<PAGE>
As filed with the Securities and Exchange
Commission on November 20, 1996 Registration No. 33-80629
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of small business issuer in its charter)
OKLAHOMA 7319 73-1323256
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
2601 NORTHWEST EXPRESSWAY, SUITE 1210W JOHN W. HAIL, CHIEF EXECUTIVE OFFICER
OKLAHOMA CITY, OKLAHOMA 73112-7293 ADVANTAGE MARKETING SYSTEMS, INC.
(405) 842-0131 2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
(405) 842-0131
(Address and telephone number, including (Name, address and telephone number,
area code, of registrant's principal of agent for service)
executive offices)
-----------------------
Copies To:
MICHAEL E. DUNN, ESQ.
DUNN SWAN & CUNNINGHAM
2800 OKLAHOMA TOWER
210 PARK AVENUE
OKLAHOMA CITY, OKLAHOMA 73102-5604
-----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
-----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,050,470 Units(2), each consisting of:
- --------------------------------------------------------------------------------------------------------------------
(a) One share of Common Stock........ 1,050,470 $6.00 $ 6,302,820 $ 2,173.38
- --------------------------------------------------------------------------------------------------------------------
(b) One 1996-A Warrant............... 1,050,470 -- -- --
- --------------------------------------------------------------------------------------------------------------------
2,148,191 Units(3), each consisting of:
- --------------------------------------------------------------------------------------------------------------------
(a) One share of Common Stock........ 2,148,191 6.80 14,607,699 5,037.13
- --------------------------------------------------------------------------------------------------------------------
(b) One 1996-A Warrant............... 2,148,191 -- -- --
- --------------------------------------------------------------------------------------------------------------------
Shares of Common Stock Underlying
1996-A Warrants(4).................. 3,198,661 12.00 38,383,932 13,235.83
- --------------------------------------------------------------------------------------------------------------------
Total $59,294,451 $20,446.34
====================================================================================================================
</TABLE>
(Footnotes on following page)
-----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THIS REGISTRATION STATEMENT CONTAINS A PROSPECTUS WHICH CONSTITUTES A
COMBINED PROSPECTUS RELATED TO REGISTRANT'S REGISTRATION STATEMENT NO. 33-25701
IN ACCORDANCE WITH RULE 429.
<PAGE>
- ---------------
(1) The offering price is based upon (i) the exercise price of outstanding
Class A Common Stock Purchase Warrants or Class B Common Stock Purchase
Warrants to purchase the shares of Common Stock, (ii) the subscription
price to purchase shares of Common Stock upon exercise of rights
distributed to Registrant's shareholders pursuant to rights offering, or
(iii) the exercise price of the 1996-A Warrants to purchase shares of
Common Stock.
(2) Issuable upon exercise of Class A Common Stock Purchase Warrants and
Class B Common Stock Purchase Warrants pursuant to Registrant's warrant
modification offer.
(3) Issuable upon exercise of rights distributed to shareholders pursuant to
Registrant's rights offering.
(4) Pursuant to Rule 416, includes such indeterminate number of additional
securities as may be required for issuance on exercise of Registrant's
1996-A Warrants as a result of adjustment in the number of securities
issuable on such exercise by reason of antidilution provisions of the 1996-
A Warrants.
-----------------------
ADVANTAGE MARKETING SYSTEMS, INC.
CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2
Included within this Registration Statement are two Prospectuses. One
Prospectus covers the offering of units comprised of one share of common stock
and one 1996-A Warrant ("Units") pursuant to a warrant modification offer
providing for the reduction of the exercise price of Registrant's outstanding
Class B Common Stock Purchase Warrants and the issuance of Units upon exercise
of the Registrant's outstanding Class A Common Stock Purchase Warrants and Class
B Common Stock Purchase Warrants (referred to hereinbelow as the "Warrant
Modification Offer Prospectus"). The second Prospectus covers the offering of
Units upon exercise of rights ("Rights") distributed to Registrant's
shareholders (referred to hereinbelow as the "Rights Offering Prospectus").
1
<PAGE>
WARRANT MODIFICATION OFFER PROSPECTUS--CROSS REFERENCE SHEET:
Location in Warrant Modification Offer
--------------------------------------
Item in Part I of Form SB-2 Prospectus
--------------------------- ----------
1. Front of Registration
Statement and Outside Front
Cover Page of Prospectus... Outside Front Cover Page.
2. Inside Front and Outside
Back Cover Pages of
Prospectus Pages........... Inside Front and Outside Back Cover
3. Summary Information and
Risk Factors............... "Prospectus Summary," "The Company," "Risk
Factors," "Selected Financial Information."
4. Use of Proceeds............ "Use of Proceeds."
5. Determination of Offering
Price...................... Front Cover Page, "Prospectus Summary," "Terms
of Warrant Modification Offer," "Description
of Securities--Public Warrants."
6. Dilution................... *
7. Selling Security Holders... *
8. Plan of Distribution....... Front Cover Page, "Terms of the Warrant
Modification Offer."
9. Legal Proceedings.......... "Business--Litigation."
10. Directors, Executive
Officers, Promoters
and Control Persons........ "Management."
11. Security Ownership of
Certain Beneficial Owners
and Management............. "Security Ownership of Certain Beneficial
Owners and Management."
12. Description of Securities.. Outside Front Cover Page, "Capitalization,"
"Terms of the Warrant Modification Offer,"
"Description of Securities."
13. Interest of Named Experts
and Counsel................ "Legal Matters," "Experts."
14. Disclosure of Commission
Position on
Indemnification for
Securities Act Liabilities. "Management--Officer and Director Liability."
15. Organization Within Last
Five Years................. *
16. Description of Business.... "Prospectus Summary," "The Company,"
"Business."
17. Management's Discussion
and Analysis or Plan of
Operations................. "Management's Discussion and Analysis of
Financial Condition and Results of
Operations," "Business."
18. Description of Property.... "Business--Properties."
19. Certain Relationships and
Related Transactions....... "Certain Transactions."
20. Market for Common Equity
and Related Stockholder
Matters.................... "Market Price of Common Stock and Public
Warrants and Dividends," "Risk Factors--
Absence of Prior Public Market for Units and
1996-A Warrants; Possible Volatility of Stock
Price," "Description of Securities."
21. Executive Compensation..... "Management--Compensation of Executive
Officers."
22. Financial Statements....... "Unaudited Pro Forma Consolidated Financial
Information of the Company" and Financial
Statements.
23. Changes in Disagreements
with Accountants on
Accounting and Financial
Disclosure................. *
- ---------------
* Not Applicable
2
<PAGE>
RIGHTS OFFERING PROSPECTUS--CROSS REFERENCE SHEET:
Item in Part I of Form SB-2 Location in Rights Offering Prospectus
--------------------------- ----------------------------------------------
1. Front of Registration
Statement and Outside Front
Cover Page of Prospectus... Outside Front Cover Page.
