------------------------

          As permitted by the provisions of the Oklahoma General Corporation
Act, the Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of the Company for a breach of
their fiduciary duty as directors. These provisions do not eliminate the
liability of a director for (i) a breach of the director's duty of loyalty to
the Company or its shareholders, (ii) acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) liability arising under Section 1053 of the Oklahoma General
Corporation Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma General Corporation Act), or
(iv) any transaction from which the director derived an improper personal
benefit. In addition, these provisions do not eliminate liability of a director
for violations of federal securities laws, nor do they limit the rights of the
Company or its shareholders, in appropriate circumstances, to seek equitable
remedies such as injunctive or other forms of non-monetary relief. Such remedies
may not be effective in all cases.

          The Certificate of Incorporation and Bylaws of the Company provide
that the Company shall indemnify all directors and officers of the Company to
the full extent permitted by the Oklahoma General Corporation Act. Under such
provisions, any director or officer, who in his capacity as such, is made or
threatened to be made, a party to any suit or proceeding, may be indemnified if
the Board of Directors determines such director or officer acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interest of the Company. The Certificate and Bylaws and the Oklahoma General
Corporation Act further provide that such indemnification is not exclusive of
any other rights to which such individuals may be entitled under the
Certificate, the Bylaws, an agreement, vote of shareholders or disinterested
directors or otherwise. Insofar as indemnification for liabilities arising under
the Act may be permitted to directors and officers of the Company pursuant to
the foregoing provisions, or otherwise, the Company

                                      -21-
<PAGE>
 
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.

          The Company may enter into indemnity agreements with each of its
directors and executive officers. Under each indemnity agreement, it is
anticipated that the Company will pay on behalf of the indemnitee, and his
executors, administrators and heirs, any amount which he is or becomes legally
obligated to pay because of (i) any claim or claims from time to time threatened
or made against him by any person because of any act or omission or neglect or
breach of duty, including any actual or alleged error or misstatement or
misleading statement, which he commits or suffers while acting in his capacity
as a director and/or officer of the Company or its affiliate or (ii) being a
party, or being threatened to be made a party, to any threatened, pending or
contemplated action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was an officer, director,
employee or agent of the Company or its affiliate or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. It is
anticipated that the payments which the Company will be obligated to make
thereunder shall include, inter alia, damages, charges, judgments, fines,
penalties, settlements and cost of investigation and costs of defense of legal,
equitable or criminal actions, claims or proceedings and appeals therefrom, and
costs of attachment, supersedeas, bail, surety or other bonds.

ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
              -------------------------------------------------------------- 

          The following table sets forth as of March 31, 1996, information
regarding ownership of Common Stock by each person known by the Company to be
the beneficial owner of more than 5% of the Company's outstanding Common Stock,
by each director, and by all executive officers and directors of the Company as
a group.  All persons named have sole voting and investment power over their
shares except as otherwise noted.
<TABLE>    
<CAPTION>
                                                      Percentage
Name & Address of                       Number of     of Shares
Beneficial Owner                     Shares Owned(1)  Outstanding
- ----------------                     ---------------  ------------
<S>                                  <C>              <C>
 
John W. Hail(2)(3)                      3,676,237           20.22%
 
Bruce Greene(4)                         3,778,000           19.24%
 
Curtis H. Wilson, Sr.(2)(5)             2,189,956           11.53%
 
United Financial(6)                     2,000,000           10.53%

William A. LaReese(7)                   1,730,000            9.55%
 
Robert & Retha Nance(8)                 1,588,137            9.06%
 
Roger P. Baresel(2)(9)                  1,290,000            7.18%
 
Harland C. Stonecipher(10)                451,318            2.66%
 
Pre-Paid Legal Services, Inc.(10)         451,318            2.66%
 
R. Terren Dunlap(2)(11)                   300,000            1.74%
 
All Current Officers and
Directors as a Group
(five persons)(3)(5)(9)(10)(11)         7,907,511           36.84%
- ----------------------------
</TABLE>     

                                      -22-
<PAGE>
 
    
(1)       Shares of Common Stock which an individual or group has a right to
          acquire within 60 days pursuant to the exercise of options or warrants
          are deemed to be outstanding for the purposes of computing the
          percentage ownership of such individual or group, but are not deemed
          to be outstanding for the purpose of computing the percentage
          ownership of any other person shown in the table.

(2)       A Director and an executive officer of the Company, with a business
          address of 2601 Northwest Expressway, Suite 1210W, Oklahoma City,
          Oklahoma 73112.

(3)       The shares and percentage include 1,200,000 shares of Common Stock
          which are subject to currently exercisable stock options granted in
          the first quarter of 1995 to and held by Mr. Hail.

(4)       Mr. Greene's business address is 1465 Greenbrier Drive Green Oaks,
          Illinois 60048. The shares and percentage include 2,652,000 shares of
          Common Stock which are subject to currently exercisable Public
          Warrants held by Mr. Greene.

(5)       The shares and percentage include 2,000,000 shares of Common Stock
          which are subject to currently exercisable stock options granted to
          and held by Mr. Wilson (of which 1,000,000 were granted in 1995), and
          includes 44,300 shares of common stock held by Ruth Wilson, wife of
          Mr. Wilson and with respect to which Mr. Wilson disclaims any
          beneficial interest.

(6)       United Financial Advisors, Inc.'s business address is 1601 NW
          Expressway, Suite 2101, Oklahoma City, Oklahoma 73118. The shares and
          percentage include 2,000,000 shares of Common Stock which are subject
          to currently exercisable Warrants held by United Financial Advisors,
          Inc.

(7)       Mr. LaReese's business address is 2239 NW 30th Street, Oklahoma City,
          Oklahoma 73112. The shares and percentage include 1,130,000 shares of
          Common Stock which are subject to currently exercisable Public
          Warrants held by Mr. LaReese.

(8)       Mr. and Mrs. Nance are husband and wife and their business address is
          Post Office Box 405, Wheatland, Oklahoma 73097. The shares and
          percentage include 725 shares owned by Mr. Nance, 302,000 shares owned
          by Mrs. Nance, 750,000 shares owned jointly, and 531,412 and 4,000
          shares of Common Stock which are subject to currently exercisable
          stock options granted to and held by Mr. and Mrs. Nance, respectively.

(9)       The shares and percentages include 100,000 shares of Common Stock and
          280,000 shares of Common Stock which are subject to currently
          exercisable stock options granted to and held by Mr. Baresel, of which
          options for 100,000, 80,000 and 100,000 shares were granted in 1992,
          1994 and 1995, respectively, and includes (i) 110,000 shares of Common
          Stock held by Judith A. Baresel, wife of Mr. Baresel, (ii) 700,000
          shares of Common Stock which are subject to currently exercisable
          stock options held by Judith A. Baresel, and (iii) 100,000 shares of
          Common Stock which are subject to currently exercisable stock options
          held as the custodian for the benefit of the children of Mr. and Mrs.
          Baresel, and with respect to which Mr. Baresel disclaims any
          beneficial interest.

(10)      Mr. Stonecipher is Director with a business address of 321 East Main
          Street, Ada, Oklahoma 74820. The shares and percentages include
          451,318 shares of Common Stock held by Pre-Paid Legal Services, Inc.
          of which Mr. Stonecipher is Chairman of the Board and Chief Executive
          Officer and is therefore deemed to beneficially own all shares of
          Common Stock beneficially owned by Pre-Paid Legal Services, Inc.