2. Inside Front and Outside
Back Cover Pages of
Prospectus................. Inside Front and Outside Back Cover Pages.
3. Summary Information and
Risk Factors............... "Prospectus Summary," "The Company," "Risk
Factors," "Selected Financial Information."
4. Use of Proceeds............ "Use of Proceeds."
5. Determination of Offering
Price...................... Front Cover Page, "Prospectus Summary,"
"Rights Offering," "Description of Securities
--Common Stock."
6. Dilution................... *
7. Selling Security Holders... *
8. Plan of Distribution....... Front Cover Page, "Rights Offering."
9. Legal Proceedings.......... "Business--Litigation."
10. Directors, Executive
Officers, Promoters
and Control Persons........ "Management."
11. Security Ownership of
Certain Beneficial Owners
and Management............. "Security Ownership of Certain Beneficial
Owners and Management."
12. Description of Securities.. Outside Front Cover Page, "Capitalization,"
"Rights Offering," "Description of
Securities--Common Stock. "
13. Interest of Named Experts
and Counsel................ "Legal Matters," "Experts."
14. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................ "Management--Officer and Director Liability."
15. Organization Within Last
Five Years................. *
16. Description of Business.... "Prospectus Summary," "The Company,"
"Business."
17. Management's Discussion
and Analysis or Plan of
Operations................. "Management's Discussion and Analysis of
Financial Condition and Results of
Operations," "Business."
18. Description of Property.... "Business--Properties."
19. Certain Relationships and
Related Transactions....... "Certain Transactions."
20. Market for Common Equity
and Related Stockholder
Matters.................... "Market Price of Common Stock and Dividends,"
"Risk Factors--Absence of Prior Public Market
for Units and 1996-A Warrants; Possible
Volatility of Stock Price," "Description of
Securities."
21. Executive Compensation..... Management--Compensation of Executive
Officers.
22. Financial Statements....... "Unaudited Pro Forma Consolidated Financial
Information of the Company," Financial
Statements.
23. Changes in Disagreements
with Accountants on
Accounting and Financial
Disclosure................. *
- ---------------
* Not Applicable
3
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 8, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS
1,050,470 UNITS
(EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE 1996-A WARRANTS)
ISSUABLE UPON EXERCISE OF CLASS A AND CLASS B COMMON STOCK PURCHASE WARRANTS
NOTICE OF REDEMPTION OF
CLASS A AND CLASS B COMMON STOCK PURCHASE WARRANTS
ADVANTAGE MARKETING SYSTEMS, INC.
Advantage Marketing Systems, Inc., an Oklahoma corporation (the "Company"),
hereby notifies the holders (the" Warrant Holders") as of , 1996
(the "Record Date") of the Company's election to redeem (the "Warrant
Redemption") the outstanding Class A Common Stock Purchase Warrants (the "Class
A Warrants") and the Class B Common Stock Purchase Warrants (the "Class B
Warrants") at $.0008 per warrant (the "Redemption Price") at 5:00 p.m.,
Central Standard Time, on , 1996, unless extended (the
"Redemption Date"). Each of the Class A Warrants and Class B Warrant is
exercisable at $6.00 or $8.00, respectively (the "Warrant Exercise
Prices") to purchase one share of the Company's common stock, par value $.0001
per share (the "Common Stock") at any time on or before the Redemption Date.
The Company's right to redeem the Class A Warrants and the Class B Warrants (the
"Public Warrants") is exercisable without restriction and is not subject to any
conditions other than the required notice which is made pursuant hereto. The
Redemption Price will be paid to the holder of an unexercised Class A Warrant or
Class B Warrant within not less than 15 days following expiration of the
Redemption Date.
In connection with the Warrant Redemption, the Company offers in accordance
with the terms hereof (the "Warrant Modification Offer") to reduce the exercise
price (the "Warrant Exercise Price") of the Class B Warrants to $6.00
and, upon exercise, each Class A Warrant and Class B Warrant will entitle the
Warrant Holder to receive one unit consisting of one share of Common Stock and
one 1996-A Warrant (the "Unit") of the Company, from the date hereof until
expiration of the Redemption Date (the "Special Exercise Period"). See "Terms
of the Warrant Modification Offer" and "Description of Securities-Public
Warrants."
(Continued on inside cover)
SEE "RISK FACTORS," BEGINNING AT PAGE 14, FOR A DISCUSSION OF CERTAIN
MATERIAL RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE UNITS OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS COMPANY (1)
- --------------------------------------------------------------------------------
Per Unit............. $6.00 - $6.00
- --------------------------------------------------------------------------------
Total................ $6,302,820 - $6,302,820
================================================================================
(1) Before deducting offering expenses payable by the Company estimated to be
$100,000. See "Use of Proceeds."
It is expected that delivery of the certificates representing the Common
Stock and 1996-A Warrants comprising the Units will be made immediately
following exercise of the Public Warrants and payment of the Warrant Exercise
Price.
, 1996
<PAGE>
(Continued from front cover)
The share of Common Stock and 1996-A Warrant comprising each Unit will
be separately transferable immediately after the sale of the Units to the
Warrant Holders. Each 1996-A Warrant is exercisable at any time 90 days after
the date of this Prospectus and on or before November 30, 1998 to purchase one
share of Common Stock for $12.00, subject to adjustment in certain events, and
may be redeemed by the Company at any time upon 30 days' notice, at a price of
$.0001 per 1996-A Warrant. The Warrant Modification Offer is part of a plan of
financing pursuant to which the Company intends to raise additional capital
through the issuance of the Units. As part of such plan of financing, and
concurrently with the Warrant Modification Offer, the Company is distributing
2,148,191 rights to its shareholders which will entitled each of its
shareholders to purchase one Unit (the "Rights Offering Units") for $6.80 each
(the "Rights Offering"). See "Use of Proceeds" and "Description of Securities--
Common Stock--Rights Offering."
Warrant Holders electing not to exercise the Public Warrants pursuant to
the Warrant Modification Offer on or before expiration of the Redemption Date
will be entitled to receipt of the Redemption Price per Public Warrant.
The Common Stock, Class A Warrants and Class B Warrants are quoted by
the National Daily Quotation Bureau, Incorporated under the symbols "AMSO,"
"AMSOW" and "AMSOZ," respectively. On Novemer 8, 1996, the closing high bid
prices of the Common Stock, Class A Warrants and Class B Warrants were $6.38,
$.24 and $.24, respectively. As of the date of this Prospectus, there is no
public market for the Units or the 1996-A Warrants, and none may develop. The
Company has applied for quotation of the Units and 1996-A Warrants by the
National Quotation Bureau, Incorporated to be quoted under the proposed symbols
" " and " ," respectively. See "Description of Securities."