(11)      The shares and percentages include 300,000 shares of Common Stock
          which are subject to a currently exercisable stock options granted in
          1995 to and held by Mr. Dunlap.     

                                      -23-
<PAGE>
 
ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
              ---------------------------------------------- 

          Except as described below, no executive officer, director, stockholder
known to the Company to own of record or beneficially more than 5% of the
Company's common stock, or any member of the immediate family of any of those
persons has engaged since the beginning of the Company's last fiscal year or
proposes to engage in the future in any transaction or series of similar
transactions with the Company, directly or indirectly through a separate entity,
in which the amount involved exceeded or will exceed $60,000.

          Except as described below, no business relationship between the
Company and any business or professional entity, for which a director of the
Company has served during the last fiscal year or currently owns a 10% record or
beneficial interest, has existed since the beginning of the Company's last
fiscal year or currently exists and which represented or will represent payments
for property or services in excess of 5% of the Company's gross revenues for its
last full fiscal year or of the other entity's consolidated gross revenues for
its last full fiscal year.  In addition, except as described below, the Company
did not owe at the end of its last fiscal period any business or professional
entity, for which a director of the Company has served during the last fiscal
year or currently serves as an executive officer or in which a director of the
Company has owned during the last fiscal year or currently owns a 10% record or
beneficial interest, an aggregate amount in excess of 5% of the Company's total
assets at the end of its last fiscal period.

          No director of the Company has served during the last fiscal year or
currently serves as a partner or executive officer of any investment banking
firm that performed services for the Company during the last fiscal year or that
the company proposes to have perform services during the current year.  The
Company knows of no other relationship between a director of the Company and the
Company that are not substantially similar in nature and scope to those
described above.

          Except as noted below, no executive officer, director, any member of
the immediate family of any of those persons, any corporation or organization
for which any of the above-listed persons serve as an executive officer or
partner or which they own directly or indirectly 10% or more of its equity
securities, or any trust or other estate in which any of the Company's executive
officers, directors or nominees for election as directors, have a substantial
beneficial interest or for which they serve as a trustee or in a similar
capacity has owed the Company at any time since the beginning of its last fiscal
year more than $60,000.
    
          On November 6, 1990, John W. Hail, Chief Executive Officer and
Chairman of the Board of Directors of the Company, formed the John Hail Agency,
Inc. ("JHA"). Mr. Hail is the sole director and shareholder of JHA. Pursuant to
an unwritten agreement, the Company provided office space, utilities and
supplies, as well as an occasional part-time administrative staff person, to
through June 30, 1996, JHA for a monthly payment of $1,000 as reimbursement of
the Company's costs. In addition, the Company made advances to JHA of $87,684
and $66,026 during the years ended December 31, 1995 and 1994, respectively. JHA
has made repayments of these advances of $67,401 and $9,069 during the fiscal
years ended December 31, 1995 and 1994, respectively. At December 31, 1995, JHA
was indebted to the Company in the amount of $51,963.

          At December 31, 1995, the balance due on a short-term loan from the
Company's Chief Executive Officer and major shareholder was $81,929.  During
1995, the Company combined interest payable of approximately $52,000 with the
principal due under the loan and began making weekly interest and principal
payments of $1,500.  During 1995, the Company received aggregate advances of
$31,963 under the loan.  During the year ended December 31, 1995, the Company
made principal payments of $127,615 thereon to the Company's Chief Executive
Officer and major shareholder.  The loan is unsecured, due on demand and bears
interest at 12 percent per annum.

          During the five months ended May 31, 1995, and the fiscal year ended
December 31, 1994, Roger P. Baresel provided accounting and consulting services
to the Company and for such services Mr. Baresel was paid $13,500 and $19,500,
respectively.  On June 1, 1995, Mr. Baresel ceased providing accounting and
consulting services to the Company and became an executive officer and a
Director of the Company.     

                                      -24-
<PAGE>
 
    
          Included among the consumer benefits sold by the Company are legal
services provided by Pre-Paid Legal Services, Inc. ("PPL").  Purchasers of these
legal services make payments directly to PPL and PPL in turn pays the Company
commissions on these sales.  PPL is a greater than five percent beneficial owner
of the of the Company's Common Stock and Harland C. Stonecipher, the founder and
Chief Executive Officer of PPL is a Director of the Company.  During the years
ended December 31, 1995 and 1994, the Company received commissions from PPL on
these sales totaling $16,415 and $71,713, respectively.

          During the years ended December 31, 1995 and 1994, the Company paid
Curtis H. Wilson, Sr., a Director of the Company, sales commissions of $51,669,
and $26,791, respectively.  During the years ended December 31, 1995 and 1994,
the Company paid William A. LaReese, a greater than five percent beneficial
owner of the Company's Common Stock, sales commissions of $10,662, and $10,398,
respectively.  During the years ended December 31, 1995 and 1994, the Company
paid jointly Robert and Retha Nance, who are greater than five percent
beneficial owners of the Company's Common Stock, sales commissions of $12,433,
and $10,000, respectively.  In addition, during the year ended December 31,
1995, the Company paid jointly Roger P. Baresel, an executive officer of the
Company, and his wife, Judith A. Baresel, sales commissions of $672.

          During 1995, the Company granted Roger P. Baresel, an executive
officer and Director of the Company, 10-year, transferrable stock options
exercisable for the purchase of 1,000,000 and350,000 shares of Common Stock for
$.25 and $.45 per share, respectively.  During 1995, Mr. Baresel transferred by
gift 1,250,000 of such stock options to third parties, including 700,000 to his
wife, Judith A. Baresel, and 100,000 to Mrs. Baresel in her capacity as guardian
for the benefit of their children.  In addition, during 1994, the Company
granted Mr. Baresel five-year stock options exercisable for the purchase of
80,000 shares of Common Stock for $.27 per share.  All of the stock options were
granted at the fair market value of the Common Stock on the date of grant and
are currently exercisable.

          During 1995, the Company granted John M. Hail, an executive officer
and Director of the Company, 10-year, transferrable stock options exercisable
for the purchase of 3,000,000 shares of Common Stock for $.25 per share.  During
1995, Mr. Hail transferred by gift 1,800,000 of these stock options to third
parties.  All of the stock options were granted at the fair market value of the
Common Stock on the date of grant and are currently exercisable.

          During 1995, the Company granted Curtis H. Wilson, Sr., a Director of
the Company, six-year stock options exercisable for the purchase of 1,000,000
shares of Common Stock for $.45 per share.  All of the stock options were
granted at the fair market value of the Common Stock on the date of grant and
are currently exercisable.

          During 1995, the Company granted R. Terren Dunlap, a Director and
executive officer of the Company, five-year stock options exercisable for the
purchase of 300,000 shares of Common Stock for $.27 per share.  All of the stock
options were granted at the fair market value of the Common Stock on the date of
grant and are currently exercisable.