Unless other exemptions become available in the future, any time that
the bid price of the Common Stock in the over-the-counter market is less than
$5.00, the Company's equity securities will be subject to the "penney stock"
trading rules. The "penny stock" trading rules impose additional duties and
responsibilities upon broker-dealers and salespersons effecting purchase and
sale transactions in such equity securities of the Company, including
determination of the purchaser's investment suitability, delivery of certain
information and disclosures to the purchaser, and receipt of a specific purchase
agreement from the purchaser prior to effecting the purchase transaction, all of
which affect or will affect the ability to resell the Common Stock, Class A
Warrants, Class B Warrants, Units and 1996-A Warrants. See "Risk Factors--Over-
the Counter Market; Penny Stock Trading Rules," and "Price Range of Common Stock
and Public Warrants--Penny Stock Trading Rules."
------------
TABLE OF CONTENTS
Page Page
---- ----
Prospectus Summary..................3 Terms of the Warrant
Risk Factors.......................14 Modification Offer................34
The Company........................19 Certain Federal Income Tax
Use of Proceeds....................20 Consequences......................41
Price Range of Common Stock Business...........................43
and Public Warrants and Management.........................50
Dividends.........................21 Certain Transactions...............53
Capitalization.....................23 Security Ownership of Certain
Selected Financial Information.....23 Beneficial Owners and
Management's Discussion and Management........................55
Analysis of Financial Description of Securities..........57
Condition and Results of Shares Eligible for Future Sale....63
Operations........................25 Legal Matters......................64
Unaudited Pro Forma Experts............................64
Consolidated Financial Additional Information.............64
Information of the Company........29 Index to Financial Statements.....F-1
Public Warrant Redemption..........33
Purposes of Warrant
Modification Offer................33
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and the financial statements and notes thereto appearing
elsewhere in this Prospectus. Prospective investors should carefully consider
the information set forth in "Risk Factors." All references in this Prospectus
to fiscal years are to the Company's fiscal year ended December 31 of each year.
Unless otherwise indicated, all information in this Prospectus gives effect to
the issuance of an additional 5,000 shares of Common Stock by December 17, 1996,
in connection with the acquisition by the Company of Miracle Mountain
International, Inc. and the reverse stock split of one for eight on October 29,
1996.
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 94
percent of its revenues. See "The Company" and "Business."
Pursuant to an Agreement and Plan of Reorganization, dated May 1,
1989, the shareholders of the Company exchanged their common stock for 800,807
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. See
"The Company--Background--Exchange."
Prior to the Exchange, Advantage Marketing Systems, Inc. (formerly
Pacific Coast International, Inc. and parent of the Company) sold, in a public
offering, 225,860 shares of Common Stock, Class A Warrants and Class B Warrant
in units, each unit consisting of one share of Common Stock, one Class A Warrant
and one Class B Warrant. See "Description of Securities." The net proceeds from
this offering were approximately $838,290. Furthermore, in conjunction with such
offering, the holders of 300,000 Class A Warrants and Class B Warrants sold such
Public Warrants. As of the date of this Prospectus, there are 524,610
outstanding Class A Warrants and 525,860 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. 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, 1997.
Each Class A Warrant and Class B Warrant entitles the holder thereof to purchase
one share of Common Stock at an exercise price of $6.00 and $8.00, respectively,
without giving effect to the Warrant Modification Offer. See "The Company--
Background--Initial Issuance of Public Warrants."
Effective December 11, 1995, Advantage Marketing Systems, Inc., the
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
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. 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.
See "The Company--Background--Merger Reincorporation."
-3-
<PAGE>
Pursuant to a Stock Purchase Agreement having an effective date of May
31, 1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the Company
(the "MMI Acquisition"). MMI is a multi-level marketer of various third-party
manufactured nutritional supplement products. Pursuant to the Purchase Agreement
and in connection with the MMI Acquisition, the Company issued and delivered to
the shareholders of MMI 20,000 shares of Common Stock. In addition, the Company
agreed to issue and deliver an additional 5,000 shares of Common Stock to the
shareholders of MMI on or before December 17, 1996, pending determination of
certain liabilities. See "The Company--Background--MMI Acquisition."
The Company's principal executive offices are located at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293 and its
telephone number is (405) 842-0131.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS.
PUBLIC WARRANT REDEMPTION
Pursuant to this Prospectus, the Company is notifying the holders (the
"Warrant Holders") of the Class A Common Stock Purchase Warrants (the "Class A
Warrants") and the Class B Common Stock Purchase Warrants (the "Class B
Warrants") as of , 1996 (the "Record Date"), of the election of
the Company to redeem (the "Warrant Redemption") the Class A Warrants and Class
B Warrants (collectively the "Public Warrants") for $.0008 per warrant (the
"Redemption Price") at 5:00 p.m., Central Standard Time, on , 1996 (the
"Redemption Date"). Each of the Class A Warrants and Class B Warrants is
exercisable for the purchase of one share of Common Stock for $6.00 or $8.00,
respectively (the "Warrant Exercise Price"), on or before expiration of the
Redemption Date, without giving effect to the Warrant Modification Offer. See
"--Warrant Modification Offer." Pursuant to the Warrant Modification Offer, from
the date hereof until expiration of the Redemption Date (the "Special Exercise
Period"), the Warrant Exercise Price of the Class B Warrants is reduced from
$8.00 to $6.00 and each Public Warrant will be exercisable to purchase one unit
consisting of one share of Common Stock and one 1996-A Warrants ("Unit") for
$6.00. The Redemption Date may be extended by the Company such number of times
as determined in the sole discretion of the Company to a date that is not more
than days following the original Redemption Date. See "Public Warrant
Redemption" and "Terms of the Warrant Modification Offer."
The Public Warrants may only be exercised by a Warrant Holder in the
event the Registration Statement of which this Prospectus is a part is effective
with the Securities and Exchange Commission and the Units (or Common Stock and
1996-A Warrants) are qualified for sale in the state of residence of the Warrant
Holder. See "Risk Factors--Securities Laws Restrictions on Exercise of
Warrants," "Terms of Warrant Modification Offer--Acceptance of Public Warrants;
Delivery of Units," and "Description of Securities--Public Warrants." Subject to
the foregoing, the Class A Warrants and Class B Warrants are exercisable at any
time by the Warrant Holders prior to the Redemption Date by delivery of the
warrant certificate evidencing the Public Warrant to U.S. Stock Transfer
Corporation (the "Warrant Agent") at 1745 Gardena Avenue, Glendale, California
91204, with the "Form of Election to Purchase" on the reverse of the certificate
duly completed and signed, accompanied with payment of the Warrant Exercise
Price in cash or by certified check or bank draft payable to the order of the
Company.
PURPOSE OF THE WARRANT MODIFICATION OFFER
The purposes of the Warrant Modification Offer are to (i) strengthen
the Company's capital structure by increasing stockholders' equity and current
assets, (ii) provide the Company greater financial flexibility and (iii)
encourage the exercise of the Public Warrants prior to their redemption. See
"Use of Proceeds."