          During 1995, the Company granted United Financial Advisory Services,
Inc. five-year stock options exercisable for the purchase of 1,000,000 shares of
Common Stock for $.45 per share and 1,000,000 shares of Common Stock for $.62
per share.  All of the stock options were granted at or above the fair market
value of the Common Stock on the date of grant and are currently exercisable.
As a result of the grant of these stock options, United Financial Advisory
Services, Inc. became a greater than five percent beneficial owner of the Common
Stock of the Company.

          During 1995, the Company granted Robert Nance, a greater than five
percent beneficial owner of the Common Stock of the Company, five-year stock
options exercisable for the purchase of 393,000 shares of Common Stock for $.25
per share and two-year stock options exercisable for the purchase of 55,560
shares of Common Stock for $.27 per share.  Furthermore, during 1994, Mr. Nance
was granted five-year stock options exercisable for the purchase of 42,865
shares of Common Stock for $.35 per share.  All of the stock options were
granted at or above the fair market value of the Common Stock on the date of
grant and are currently exercisable.     

                                      -25-
<PAGE>
 
          The Board of Directors of Company believes that the terms of the
transactions described above were at least as favorable as could be obtained
from unaffiliated third parties.  The Company has adopted policies that any
loans to officers, directors and five percent or more shareholders
("affiliates") are subject to approval by a majority of the disinterested
independent directors of the Company and that further transactions with
affiliates will be on terms no less favorable than could be obtained from
unaffiliated parties and approved by a majority of the disinterested independent
directors.  As of March 31, 1996, the Board of Directors is comprised of the
five members of which one is an independent director.

                                    PART IV

ITEM 13.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
              ---------------------------------------------------------------- 

The following documents are filed as part of this report:
    
1.  Financial Statements appearing at pages F-2 through F-15:
 
          Report of Independent Certified Public Accountants.

          Consolidated Balance Sheets - December 31, 1995 and 1994.

          Consolidated Statements of Operations - For The Years Ended December
          31, 1995 and 1994.

          Consolidated Statements of Stockholders' Deficiency - For The Years
          Ended December 31, 1995 and 1994.

          Consolidated Statements of Cash Flows - For The Years Ended December
          31, 1995 and 1994.

          Notes to Consolidated Financial Statements.      


2.  Exhibits.

          The following exhibits are filed with or incorporated by reference
into this Form 10-KSB.

          2.1  Agreement and Plan of Reorganization dated May 1,1989, between
               Pacific Coast International, Inc., Advantage Marketing Systems,
               Inc. and the stockholders of Advantage Marketing Systems, Inc.
               (1)

          2.2  Agreement and Plan of Merger between AMS, Inc. and Advantage
               Marketing Systems, Inc. (7)

          2.3  Certificate of Merger of Advantage Marketing Systems, Inc. (A
               Delaware Corporation) with and into Advantage Marketing Systems,
               Inc. (An Oklahoma Corporation). (7)
    
          3.1  Amended and Restated Certificate of Incorporation of  Advantage
               Marketing Systems, Inc. (7)

          3.2  By-Laws (7)    

          4.1  Warrant Agreement and between the Registrant and U.S. Stock
               Transfer Corp. and amendment thereto (8)
    
          4.2  Class A Common Stock Purchase Warrant Certificate (8)     

                                      -26-
<PAGE>
 
    
          4.3   Class B Common Stock Purchase Warrant Certificate (8)     

          10.1  Lease of Registrant's corporate offices located at 2601 N.W.
                Expressway, Suite 1210W, Oklahoma City (6)

          10.2  Lease of Registrant's computer equipment with IBM Credit
                Corporation (3)

          10.3  Legal Services Agreement between Registrant and Pre-Paid Legal
                Services, Inc. (3)

          10.4  Group Contract between Registrant and Consumer Benefit Services,
                Inc. (3)

          10.5  Distributor Agreement between Registrant and ToppMed, Inc.(3)

          10.6  Letter of Intent between Registrant and CUC International(3)

          10.7  Letter of Agreement between Registrant and Coupon Exchange Club
                (3)

          10.8  Agreement Number 1 between Registrant and TMS, Inc.(3)

          10.9  Agreement Number 2 between Registrant and TMS, Inc.(3)

          10.10 Agreement between Registrant and Innovative Benefits, Inc.(4)

          10.11 Agreement between Registrant and Mr. Jim Gabler (4)

          10.12 Agreement between Registrant and Health Management Systems,
                Inc. (4)

          10.13 Agreement between Registrant and Consumer's Choice  Association
                (5)

          10.14 Agreement between Registrant and Innovative Benefits, Inc.(5)

          10.15 Secondary Public Offering Letter of Intent.

          22    Subsidiaries of the Registrant (3)
- -------------------
(1)       Filed as an exhibit to Registrant's Form 8-K dated May 19, 1989, which
          is incorporated herein by reference.
(2)       Filed as an exhibit to Registrant's Form S-1 Registration Statement
          (No. 33-25701) which is incorporated herein by reference.
(3)       Filed as an exhibit to Registrant's Form 10-K for the year ending
          December 31, 1989, which is incorporated herein by reference.
(4)       Filed as an exhibit to Registrant's Form 10-K for the year ending
          December 31, 1990, which is incorporated herein by reference.
(5)       Filed as an exhibit to Registrant's Form 10-K for the year ending
          December 31, 1991, which is incorporated herein by reference.
(6)       Filed as an exhibit to Registrant's Form 10-KSB for the year ending
          December 31, 1993, which is incorporated herein by reference.
(7)       Filed as an exhibit to Registrant's Form 8-K filed December 11, 1995,
          which is incorporated herein by reference.
(8)       Filed as exhibits to Registrant's Registration Statement on Form SB-2,
          as filed with the Commission on December 18, 1995, and as amended
          pursuant to Amendment No. 1 as filed with the Commission on July 1,
          1996.

                                      -27-
<PAGE>
 
3.        The registrant filed a report on Form 8-K on December 11, 1995,
          describing the implementation of an Agreement and Plan of Merger under
          which the Company reincorporated in Oklahoma by merging with and into
          its wholly-owned subsidiary.

          Item 2. Acquisition or Disposition of Assets

          Effective December 11, 1995, Advantage Marketing Systems, Inc., the
          former parent of the Company ("AMS Delaware"), merged with the Company
          ("AMS Oklahoma") pursuant to an Agreement and Plan of Merger (the
          "Reincorporation Merger"), and the Company was the surviving
          corporation. As a result of the Merger, AMS Delaware ceased to exist
          as a Delaware corporation, and the Company succeeded to all rights,
          privileges, powers, franchises, obligations, assets and properties of
          AMS Delaware. The Merger was accounted for as a reorganization of
          entities under common control and was recorded at historical cost.

          Item 7. Financial Statements and Exhibits.

          (a) Financial Statements and Exhibits.

          Because AMS Oklahoma has been a wholly-owned subsidiary of AMS
          Delaware since May 1989, and has been consolidated for financial
          statement purposes with AMS Delaware, the Registrant is not required
          to provide financial statements of AMS Oklahoma with respect to the
          Reincorporation Merger.

          (b) Pro Forma Financial Information.

          Because AMS Oklahoma has been a wholly-owned subsidiary of AMS
          Delaware since May 1989, and has been consolidated for financial
          statement purposes with AMS Delaware, the Registrant is not required
          to provide pro forma financial information with respect to the
          Reincorporation Merger.