-4-
<PAGE>
RIGHTS OFFERING TO SHAREHOLDERS
Concurrently with the Warrant Modification Offer, pursuant to a
separate prospectus included within the Registration Statement of which this
Prospectus is a part, the Company will issue 2,148,191 ("Rights") to its
shareholders, each Right exercisable to purchase one unit consisting of one
share of Common Stock and one 1996-A Warrant ("Rights Offering Unit") at $6.80
(the "Rights Offering"). The Rights will be issued as a dividend to the holders
(the "Shareholders") on , 1996 (the "Record Date"), on the basis of
one Right per share of Common Stock outstanding on the Record Date. The Rights
are exercisable on or before , 1996, subject to extension by
the Company (the "Rights Exercise Date"). See "Description of Securities--Common
Stock--Rights Offering." Warrant Holders exercising their Public Warrants after
the Record Date will not be entitled to receive any Rights as a shareholder of
the Company.
THE WARRANT MODIFICATION OFFER
In connection with the Warrant Redemption, the Company offers pursuant
hereto to reduce the Warrant Exercise Price of the Class B Warrants and upon
exercise of the Public Warrants (the Class A Warrants and the Class B Warrants)
prior to , 1996, in lieu of receipt of one share of Common Stock,
the holders of each Public Warrant will receive one Unit (one share of Common
Stock and one 1996-A Warrant) per Public Warrant. The Units are being offered on
a best efforts basis by the Company and its officers and directors, without
commissions, selling fees or direct or indirect remuneration. Holders of the
Public Warrants will not be required to pay any brokerage commissions or fees
with respect to the exercise of their Public Warrants. The Company will pay all
charges and expenses of the Warrant Agent. See "The Warrant Modification Offer--
Plan of Distribution" and " --Acceptance of Public Warrants; Delivery of Units."
THIS OFFERING
The Warrant Modification Offer.............. The Warrant Exercise Price of the
Class B Warrants has been reduced
from $8.00 to $6.00 from the date
hereof until the Redemption Date
(the "Special Exercise Period").
Upon exercise of either the Class A
Warrant or Class B Warrant
(collectively, the "Public
Warrants") during the Special
Exercise Period, the Company will
issue and deliver one Unit per
Public Warrant in separate
certificates of one share of Common
Stock and one 1996-A Warrant.
Expiration Date of the Offer................ The Warrant Modification Offer will
expire on the Redemption Date,
subject to extension. The Company
has reserved the right, exercisable
in its sole discretion, to extend
the Redemption Date and effectively
extend the Special Exercise Period,
in the event any of the conditions
specified in "Terms of the Warrant
Modification Offer--Conditions of
the Warrant Modification Offer" are
not met or waived by the Company
and so long as Public Warrants have
not theretofore been accepted for
exercise, as well as for any other
reason based upon factors and
considerations that exist and that
the Company deems material and
appropriate at that time, which as
of the date of this Prospectus are
undeterminable. See "--Conditions
of the Warrant Modification Offer,"
below and "Terms of the Warrant
Modification Offer-- Expiration;
Extensions; Termination;
Amendment."
Securities Offered.......................... 1,050,470 Units issuable upon
exercise of the Public
-5-
<PAGE>
Warrants during the Special
Exercise Period, each Unit
consisting of one share of Common
Stock and one 1996-A Warrant, each
share of Common Stock and each
1996-A Warrant comprising the
Units will be immediately
transferable after issuance and
delivery of the Units to the
Warrant Holders. Each 1996-A
Warrant is exercisable at any time
90 days after the date of this
Prospectus and on or before
November 30, 1998, to purchase one
share of Common Stock for $12.00,
subject to adjustment in certain
events, and may be redeemed by the
Company at any time upon 30 days'
notice, at a price of $.0001 per
1996-A Warrant. See "Description of
Securities-- Common Stock" and "--
1996-A Warrants."
Exercise Price.............................. $6.00 per Public Warrant during
the Special Exercise Period.
Securities outstanding:
Common Stock......................... 2,148,191 shares of Common Stock
are outstanding as of the date of
this Prospectus.
After giving effect to this
offering and the Warrant
Modification Offer and assuming the
exercise of the Public Warrants in
full and the issuance pursuant
thereto of 1,050,470 Units
(1,050,470 shares of Common Stock
and 1,050,470 1996-A Warrants),
there will be 3,198,661 outstanding
shares of Common Stock and
1,050,470 1996-A Warrants
outstanding; however, there is no
assurance than any of the Public
Warrants will be exercised.
In addition, after giving effect to
the issuance of the Rights and
assuming the exercise of the Rights
in full and the issuance of
2,148,191 Rights Offering Units
(2,148,191 shares of Common Stock
and 2,148,191 1996-A Warrants)
pursuant thereto, there will be
5,346,852 shares of Common Stock
outstanding and 3,198,661 1996-A
Warrants outstanding; however,
there is no assurance than any of
the Rights will be exercised.
Furthermore, after giving effect to
(i) this offering and the Warrant
Modification Offer and assuming the
exercise of the Public Warrants in
full and the issuance of 1,050,470
Units (1,050,470 shares of Common
Stock and 1,050,470 1996-A
Warrants), (ii) the issuance of the
Rights and assuming the exercise of
the Rights in full and the issuance
of 2,148,191 Rights Offering Units
(2,148,191 shares of Common Stock
and 2,148,191 1996-A Warrants)
pursuant thereto and (iii) exercise
of the 1996-A Warrants in full, the
issued and outstanding capital
stock of the Company will consist
of 8,545,513 shares of Common
Stock;
-6-
<PAGE>
however, there is no assurance than
any of the 1996-A Warrants will be
exercised. See "Warrant
Modification Offer" and
"Description of Securities--Common
Stock," "-- Common Stock--Rights
Offering," and "--1996-A Warrants."
The forgoing does not include (i)
1,540,177 shares reserved for
issuance to holders of outstanding
stock options and other warrants
and (ii) 1,125,000 shares reserved
for issuance pursuant to the
Advantage Marketing Systems, Inc.
1995 Stock Option Plan (the "Stock
Option Plan"). See "Management--
Stock Option Plan" and "Description
of Securities--Other Stock Options
and Warrants."
Class A Warrants..................... 524,610 as of the date of this
Prospectus; none after the
Redemption Date.
Class B Warrants..................... 525,860 as of the date of this
Prospectus; none after the
Redemption Date.
1996-A Warrants...................... 1,050,470 will be outstanding
assuming exercise of the Public
Warrants in full during the Special
Exercise Period pursuant to the
Warrant Modification Offer;
however, there is no assurance that
any of the Public Warrants will be
exercised. Furthermore, assuming
and giving effect to the issuance
of the Rights and exercise of the
Rights in full, the number of
outstanding 1996-A Warrants will be
3,198,661; however, there is no
assurance than any of the Rights
will be exercised. See "Description
of Securities --Common Stock--
Rights Offering" and "--1996-A
Warrants."
Net proceeds indeterminable................. $6,202,820 after deduction of
offering expenses estimated at
$100,000, assuming exercise of the
Public Warrants in full. However,
there is no assurance that any of
the Public Warrants will be
exercised pursuant to the Warrant
Modification Offer, in which case
the Company will not receive any
proceeds from this offering and the
Warrant Modification Offer.
Use of proceeds............................. Assuming exercise of the Public
Warrants in full pursuant to the
Warrant Modification Offer, the
estimated net proceeds to the
Company would be $6,202,820;
however, there is no assurance that
any of the Public Warrants will be
exercised in which case there will
not be any net proceeds from this
offering received by the Company.
See "Use of Proceeds" and "Warrant
Modification Offer." Concurrently
with this offering and the Warrant
Modification Offer, the Company is
distributing 2,148,191 Rights to
its shareholders each of which will
entitle the shareholder to purchase
one Unit (the "Rights Offering
Units") for $6.80 each (the "Rights
Offering"). See "-- Rights Offering
to Shareholders," below, and "
Description of Securities--Common
Stock--Rights
-7-
<PAGE>
Offering." Assuming exercise of the
Rights in full, the estimated net
proceeds to the Company from the
Rights Offering would be
$14,507,699 after reduction by
estimated offering expenses of
$100,000; however, there is no
assurance that any of the Rights
will be exercised in which case
there will not be any net proceeds
from the Rights Offering received
by the Company.
The net proceeds received by the
Company from this offering and the
Rights Offering will be used for
general corporate purposes,
including working capital and to
fund the Company's efforts to
expand sales and marketing
activities. The Company estimates
that it will use approximately (i)
$1.5 million for expansion of its
U.S. distributor network and
enhancement of its marketing
materials, (ii) $.5 million to
develop new products and enhance
the packaging of its existing
products and (iii) $1 million for
the expansion into and development
of international markets. In the
event the Company receives combined
net proceeds of less than $3.0
million pursuant to this offering
and the Rights Offering, the net
proceeds will be devoted to each of
these purposes in the order in
which presented. Combined net
proceeds in excess of $3.0 million
will be devoted to general
corporate purposes including
further expansion of the Company's
distributor network and enhancement
of its marketing materials,
development of new products and
enhancement of packaging of its
existing products and expansion
into and development of
international markets. The Company
does not intend to use any of the
proceeds to discharge existing
debt. Pending use of the net
proceeds, they will be invested by
the Company in investment grade,
short-term, interest-bearing
securities. See "Use of Proceeds."
Consequences to Non-Exercising
Warrant Holders........................... The Public Warrants not exercised
or that are not exercisable because
of securities laws restrictions or
limitations (see "--Acceptance of
Public Warrants," below, and "Risk
Factors--Securities Laws
Restrictions on Exercise of
Warrants" and "Terms of the Warrant
Modification Offer--Acceptance of
Public Warrants; Delivery of
Units") prior to the Redemption
Date will be redeemed by the
Company at $.0008 per Public
Warrant. See "Terms of the Warrant
Modification Offer--Advantages and
Disadvantages of Public Warrant
Exercise."
How to Exercise Public Warrants............. Any holder of the Public Warrants
electing exercise of the Public
Warrants should either (i) fill out
the "Form to Exercise for Purchase"
on the back of the Public Warrant
certificate and forward it along
with cash or a certified or
official bank check in the amount
of the proper exercise price and
any other required documents to the
Warrant
-8-
<PAGE>
Agent, or (ii) request a broker or
bank to effect the transaction.
Holders of Public Warrants
registered in the name of a broker,
dealer, bank, trust company or
nominee should instruct such
institutions to tender the Public
Warrants. See "Terms of the Warrant
Modification Offer--How to
Exercise."
Acceptance of Public Warrants............... The Company will accept any and all
Public Warrants duly exercised and
not withdrawn on or prior to the
Redemption Date, subject to certain
conditions. In certain cases, the
sale of the Units (and the shares
of Common Stock and 1996-A Warrants
comprising the Units) pursuant to
exercise of the Public Warrants
could violate the securities laws
of certain states or other
jurisdictions. The Company has
undertaken registration or
qualification of the Units for sale
in California, Colorado, Georgia,
Kentucky, Illinois, Louisiana, New
Hampshire, New York, Ohio,
Oklahoma, Pennsylvania, Tennessee,
Texas, Virginia, Washington and
Wisconsin; however, there is no
assurance that such registration or
qualification will become effective
in any such states. In addition,
the Company may undertake
registration of the Units in
additional states as determined in
the sole discretion of the Company.
Those Warrant Holders residing in
states in which the Units have not
been registered or otherwise
qualified for sale in such state,
will not be permitted to exercise
their Public Warrants. Prior to
tendering of Public Warrants for
exercise, the Warrant Holder should
either contact the Company or the
Warrant Agent to determine whether
the Units have been registered or
qualified in the state of such
Warrant Holder's residence. The
Company has used and will continue
to use its best efforts to cause
the sale of the Units and shares of
Common Stock to be lawful. See
"Terms of the Warrant Modification
Offer--Acceptance of Public
Warrants; Delivery of Units."
The Company is not required to
accept the exercise of the Public
Warrants, if, in the opinion of
counsel, the sale of Units or
Common Stock upon such exercise
would be unlawful. In such cases,
the Public Warrants will not be
accepted for exercise, and the
Warrant Holder will be required to
sell such warrants in the open
market, subject to the "penny
stock" rules (see "Price Range of
Common Stock and Public Warrants
and Dividends--Penny Stock Rules"),
or hold such warrants until the
Redemption Date and receive the
Redemption Price per warrant. See
"Risk Factors--Securities Laws
Restrictions on Exercise of
Warrants," "Public Warrant
Redemption," "Terms of the Warrant
Modification Offer--Conditions of
the Warrant Modification Offer" and
"--Acceptance of Public Warrants;
Delivery of Securities" and
"Description of Securities--Public
Warrants."
-9-
<PAGE>
Conditions of the Warrant
Modification Offer........................ The Company has reserved certain
rights and imposed certain
conditions with respect to the
Warrant Modification Offer and the
Company's obligations associated
therewith, including any
prohibitive injunction, suspension
of trading of the Common Stock and
enactment of any statute or
regulation prohibiting, materially
restricting or delaying
consummation of the Warrant
Modification Offer. See "Terms of
the Warrant Modification Offer--
Conditions of the Warrant
Modification Offer."
Delivery of Securities...................... The Company will deliver the
certificates for the shares of
Common Stock and the 1996-A
Warrants comprising the Units
issuable upon exercise of the
Public Warrants, as promptly as
practicable after the Redemption
Date. See "Terms of the Warrant
Modification Offer--Acceptance of
Public Warrants; Delivery of
Units."