          (c) Exhibits

          2.1  Agreement and Plan of Merger between AMS, Inc. and Advantage
               Marketing Systems, Inc.

          2.2  Certificate of Merger of Advantage Marketing Systems, Inc. (A
               Delaware Corporation) with and into Advantage Marketing Systems,
               Inc. (An Oklahoma Corporation).

          3.1  Amended and Restated Certificate of Incorporation of Advantage
               Marketing Systems, Inc.

                                      -28-
<PAGE>
 
                                   SIGNATURES
                                   ----------
                                        
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                    REGISTRANT:
                                    ADVANTAGE MARKETING SYSTEMS, INC.
                                    (FORMERLY AMS, INC.)


Date: April 12, 1996                By: /S/ John W. Hail
                                              John W. Hail, Chief Executive 
                                              Officer


Date: April 12, 1996                By: /S/ Roger P. Baresel
                                              Roger P. Baresel, Chief Financial
                                              and Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.


Date: April 12, 1996                By: /S/ John W. Hail
                                              John W. Hail, Chief Executive
                                              Officer & Chairman of the Board
                                              and Director


Date: April 12, 1996                By: /S/ Curtis H. Wilson, Sr.
                                              Curtis H. Wilson, Sr., Vice-
                                              Chairman of the Board & Director


Date: April 12, 1996                By: /S/ Roger P. Baresel
                                              Roger P. Baresel, Chief Financial
                                              Officer and Director

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
- -------------------------------------------------------------------------------
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
- --------------------------------------------------------------------------------
SECTION 12 OF THE ACT.
- --------------------- 

No annual report for the fiscal year ended December 31, 1995, or any proxy
material has been sent to the Registrant's security holders.  Should the
Registrant send such report or proxy material to its security holders, the
Registrant will furnish copies of such material to the Commission when it is
sent to its security holders.

                                      -29-
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS

                       ADVANTAGE MARKETING SYSTEMS, INC.
<TABLE>
<CAPTION>

                                                                                            Page
                                                                                            ----
<S>                                                                                          <C> 
Independent Auditors' Report..............................................................   F-2

Consolidated Balance Sheets as of December 31, 1995 and 1994..............................   F-3

Consolidated Statements of Operations for Years Ended December 31, 1995 and 1994..........   F-4

Consolidated Statements of Stockholders' Deficiency for Years Ended
        December 31, 1995 and 1994........................................................   F-5

Consolidated Statements of Cash Flows for Years Ended December 31, 1995 and 1994..........   F-6

Notes to Consolidated Financial Statements for Years Ended December 31, 1995 and 1994.....   F-7
</TABLE>


                                      F-1
<PAGE>
 
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc.
  (formerly AMS, Inc.)
Oklahoma City, Oklahoma

We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. (formerly AMS, Inc.) (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' deficiency, and cash flows for each of the two years in the period
ended December 31, 1995.  These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
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, such consolidated financial statements present fairly, in all
material respects, the financial position of Advantage Marketing Systems, Inc.
(formerly AMS, Inc.) at December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

                                         DELOITTE & TOUCHE LLP

Oklahoma City, Oklahoma
March 29, 1996



                                      F-2
<PAGE>
 
ADVANTAGE MARKETING SYSTEMS, INC. (formerly AMS, Inc.)
 
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994

<TABLE> 
<CAPTION> 
- ------------------------------------------------------------------------------------------------------------------
 
ASSETS                                                                                  1995          1994
                                                                                    ------------  ------------
<S>                                                                                 <C>           <C> 
CURRENT ASSETS:
  Cash.........................................................................     $   112,087   $       -
  Receivables - net of allowances of $21,485 and $19,485, respectively.........          18,299        33,887
  Receivable from affiliate....................................................          51,963        31,680
  Inventory....................................................................          98,621        47,871
  Prepaid commissions..........................................................           2,371         4,358
                                                                                    -----------   -----------
            Total current assets...............................................         283,341       117,796

COMMISSION ADVANCES TO RELATED PARTIES - NONCURRENT............................              65        14,390
RECEIVABLES - NONCURRENT.......................................................          22,620           -
PROPERTY AND EQUIPMENT, Net....................................................         159,797        44,783
OTHER ASSETS...................................................................          67,173           -
                                                                                    -----------   -----------
TOTAL..........................................................................     $   532,996   $   176,969
                                                                                    ===========   ===========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
  Accounts payable.............................................................     $    91,949   $    79,415
  Accrued expenses.............................................................         151,654        92,067
  Accrued promotion expense....................................................          99,424         7,000
  Interest payable.............................................................             -          51,806
  Bank overdraft...............................................................             -          46,663
  Deferred revenue.............................................................             -          40,852
  Notes payable:
    Stockholders...............................................................          81,929       132,828
    Other......................................................................           8,440         5,827
  Capital lease obligation.....................................................          20,679           -
                                                                                    -----------   -----------
            Total current liabilities..........................................         454,075       456,458

LONG-TERM LIABILITIES:
  Notes payable:
    Stockholder................................................................             -           7,947
    Other......................................................................          28,500           -
  Capital lease obligation.....................................................          75,649           -
                                                                                    -----------   -----------
            Total liabilities..................................................         558,224       464,405
                                                                                    -----------   -----------

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
  Preferred stock - $.0001 par value; authorized 5,000,000 shares; none issued              -             - 
  Common stock - $.0001 par value; authorized 495,000,000 shares;
    issued and outstanding 16,985,524 and 16,965,524 shares, respectively......           1,698         1,696
  Paid-in capital..............................................................       1,858,396     1,845,898
  Accumulated deficit..........................................................      (1,885,322)   (2,135,030)
                                                                                    -----------   -----------
            Total stockholders' deficiency.....................................         (25,228)     (287,436)
                                                                                    -----------   -----------
TOTAL..........................................................................     $   532,996   $   176,969
                                                                                    ===========   ===========
</TABLE> 
                See notes to consolidated financial statements.



                                      F-3
<PAGE>
 
ADVANTAGE MARKETING SYSTEMS, INC. (formerly AMS, Inc.)
 
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
 
<TABLE>      
<CAPTION> 
  
                                                          1995         1994
                                                       -----------  -----------
REVENUES:                               
<S>                                                    <C>          <C>
  Programs.....................................        $ 4,382,935  $ 2,564,542
  Promotional material.........................            109,733       82,780
  Other........................................             25,535       30,625
                                                       -----------  -----------

            Total revenues.....................          4,518,203    2,677,947
                                                       -----------  -----------

COSTS AND EXPENSES:
  Programs.....................................          1,094,157      684,128
  Promotional material.........................             92,087       83,964
  Selling......................................          2,201,510    1,289,616
  General and administration...................            857,743      515,158
  Interest expense.............................             22,998       25,075
                                                       -----------  -----------

            Total expenses.....................          4,268,495    2,597,941
                                                       -----------  -----------

NET INCOME.....................................        $   249,708  $    80,006
                                                       ===========  ===========


Weighted average common shares outstanding ....         21,301,441   16,954,848

Net income per common share....................        $      0.01          NIL
 
</TABLE>      



                See notes to consolidated financial statements.