Withdrawal Rights........................... Exercise of Public Warrants
pursuant to the Warrant
Modification Offer may be withdrawn
prior to the Redemption Date. After
the Redemption Date, such tenders
will be irrevocable, except that
they may be withdrawn after , 1996
(i.e., 40 business days from the
date of this Prospectus), unless
theretofore accepted for exercise.
See "Terms of the Warrant
Modification Offer--Withdrawal
Rights."
Tax Consequences............................ The Company's tax counsel is of the
opinion that there is a lack of
definitive authority addressing the
tax consequences to the Warrant
Holders of the Warrant Modification
Offer, and there exists several
reasonable and diverse reporting
positions. Given the unclear state
of the law in this area, and the
technical intricacies of the
available reporting positions, it
is particularly important that
Warrant Holders consult their own
tax advisors regarding the tax
consequences to them of the Warrant
Modification Offer and exercise or
nonexercise of the Public Warrants.
For tax purposes only, the Warrant
Modification Offer may be viewed as
the grant of additional rights to
the Warrant Holders which merely
modifies the securities to be
delivered upon exercise of the
Public Warrants and with respect to
the Class B Warrants a reduction
modification of the Exercise Price
of the Public Warrants. Pursuant to
this theory, the Public Warrants
would be valued as of the date the
Company announced the Warrant
Modification Offer and that value
would be reported by the Warrant
Holders as ordinary income.
Alternatively, the Warrant
Modification Offer constitutes the
grant of additional separate and
independent warrants to the Warrant
Holders. Under this theory, the
Public Warrants would be deemed to
have lapsed, which would
-10-
<PAGE>
give rise to a loss to the Warrant
Holders on the Redemption Date. In
addition, the Warrant Holders would
be required to recognize ordinary
income as a result of receipt of
the new warrant.
Another alternative is that the
Warrant Modification Offer
constitutes an exchange of the
Public Warrants as constituted
prior to the Warrant Modification
Offer for the Public Warrants as
modified by the Warrant
Modification Offer. Under this
theory, in the event the amount
realized as a result of the
transaction (i.e., the trading
price of the Public Warrants as
modified pursuant to the Warrant
Modification Offer) exceeds the
Warrant Holder's tax basis in the
Public Warrant, the Warrant Holder
would be required to recognize
taxable gain in the amount of such
excess.
Another alternative is that the
reduction in the Warrant Exercise
Price of the Class B Warrants
pursuant to the Warrant
Modification Offer constitutes a
dividend taxable to each holder of
the Class B Warrants (whether or
not the Warrant Modification Offer
is accepted by exercising the Class
B Warrants) and which would entitle
each such Warrant Holder to a
corresponding increase in the tax
basis of the Class B Warrants.
The proper date or dates for
recognition and measurement of
income possibly recognizable by the
Warrant Holders or loss becoming
available to the Warrant Holders is
uncertain, and is, in part,
dependent upon whether the Public
Warrants are sold, exchanged, lapse
or are otherwise disposed of and
the timing of when those events
occur or are deemed to occur. See
"Certain Federal Income Tax
Consequences" for a more complete
discussion.
In the opinion of the Company's tax
counsel, based on information
provided by the Company with
respect to the ownership of the
shares of Common Stock and the
Public Warrants, the Warrant
Modification Offer will not
adversely affect the Company's
ability to preserve and utilize it
net operation loss carryforwards.
Warrant Agent............................... U.S. Stock Transfer Corporation.
The Warrant Agent may be contacted
at the address and telephone number
set forth on the back cover of this
Prospectus.
Additional Information...................... The Company may be contacted at the
address and telephone number set
forth on the back cover of this
Prospectus.
-11-
<PAGE>
National Daily Quotation Bureau symbols:.... Common Stock...........AMSO
Class A Warrant........AMSOW
Class B Warrant........AMSOZ
Unit...................(proposed)
1996-A Warrant.........(proposed)
SUMMARY HISTORICAL FINANCIAL AND OPERATING INFORMATION OF THE COMPANY
The following table sets forth summary historical financial and operating
information of the Company for the fiscal years ended December 31, 1994 and
1995, and the nine months ended September 30, 1995 and 1996. See "Selected
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The financial and operating information
for the fiscal years ended December 31, 1994 and 1995, is derived from the
audited financial statements of the Company appearing elsewhere in this
Prospectus. The financial and operating information for the nine months ended
September 30, 1995 and 1996, are derived from the unaudited financial statements
of the Company appearing elsewhere in this Prospectus which, in the opinion of
management, include all adjustment (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations of the Company for the unaudited interim periods. The
following information should be read in conjunction with the financial
statements and the related notes thereto of the Company, and other information
relating to the Company presented elsewhere in this Prospectus. The statements
of operations information for any particular period is not necessarily
indicative of the results of operation for any future period.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------- ---------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Programs..................... $2,564,542 $4,382,935 $3,155,934 $4,186,404
Promotional material......... 82,780 109,733 88,893 234,735
Other........................ 30,625 25,535 17,797 37,471
---------- ---------- ---------- ----------
Total revenues............ 2,677,947 4,518,203 3,262,624 4,458,610
---------- ---------- ---------- ----------
Cost and expenses:
Programs..................... 684,128 1,094,157 906,935 968,635
Promotional material......... 83,964 92,087 69,395 142,610
Selling...................... 1,289,616 2,201,510 1,495,084 2,235,879
General and administrative... 515,158 857,743 593,273 789,410
Interest expense............. 25,075 22,998 20,335 19,422
---------- ---------- ---------- ----------
Total expenses............ 2,597,941 4,268,495 3,085,022 4,155,956
---------- ---------- ---------- ----------
Income before income taxes...... 80,006 249,708 177,602 302,654
Tax benefit..................... -- -- -- 438,349
---------- ---------- ---------- ----------
Net income...................... $ 80,006 $ 249,708 $ 177,602 $ 741,003
========== ========== ========== ==========
Weighted average common shares
outstanding(1)................. 2,119,356 2,662,681 2,121,524 3,175,551
Net income per common share..... $ .04 $ .09 $ .08 $ .23
CASH FLOW DATA:
Net cash provided by operating
activities..................... $ 109,252 $ 337,241 $ 239,071 $ 310,375
Net cash used in investing
activities..................... (63,646) (99,561) (4,072) (227,083)
Net cash used in financing
activities..................... (45,606) (125,593) (76,044) (77,414)
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets........................ $ 117,796 $ 283,341 $ 424,800
Working capital deficiency............ (338,662) (170,734) (137,166)
Total assets.......................... 176,969 532,996 1,514,933
Short-term debt....................... 138,655 111,048 52,091
Long-term debt........................ 7,947 104,149 85,692
Stockholders' equity (deficiency)..... (287,436) (25,228) 837,275
</TABLE>
- ------------------------
(1) Without giving effect to exercise of the Public Warrants pursuant to the
Warrant Modification Offer and exercise of the Rights pursuant to the
Rights Offering and the issuance of an additional 5,000 shares in
connection with the MMI Acquisition, and does not include 1,125,000
shares reserved for issuance pursuant to the Stock Option Plan. See
"Description of Securities--Common Stock--Rights Offering," and "--Other
Options and Warrants" and "Management--Stock Option Plan."-
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following table presents selected pro forma information for the Company
on the assumption that the MMI Acquisition occurred at the beginning of each
period for which results of operations are presented. The information presented
below is derived from and should be read in conjunction with, the consolidated
financial statements of the Company and MMI, the unaudited pro forma
consolidated statements of operations and other information related to
the Company and MMI, all presented elsewhere in this Prospectus. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations that would have been achieved if the MMI
Acquisition had been consummated in accordance with the assumptions set forth in
the notes to the unaudited pro forma consolidated statements of operations
of the Company, nor is it necessarily indicative of future operating
results. See "Unaudited Pro Forma Consolidated Financial Information of the
Company."