                                      F-4
<PAGE>
 
ADVANTAGE MARKETING SYSTEMS, INC. (formerly AMS, Inc.)
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE> 
<CAPTION> 
- ------------------------------------------------------------------------------------------------------ 
 
                                                                                          Total
                                                  Common    Paid-in     Accumulated   Stockholders'
                                        Shares    Stock     Capital       Deficit       Deficiency
                                      ----------  ------  -----------  -------------  --------------
<S>                                   <C>         <C>     <C>          <C>            <C> 
BALANCE,
  DECEMBER 31, 1993................   16,844,787  $1,684   $1,821,763   $(2,215,036)      $(391,589)

Conversion of payables
  into stock.......................       10,737       1        2,146          -              2,147

Issuance of capital stock
  for services received............      110,000      11       21,989          -             22,000

Net income for the year ended
  December 31, 1994................          -        -           -          80,006          80,006
                                      ----------  ------  -----------  ------------       ---------

BALANCE,
  DECEMBER 31, 1994................   16,965,524   1,696    1,845,898    (2,135,030)       (287,436)

Warrants exercised.................       10,000       1        7,499           -             7,500

Issuance of capital stock for cash.       10,000       1        4,999           -             5,000

Net income for the year ended
  December 31, 1995................          -        -           -         249,708         249,708
                                      ----------  ------  -----------  ------------       ---------

BALANCE,
  DECEMBER 31, 1995................   16,985,524  $1,698   $1,858,396   $(1,885,322)      $ (25,228)
                                      ==========  ======  ===========  ============       =========
</TABLE>



                See notes to consolidated financial statements.


                                      F-5
<PAGE>
 
ADVANTAGE MARKETING SYSTEMS, INC. (formerly AMS, Inc.)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE> 
<CAPTION> 
- ----------------------------------------------------------------------------------------------------------------

                                                                                           1995       1994
                                                                                        ----------  ---------
<S>                                                                                     <C>         <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net income....................................................................        $ 249,708   $ 80,006
  Adjustments to reconcile net income to net cash used by operating activities:
      Depreciation and amortization.............................................           43,310     33,403
      Provision for bad debts...................................................              -          884
      Stock issued for services.................................................              -       22,000
      Stock issued for refunds..................................................              -        2,147
      Changes in assets and liabilities which provided (used) cash:
        Receivables and advances................................................            7,293      7,545
        Inventory...............................................................          (50,750)   (28,854)
        Prepaid expenses........................................................            1,859        -
        Prepaid commissions.....................................................              128     24,274
        Accounts payable and accrued expenses...................................          126,545     20,871
        Notes payable to associates.............................................              -      (10,728)
        Interest payable........................................................              -       20,860
        Deferred revenue........................................................          (40,852)   (63,156)
                                                                                        ---------   --------
            Net cash provided by operating activities...........................          337,241    109,252
                                                                                        ---------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment...........................................          (50,105)    (6,689)
  Advances to affiliate.........................................................          (87,684)   (66,026)
  Repayment of advances to affiliate............................................           67,401      9,069
  Purchase of other assets......................................................          (29,173)       -
                                                                                        ---------   --------
            Net cash used for investing activities..............................          (99,561)   (63,646)
                                                                                        ---------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock........................................           12,500        -
  Loans from stockholders.......................................................           31,963     61,374
  Other loans...................................................................           39,098      3,685
  Bank overdraft................................................................          (46,663)    13,074
  Payment on notes payable - stockholders.......................................         (142,615)   (79,138)
  Payment on notes payable - other..............................................           (7,985)    (4,666)
  Principal payment on capital leases...........................................          (11,891)   (39,935)
                                                                                        ---------   --------
            Net cash used in by financing activities............................         (125,593)   (45,606)
                                                                                        ---------   --------

NET INCREASE IN CASH............................................................          112,087        -

BEGINNING CASH BALANCE..........................................................              -          -
                                                                                        ---------   --------

ENDING CASH BALANCE.............................................................        $ 112,087   $    -
                                                                                        =========   ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION:
  Cash paid during the year for interest........................................        $  27,335   $  4,215

  Noncash financing and investing activities:
    Purchase of property and equipment by entering into capital leases..........          108,219        -

    Reclassify interest payable to notes payable - stockholders.................           51,806        -

    Issuance of common stock for notes and accounts payable.....................              -       89,892
</TABLE> 

                See notes to consolidated financial statements.



                                      F-6
<PAGE>
 
ADVANTAGE MARKETING SYSTEMS, INC. (formerly AMS, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Nature of Business - The Company is engaged in marketing consumer products
   ------------------                                                        
   and services.  The Company has negotiated marketing agreements with various
   providers to market nutritional supplements and service contracts through a
   multi-level sales organization of independent sales associates developed by
   the Company. The Company also sells supplies and materials to its sales
   associates.

   Use of Estimates - The preparation of 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 and the reported amounts of revenues and expenses
   during the reporting period.  Actual results could differ from those
   estimates.

   Revenue Recognition - Program revenue is recognized when products are shipped
   -------------------                                                          
   or services are rendered.  Sales of training and promotional material to the
   sales force are recorded as revenue when the goods are shipped.

   Inventory - Inventory consists of consumer product inventory, and training
   ---------                                                                 
   and promotional material such as video tapes, cassette tapes and paper
   supplies held for sale to customers and independent sales associates.
   Inventory is stated at the lower of cost or market.  Cost is determined on a
   first-in, first-out method.

   Property and Equipment - Property and equipment are recorded at cost or, in
   ----------------------                                                     
   the case of leased assets under capital leases, at the fair value of the
   property and equipment.  Property and equipment are depreciated using the
   straight-line method over the estimated useful lives of the assets of three
   to five years.  Leased assets under capital leases and leasehold improvements
   are amortized over the term of the lease.
    
   In March 1995, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for
                                                        --------------
   Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
   ---------------------------------------------------------------------------  
   Effective for fiscal years beginning after December 31, 1995, SFAS 121
   establishes accounting standards for impairment of long-lived assets, certain
   identifiable intangibles and goodwill related to such assets.  The Company
   will adopt SFAS 121 in 1996.  Management does not believe this pronouncement
   will have a material effect on the Company's consolidated financial
   statements.      

   Earnings per Share - Earnings per common share were computed by dividing net
   ------------------                                                          
   income or loss by the weighted average number of shares outstanding.
   Outstanding stock options have been included in primary earnings per share,
   as the criteria for classification as a common stock equivalent has been met
   in 1995.  The effect of these common stock equivalents on the weighted
   average number of shares outstanding was an approximate increase in shares of
   4,300,000. Warrants have not been considered as their effect is antidilutive.
   No difference exists between primary and fully dilutive earnings per share.

   Income Taxes - The Company recognizes an asset and liability approach for
   ------------                                                             
   accounting for income taxes.  Deferred income taxes are recognized for the
   tax consequences of temporary differences and carryforwards by applying
   enacted tax rates applicable to future years to differences between the
   financial statement amounts and the tax bases of existing assets and
   liabilities.  A valuation allowance is to be established if it is more likely
   than not that some portion of the deferred tax asset will not be realized.