<TABLE>
<CAPTION>
PRO FORMA COMBINED
---------------------------
STATEMENTS OF OPERATIONS DATA: DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenues........................................... $4,795,569 $4,663,722
Costs and expenses................................. 4,704,024 4,403,227
Net Income......................................... 91,545 710,316
Weighted average common shares
outstanding(1)................................... 2,682,681 3,195,551
Net income per common share........................ .03 .22
</TABLE>
- ------------------------
(1) Without giving effect to exercise of the Public Warrants pursuant to the
Warrant Modification Offer and exercise of the Rights pursuant to the
Rights Offering and the issuance of an additional 5,000 shares in
connection with the MMI Acquisition, and does not include
1,125,000 shares reserved for issuance pursuant to the Stock Option
Plan. See "Description of Securities--Common Stock--Rights Offering," and
"--Other Options and Warrants" and "Management--Stock Option Plan."
-13-
<PAGE>
RISK FACTORS
Purchase of Units pursuant to exercise of the Public Warrants, offered
hereby involves a high degree of risk. In addition to the other information set
forth elsewhere in this Prospectus, the following factors relating to the
Company and exercise of the Public Warrants should be considered when evaluating
exercise of the Public Warrants and investment in the Units offered hereby.
SECURITIES LAWS RESTRICTIONS ON EXERCISE OF WARRANTS. In certain cases, the
sale of the Units and the Common Stock and 1996-A Warrants comprising the Units
by the Company upon exercise of Public Warrants could violate the securities
laws of certain states or other jurisdictions. The Company has used and will
continue to use its best efforts to cause the Registration Statement of which
this Prospectus is a part to be declared effective under the laws of various
states as may be required to cause the sale of securities upon exercise of
Public Warrants and the 1996-A Warrants to be lawful. However, the Company is
not required to accept the exercise of the Public Warrants, if, in the opinion
of counsel, the sale of Units and Common Stock and 1996-A Warrants comprising
the Units upon such exercise would be unlawful. In such cases, the Public
Warrants will not be accepted for exercise, and the holder of the Public
Warrants will be required to sell the Public Warrants in the open market, if
such market is available, or hold such warrants until expiration or redemption.
See "Warrant Redemption," and "Description of Securities--Public Warrants."
CONSEQUENCES TO NON-EXERCISING WARRANT HOLDERS. The Public Warrants that
are not exercised by a Warrant Holder prior to the Redemption Date (or that are
not exercisable because of securities laws restrictions or limitations) will be
redeemed by the Company at $.0008 per Public Warrant. The Warrant Holder will be
required to sell such Public Warrants in the open market, if such market is
available, or hold such Public Warrants and receive the Redemption Price. See
"Terms of the Warrant Modification Offer--Advantages and Disadvantages of Public
Warrant Exercise."
ABSENCE OF PRIOR PUBLIC MARKET FOR UNITS AND 1996-A WARRANTS; POSSIBLE
VOLATILITY OF STOCK PRICE. Although the Common Stock is currently traded in the
over-the-counter market, there currently is no public market for the Units or
the 1996-A Warrants offered pursuant to the Warrant Modification Offer, and
there is no assurance that a market will develop or be sustained. See "Price
Range of Common Stock and Public Warrants and Dividends." The market price of
the Common Stock (as well as the Units and 1996-A Warrants, if a market
develops) may be significantly affected by factors such as announcements of new
products, product lines or marketing strategies offered by the Company or its
competitors, increase or decrease in membership and sales associates of the
network purchasing programs offered by the Company, quarter-to-quarter
variations in the Company's anticipated or actual results of operations and
conditions in the marketing of products and product lines.
1996-A WARRANT EXERCISE AND REDEMPTION PROVISIONS. Each 1996-A Warrant
entitles the holder to purchase one share of Common Stock, subject to certain
anti-dilution adjustments, at a price of $12.00 per share, on 90 days after the
date of this Prospectus and or before November 30, 1998. See "Description of
Securities--1996-A Warrants." Holders of 1996-A Warrants may exercise such
warrants only with respect to shares of Common Stock that are registered or
qualified for sale under the state securities laws of the states in which the
holders of the 1996-A Warrants reside. There can be no assurance that the
Company will maintain effectiveness, under the state securities laws of the
states in which the holders of the 1996-A Warrants reside, of this Prospectus or
any other prospectus covering the shares underlying the 1996-A Warrants at all
times that the 1996-A Warrants are outstanding. However, the Company will make a
good faith effort to maintain an effective registration statement and current
prospectus in such states at such times, if ever, that the price of the Common
Stock exceeds the 1996-A Warrant exercise price. The 1996-A Warrants may be
deprived of any value in the event this Prospectus or another prospectus
covering the shares issuable upon exercise of the 1996-A Warrants is not kept
effective in the states in which the holders of the 1996-A Warrants reside. The
1996-A Warrants will initially be sold and issued only in those jurisdictions
that 1996-A Warrants are registered or otherwise qualified in connection with
the Warrant Modification Offer, which may not include a jurisdiction in which
the holder of a 1996-A Warrant currently resides and in which the Units (and the
share
-14-
<PAGE>
of Common Stock and 1996-A Warrant comprising each Unit) offered pursuant to
this Prospectus are registered or qualified. If the Company is unable or chooses
not to register or qualify or maintain the registration or qualification of the
Units (and the shares of Common Stock and 1996-A Warrant comprising each Unit)
offered pursuant to this Prospectus for sale in a state in which holders of a
1996-A Warrant resides, the Company will not permit such 1996-A Warrants to be
exercised, and such holders may have no choice but to either sell their Warrants
in the open market or let them be redeemed. A holder of 1996-A Warrants and
other interested persons who wish to know whether the Common Stock underlying
such warrants may be issued to the holder, upon the exercise, in a particular
state, should send a written inquiry to the Company. Additionally, the 1996-A
Warrants may be redeemed by the Company, in whole but not in part, upon not less
than 30 days' prior written notice at a price of $.0001 per 1996-A Warrant at
any time. See "Description of Securities--1996-A Warrants."