                                      F-7
<PAGE>
 
2.  PROPERTY AND EQUIPMENT

    Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                       1995              1994
                                                                    ----------        ---------- 
      <S>                                                           <C>               <C>
      Office furniture, fixtures, and equipment...............      $  378,287        $  265,504
      Automobile..............................................          54,056             9,184
      Leasehold improvements..................................          22,220            21,552
                                                                    ----------        ----------
                                                                       454,563           296,240
      Accumulated depreciation and amortization...............        (294,766)         (251,457)
                                                                    ----------        ----------
      Total property, net.....................................      $  159,797        $   44,783
                                                                    ==========        ==========
</TABLE> 
 
3. NOTES PAYABLE TO STOCKHOLDERS

   The Company has a note payable to its major stockholder and chief executive
   officer in the amount of $81,929 and $125,775 as of December 31, 1995 and
   1994, respectively.  This note is due on demand and bears interest at 12%.
   During 1995, the Company combined interest payable on the note of
   approximately $52,000 with the principal and began making weekly payments of
   principal and interest.  Also during 1995, the Company received advances of
   $31,963 and made payments of $127,615 on this payable.

   During 1994, the Company had a note payable to a stockholder in the amount of
   $15,000, bearing interest at 12%.  Terms of the note required eight quarterly
   payments of principal and interest beginning in the first quarter of 1995.
   In 1995 the note was paid in full.

4. LEASE AGREEMENTS

   During 1995, the Company entered into various capital leases for office
   related equipment.  The lease terms range from 36 to 60 months.
   Additionally, annual lease rental payments for each lease range from $1,300
   to $14,000 per year. The schedule of minimum lease payments below reflects
   all payments under the leases. The property and equipment accounts include
   $96,328 for leases that have been capitalized at December 31, 1995. Related
   accumulated depreciation amounted to $9,941 at December 31, 1995.

   The Company leases office space and transportation equipment under a
   noncancellable operating lease.  Rental commitments are listed below.

   Future minimum lease payments under capital leases and noncancellable
   operating leases with initial or remaining terms of one year or more at
   December 31, 1995 are as follows:

<TABLE>
<CAPTION>
 
                                                          Capital   Operating
    Year ending:                                          Leases     Leases      Total
                                                         ---------  ---------  ---------
    <S>                                                  <C>        <C>        <C> 
    1996........................................         $ 35,151    $ 52,990   $ 88,141
    1997........................................           35,760      54,523     90,283
    1998........................................           35,760      22,984     58,744
    1999........................................           20,014       -         20,014
    2000........................................            2,682       -          2,682
                                                         --------   ---------   --------

    Total minimum lease payments................          129,367    $130,497   $259,864
                                                                     ========   ========
    Less amount representing interest...........          (33,039)
                                                         --------
    Present value of net minimum lease payments.           96,328
    Less current portion........................          (20,679)
                                                         --------
    Long-term capital lease obligations.........         $ 75,649
                                                         ========
</TABLE>



                                      F-8
<PAGE>
 
    Rental expense under operating leases for the years ended December 31, 1995
    and 1994 was $55,476 and, $57,458, respectively.

5.  STOCKHOLDERS' EQUITY

    Common Stock - During 1994, $2,147 of accounts payable were settled by the
    ------------                                                              
    Company through the issuance of 10,737 shares of its common stock with an
    estimated fair value as of the date of settlement which equaled the
    liability. No gain or loss was recorded as a result of this transaction.

    During 1994, the Company issued 60,000 shares of its common stock to a
    consultant for services rendered and 50,000 shares of stock for services
    performed by individuals primarily involved in marketing the Company's
    programs. A charge of $22,000, the estimated fair value of the shares at the
    date of issuance, was recorded as selling expense.

    The Company plans to effect a public offering of common stock in 1996.  See
    discussion of this offering at Proposed Redemption and Offerings below.
                                   ---------------------------------       

    Common Stock Options - The Company has issued options in 1995 and 1994
    --------------------                                                  
    primarily for services rendered.  The exercise price of these options was
    equal to or in excess of the fair market value of the common stock at the
    date of grant.

    During 1995, the Company issued various options at exercise prices ranging
    from $0.25 per share to $0.81 per share.  Options were granted primarily for
    services rendered and to ensure the future availability of those services to
    the Company.  Various options are subject to certain requirements including
    vesting limits, employment requirements, and future events. The majority of
    options granted to officers of the Company contain no conditional terms
    other than the period of exercise.
    
    During 1994, the Company issued options on 272,864 shares of the Company's
    common stock at exercise prices ranging from $.27 to $.35 per share. These
    options are exercisable at any time through December 31, 1999 so long as the
    individual is continuing to provide services to the Company at the date of
    exercise. The options vest at 20% per year. The vested options are not
    subject to a continuing employment requirement.      

    The following table summarizes the Company's stock option activity for the
    years ended December 31, 1995 and 1994:

<TABLE>     
<CAPTION>
                                                        Exercise               Exercise
                                              1995       Price       1994       Price
                                           ----------  ----------  ---------  ----------
    <S>                                    <C>         <C>         <C>        <C> 
    Options outstanding
      at beginning of year...........       2,802,865  $.20 - .27  2,530,000  $      .20

    Options granted
      during the year:                      5,653,000         .25          -           -
                                              355,548         .27    230,000         .27
                                                                      42,864         .35
                                            2,420,000         .45          -           -
                                            1,000,000         .62          -           -
                                               90,000         .81          -           -
                                           ----------              ---------
                                            9,561,412                272,864
                                           ----------              ---------
    Options outstanding
      at end of year.................      12,321,412  $.20 - .81  2,802,864  $.20 - .35
                                           ==========              =========
</TABLE>      
    
    The Company has filed a registration statement with the Securities and
    Exchange Commission to register common stock to be issued in association
    with a planned redemption of outstanding warrants and distribution of common
    stock rights. See discussion at Proposed Redemption and Offerings below.
                                    ---------------------------------           
        



                                      F-9
<PAGE>
 
   Common Stock Warrants - The following table summarizes the Company's common
   ---------------------                                                      
   stock warrants activity for the years ended December 31, 1995 and 1994.  The
   Company plans to redeem all Class A and Class B Warrants in 1996.  See
   discussion of the planned redemption at Proposed Redemption and Offerings
                                           ---------------------------------
   below.

<TABLE>
<CAPTION>
 
                                                     Warrants
                                                      Issued/              Exercise           Exercise
December 31, 1995:                                  Outstanding              Price             Period  
                                                -------------------     --------------    ------------------
<S>                                                  <C>                  <C>              <C>
 Class A Warrants at beginning of year               4,206,876                 $ .75       4/26/89 - 7/26/96
 
 Class A Warrants exercised during the year            (10,000)                $ .75
                                                   -----------
 Class A Warrants at end of year                     4,196,876
                                                   ===========
 Class B Warrants                                    4,206,876                 $1.00      4/26/89 - 7/26/97
                                                   =========== 

      During 1995, Class A and B warrants exercise periods extended by one year to 1996 
      and 1997, respectively, by Board of Director approval.
 
December 31, 1994:
 
 Class A Warrants                                    4,206,876                $ .75      4/26/89 - 7/26/95 
                                                   =========== 
 Class B Warrants                                    4,206,876                $1.00      4/26/89 - 7/26/96 
                                                   ===========                          
 
      During 1994, Class A and B warrants exercise periods extended by one year 
      to 1995 and 1996, respectively, by Board of Director approval.
</TABLE>

   Each warrant entitles the holder to purchase one share of common stock.  The
   Company may redeem the warrants at any time at a price of $.0001 per warrant.
   
   Proposed Redemption and Offerings - The Company has filed a registration
   ---------------------------------                                       
   statement with the Securities and Exchange Commission to redeem the
   outstanding Class A and Class B Warrants at the redemption price noted above.
   In connection with the redemption, the Company will offer to reduce the
   exercise price of Class B Warrants and will offer upon exercise of each Class
   A and Class B Warrant one share of common stock plus one new 1996-A Warrant.
   Each 1996-A Warrant will be exercisable at any time 90 days after the date of
   the associated prospectus and on or before June 30, 1998 to purchase one
   share of common stock at $1.50 per share.  The proposed redemption will be
   limited to a specific period after the declaration of effectiveness of the
   related registration statement filed by the Company with the Securities and
   Exchange Commission.      
    
   In addition, the registration statement includes the Company's intention to
   distribute nontransferable rights to purchase a unit consisting of one share
   of common stock and one new 1996-A Warrant to existing shareholders of
   record.  The rights will be offered at no cost and will allow shareholders of
   record to purchase one unit for every previous common share held.  In
   connection with these offerings, the Company has incurred certain direct
   costs consisting primarily of legal, accounting and filing fees.  These costs
   totaled approximately $53,000 at December 31, 1995, and are included in other
   assets in the Company's financial statements.  The rights exercise period
   will be limited to a specific time period after the declaration of
   effectiveness of the related registration statement filed by the Company with
   the Securities and Exchange Commission.      

   Also, the Company has signed a letter of intent with an underwriter to effect
   a public offering of additional common stock in 1996.  The Company plans to
   coordinate the offering with the notification to redeem outstanding warrants
   and distribute rights mentioned above.  The agreement between the Company and
   the underwriter includes a provision requiring the Company to grant various
   options and sell various warrants to the underwriters.

6. STOCK OPTION PLAN

   During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
   Under this Plan, options 



                                     F-10
<PAGE>
 
   available for granting consist of (i) nonqualified stock options, (ii)
   nonqualified stock options with stock appreciation rights attached, (iii)
   incentive stock options, and (iv) incentive stock options with stock
   appreciation rights attached. Shares of stock covered by this Plan shall
   consist of 9,000,000 shares of the common stock, $.0001 par value, of the
   Company. The Plan limits participation to employees, independent contractors,
   and consultants. Nonemployee director are excluded from Plan participation.
   The option price for shares of stock subject to this Plan are set by the
   Stock Option Committee of the Board of Directors at a price not less than 85%
   of the market value of the stock on the date of grant. No stock options shall
   be exercisable within six months from the date of grant, unless under a Plan
   exception, nor more than ten years after the date of grant. The Plan provides
   for the grant of stock appreciation rights, which allow the holder to receive
   in cash, stock or combination thereof, the difference between the exercise
   price and the fair market value of the stock at date of exercise. The value
   of stock appreciation rights is charged to compensation expense. The stock
   appreciation right is not separable from the underlying stock option or
   incentive stock options originally granted. Options can only be exercised in
   tandem, and can only be exercised when a positive spread exists between the
   fair market value and exercise price. No options under this Plan have been
   granted or exercised as of December 31, 1995.

   In October 1995, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-
                                                        --------------------
   Based Compensation, effective for fiscal years beginning after December 15,
   ------------------                                                         
   1995.  SFAS No. 123 requires expanded disclosures of stock-based compensation
   arrangements with employees and encourages, but does not require,
   compensation costs to be measured based on the fair value of the equity
   instrument awarded.  Companies are permitted, however, to continue to apply
   APB Opinion No. 25, which recognizes compensation cost based on the intrinsic
   value of the equity instrument awarded.  The Company will continue to apply
   APB Opinion No. 25 to its stock-based compensation awards to employees and
   will disclose the required pro forma effect on net income and earnings per
   share.

7. DEFERRED REVENUE

   During 1994, the Company received advance annual payments for certain program
   memberships.  Receipts representing payment for future months' programs
   services are deferred and recognized over the twelve month period covered by
   the membership.  Prepaid commissions represent commissions paid on these
   memberships and are amortized over the twelve-month period covered by the
   memberships.  There were no deferred revenues received or recorded during
   1995.

8. RELATED PARTIES

   During 1995 and 1994, the Company received approximately $16,415 and $71,713
   from Pre-Paid Legal Services, Inc., a stockholder, for commissions on sales
   of memberships for the services provided by Pre-Paid Legal Services, Inc.  At
   December 31, 1995 and 1994, $-0- and $5,603, respectively, has been recorded
   as deferred revenue in the accompanying balance sheet.

   The Company makes advances to an affiliate, the John Hail Insurance Agency,
   which is owned by the chief executive officer and major stockholder of the
   Company.  These advances have no specific repayment terms.  Total advances to
   the affiliate were $87,684 and $66,026 in 1995 and 1994 and repayments
   received were $67,401 and $9,069 in 1995 and 1994, respectively.  The amount
   receivable from the affiliate at December 31, 1995 and 1994 was $51,963 and
   $31,680, respectively.  Revenue from the affiliate in 1995 and 1994 included
   $12,000 earned for providing administrative services for each of the two
   years.

   Certain stockholders receive commissions on revenue of the Company.  Such
   commissions are recognized as compensation to the stockholders and are
   included in selling expense.

9. INCOME TAXES

   Deferred income taxes reflect the net tax effects of (a) temporary
   differences between the carrying amounts of assets and liabilities for
   financial reporting purposes and the amounts used for income tax purposes
   primarily for depreciation and prepaid commissions, and (b) operating loss
   and tax credit carryforwards.



                                     F-11
<PAGE>
 
   A reconciliation of the statutory Federal income tax rate to the effective
   income tax rate for the years ended December 31, 1995 and 1994 is as follows:

<TABLE>
<CAPTION>
 
                                                     1995              1994
                                                    ------            ------   
     <S>                                            <C>               <C>      
     Statutory Federal income tax rate.........      34.0%             34.0%   
     Benefit of graduated tax rates............      (2.2)            (15.3)   
     Benefit of operating loss carryforwards...     (31.8)            (18.7)   
                                                    ------            ------   
                                                                               
     Effective income tax rate.................       0.0%              0.0%    
                                                    =====              ====   
</TABLE> 
 
 Deferred tax liabilities and assets at December 31, 1995 and 1994 are 
 comprised of the following:
 
<TABLE> 
<CAPTION> 
                                                                      December 31,
                                                                 --------------------------
                                                                   1995              1994
                                                                 ---------        ---------
     <S>                                                          <C>              <C>
     Deferred tax liabilities:
       Commissions advanced.............................         $       -        $  (4,500)
       Depreciation and amortization....................                 -                -
                                                                 ---------        ---------
              Total deferred tax liabilities............                 -           (4,500)
                                                                 ---------        ---------

     Deferred tax assets:
       Depreciation and amortization....................             3,900            1,000
       Net operating loss carryforward..................           566,400          690,000
                                                                 ---------        ---------
              Total deferred tax assets.................           570,300          691,000
       Valuation allowance for deferred tax assets......          (570,300)        (686,500)
                                                                 ---------        ---------
              Total net deferred tax assets.............                 -            4,500
                                                                 ---------        ---------
       Net deferred taxes...............................         $       -        $       -
                                                                 =========        =========
</TABLE>

    
     The Company has net operating loss carryforwards for income tax purposes at
     December 31, 1995 totaling approximately $1,780,000, which will begin to
     expire in 2003. Management has determined that it is not more likely than
     not that the Company will be able to realize the tax benefits from the net
     operating loss carryforwards.      

10.  COMMISSION ADVANCES TO RELATED PARTIES - NONCURRENT

     Noncurrent commission advances represent advances to certain individuals
     and are repayable from future commissions earned by the individuals. These
     advances do not bear interest and are not expected to be repaid in 1995. In
     1994, the amounts advanced include approximately $9,600 and $4,700 advanced
     to a director and an officer, respectively.

                                  * * * * * *



                                     F-12
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 
EXHIBIT
  NO.         DESCRIPTION                            SEQUENTIALLY NUMBERED PAGE
- -------       -----------------------                --------------------------
<S>           <C>                                    <C> 
 2.1             Agreement and Plan of                 Incorporated herein by
                 Reorganization dated                  reference to Exhibit No. 2.1
                 May 1, 1989, between                  to Registrant's Form 8-K
                 Pacific Coast                         dated May 19, 1989.
                 International, Inc.,
                 Advantage Marketing
                 Systems, Inc. and the
                 stockholders of
                 Advantage Marketing
                 Systems, Inc.
 
 2.2             Agreement and Plan of                 Incorporated herein by
                 Merger between AMS,                   reference to Exhibit No. 2.1
                 Inc. and Advantage                    to Registrant's Form 8-K
                 Marketing Systems,                    dated December 11, 1995. 
                 Inc.                                                 
                             
 
 2.3             Certificate of Merger                 Incorporated herein by
                 of Advantage Marketing                reference to Exhibit No. 2.2
                 Systems, Inc. (A                      to Registrant's Form 8-K
                 Delaware Corporation)                 dated December 11, 1995
                 with and into Advantage
                 Marketing Systems, Inc.
                 (An Oklahoma Corporation)
 
 3.1             Amended and Restated                  Incorporated herein by
                 Certificate of Incorporation          reference to Exhibit 3.1 to 
                 of the Registrant.                    Registrant's Form SB-2        
                                                       Registration Statement (No.
                                                       33-80629).
 
 3.2             Bylaws of the Registrant.             Incorporated herein by
                                                       reference to Exhibit 3.2 to
                                                       Registrant's Form SB-2
                                                       Registration Statement (No.
                                                       33-80629).
 
 4.1             Warrant Agreement and Amendments      Incorporated herein by
                 Between the Registrant and the        reference to Exhibits 4.6 through
                 Warrant Agent.                        4.12 to Registrant's Form SB-2
                                                       Registration Statement (No.
                                                       33-80629) as filed with the 
                                                       Commission on December 18, 1995 
                                                       and Amendment No. 1 thereto as 
                                                       filed with the Commission on July 1, 
                                                       1996.
</TABLE> 

                                       1
<PAGE>
 
<TABLE>
<S>                          <C>                       <C>
 4.2             Form of Class A Common Stock          Incorporated herein by reference
                 Purchase Warrant Certificate.         Exhibit 4.2 of Amendment No. 1
                                                       to Form SB-2 Registration Statement
                                                       (No.33-80629) as filed with the 
                                                       Commission on July 1, 1996.
 
 4.3             Form of Class B Common Stock          Incorporated herein by reference
                 Purchase Warrant Certificate.         to Exhibit 4.3 of Registrant's
                                                       Amendment No. 1 to Form SB-2
                                                       Registration Statement (No.
                                                       33-80629) as filed with the 
                                                       Commission on July 1, 1996.
 
 10.1            Lease of Registrant's                 Incorporated herein by
                 corporate offices.                    reference to Exhibit 10.1 to
                                                       Registrant's Form 10-KSB for
                                                       the year ending December 31,
                                                       1993.
 
 10.2            Lease of computer                     Incorporated herein by
                 equipment.                            reference to Exhibit 10.2 to
                                                       Registrant's Form 10-K for
                                                       the year ending December 31,
                                                       1989.

 10.3            Legal services agreement              Incorporated herein by
                 with Pre-Paid Legal                   reference to Exhibit 10.3 to
                 Services, Inc.                        Registrant's Form 10-K for
                                                       the year ending December 31,
                                                       1989.
 
 10.4            Group Contract with                   Incorporated herein by
                 Consumer Benefit                      reference to Exhibit 10.4 to
                 Services, Inc.                        Registrant's Form 10-K for
                                                       the year ending December 31,
                                                       1989.
 
 10.5            Distributor Agreement                 Incorporated herein by
                 with ToppMed, Inc.                    reference to Exhibit 10.5 to
                                                       Registrant's Form 10-K for
                                                       the year ending December 31,
                                                       1989.

 10.6            Letter of Intent with                 Incorporated herein by
                 CUC International.                    reference to Exhibit 10.6 to
                                                       Registrant's Form 10-K for
                                                       the year ending December 31,
                                                       1989.
</TABLE> 

                                       2
<PAGE>
 
<TABLE>
<S>                          <C>                        <C>
 10.7            Letter Agreement with                 Incorporated herein by
                 Coupon Exchange Club.                 reference to Exhibit 10.7 to
                                                       Registrant's Form 10-K for the year 
                                                       ending December 31,
                                                       1989.
 
 10.8            Agreement Number 1 with               Incorporated herein by
                 TMS, Inc.                             reference to Exhibit 10.8 to
                                                       Registrant's Form 10-K for
                                                       the year ending December 31,
                                                       1989.
 
 10.9            Agreement Number 2 with               Incorporated herein by
                 TMS, Inc.                             reference to Exhibit 10.9 to
                                                       Registrant's Form 10-K for
                                                       the year ending December 31,
                                                       1989.
 
 10.10           Agreement with                        Incorporated herein by
                 Innovative Benefits,                  reference to Exhibit 10.10 to 
                                                       Registrant's Form 10-K for the year 
                                                       ending December 31, 1990.
 
 10.11           Agreement with Mr. Jim                Incorporated herein by
                 Gabler.                               reference to Exhibit 10.11
                                                       to Registrant's Form 10-K
                                                       for the year ending December
                                                       31, 1990.
 
 10.12           Agreement with Health                 Incorporated herein by
                 Management Systems, Inc.              reference to Exhibit 10.12
                                                       to Registrant's Form 10-K
                                                       for the year ending December
                                                       31, 1990.
 
 10.13           Agreement with Consumer's             Incorporated herein by
                 Choice Association                    reference to Exhibit 10.13
                                                       to Registrant's Form 10-K
                                                       for the year ending December
                                                       31, 1991.
 
 10.14           Agreement with Innovative             Incorporated herein by
                 Benefits, Inc.                        reference to Exhibit 10.14
                                                       to Registrant's Form 10-K
                                                       for the year ending December
                                                       31, 1991.
 
 10.15           Secondary Public offering             062
                 Letter of Intent
 
 22              List of Subsidiaries of               Incorporated herein by
                 the Registrant.                       reference to Exhibit 22 to
                                                       Registrant's Form 10-K for
                                                       the year ending December 31, 1989.
</TABLE> 

                                       3


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