MANAGEMENT DISCRETION OVER APPLICATION OF PROCEEDS. The Company will
allocate the net proceeds of exercise of the Public Warrants to general
corporate purposes and working capital. See "Use of Proceeds." The application
of such proceeds will be at the sole discretion of management of the Company.
Individual shareholders will have no control over decisions regarding the
application or use of the net proceeds obtained pursuant to exercise of the
Public Warrants.
OVER-THE-COUNTER MARKET; PENNY STOCK TRADING RULES. The Common Stock, Class
A Warrants and Class B Warrants are and it is anticipated, although there is no
assurance a market will develop, that the Units and 1996-A Warrants will also be
traded in the over-the-counter market and will be subject to the "penny stock"
trading rules. See "Price Range of Common stock and Public Warrants and
Dividends--Penny Stock Trading Rules." The over-the-counter market is
characterized as volatile in that securities traded in such market are subject
to substantial and sudden price increases and decreases and at times price (bid
and asked) information for such securities may not be available. In addition,
when there are only one or two market makers (a dealer holding itself out as
ready to buy and sell the securities on a regular basis), there is a risk that
the dealer or group of dealers may control the market in the security and set
prices that are not based on competitive forces and the available offered price
may be substantially below the quoted bid price. There is no assurance that
immediately following exercise of a Public Warrant, the Warrant Holder will be
able to resell the Unit, Common Stock and/or 1996-A Warrant or if sold whether a
profit will be realized (i.e., sale of the Common Stock or 1996-A Warrant at a
price, after dealer compensation or markdown, in excess of the exercise price of
the Public Warrant allocable to the Common Stock or the 1996-A Warrant).
Unless other available exemptions become available in the future, at any
time the bid price of the Common Stock in the over-the-counter market is less
than $5.00, the Company's equity securities will be subject to the "penney
stock" trading rules, unless the Company meets certain other exemptions under
the penney stock trading rules. The penny stock trading rules impose additional
duties and responsibilities upon broker-dealers and salespersons effecting
purchase and sale transactions in such equity securities of the Company,
including determination of the purchaser's investment suitability, delivery of
certain information and disclosures to the purchaser, and receipt of a specific
purchase agreement from the purchaser prior to effecting the purchase
transaction. Required compliance with the penny stock trading rules affect or
will affect the ability to resell the Common Stock, Class A Warrants, Class B
Warrants, Unit or 1996-A 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 ability of a holder to resell the Company's
equity securities, and the liquidity typically associated with other publicly
traded equity securities may not exist. Therefore, a Warrant Holder electing to
exercise a Public Warrant may be required to hold the Common Stock and/or 1996-A
Warrant for an indefinite time and even then may realize a loss, which loss
could be substantial. See "Price Range of Common Stock and Public Warrants and
Dividends--Penny Stock Trading Rules."
RIGHTS OFFERING. Concurrently with the Warrant Modification Offer, pursuant
to a separate prospectus included within the Registration Statement of which
this Prospectus is a part, the Company will issue 2,148,191 rights
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("Rights") to its shareholders, each Right exercisable to purchase one unit
comprised of one share of Common Stock and one 1996-A Warrant ("Rights Offering
Unit") at $6.80 (the "Rights Offering"). The Rights will be issued as a dividend
to the holders of Common Stock (the "Rights Holders") on , 1996 (the "Record
Date"), on the basis of one Right per share of Common Stock outstanding on the
Record Date. The Rights are exercisable on or before , 1996, subject to
extension by the Company. See "Description of Securities--Common Stock--Rights
Offering." Warrant Holders exercising their Public Warrants after the Record
Date will not be entitled to receive any Rights as a shareholder of the Company.
Although there is no assurance that any of the Rights will be exercised, in the
event of exercise all or any portion of the Rights, additional shares of Common
Stock and 1996-A Warrants will be issued and outstanding, which may be diluting
on an earnings per share basis and in such case may adversely affect the public
market trading price of the Common Stock. See "Description of Securities--Common
Stock--Rights Offering."
OUTSTANDING STOCK OPTIONS AND WARRANTS; OPTION AND WARRANT OFFERING.
Furthermore, as of October 28, 1996, there were 1,540,177 outstanding stock
options and other warrants (of which 535,000 are held by current management of
the Company) exercisable to purchase Common Stock at an exercise price of from
$1.60 to $6.48 per share during periods that expire in February 1997 through
July 2005. See "Description of Securities--Other Stock Options and Warrants."
During the term of the outstanding stock options and other warrants, the holders
are given the opportunity to profit from a rise in the market price of the
Common Stock. Exercise of such stock options and warrants may dilute the net
book value per share of outstanding Common Stock at the time of exercise and
will be diluting on an earnings per share basis, which may adversely affect the
public market trading price of the Common Stock. The existence of these stock
options and warrants may adversely affect the terms on which the Company may
obtain additional equity financing. Furthermore, the holders are likely to
exercise their stock options or warrants at a time when the Company would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise of such stock options and warrants. See
"Description of Securities--Other Stock Options and Warrants."
COMMON STOCK ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Common Stock in the public market following completion of the Warrant
Modification Offer and the Rights Offering could adversely affect the market
price of the Common Stock. See "Shares Eligible for Future Sale." At October 28,
1996, there were 627,834 shares of the Company's outstanding Common Stock which
were "restricted securities" that may in the future be sold in compliance with
Rule 144 as promulgated by the Commission pursuant to the 1933 Act. Rule 144
generally provides that beneficial owners of shares who have held such shares
for two years may sell within a three-month period a number of shares not
exceeding one percent of the total outstanding shares or the average trading
volume of the shares during the four calendar weeks preceding such sale. See
"Shares Eligible for Future Sale."
The shares of Common Stock held by the executive officers and directors of
the Company, who in the aggregate hold of record 367,927 shares as of October
28, 1996 (see "Security Ownership of Certain Beneficial Owners and Management"),
are eligible for sale in the open market pursuant to an effective registration
statement under the 1933 Act or upon satisfaction of the applicable holding
period and other requirements of Rule 144. Subject to the Rule 144 sale
limitations, 627,834 outstanding shares of Common Stock are eligible for sale
under Rule 144 as of the date of this Prospectus. Future sales of substantial
amounts of Common Stock in the public market following completion of the Warrant
Modification Offer and could adversely affect the market price of the Common
Stock. See "Shares Eligible for Future Sale."
DEFICIT WORKING CAPITAL; FUTURE OPERATING RESULTS. At September 30, 1996,
the Company had a deficit working capital of $137,166. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Capital Resources and Liquidity." There is no assurance that revenues from
operations will be sufficient to cover the deficit working capital. The Company
attained profitability in 1994, and, as of September 30, 1996, the Company had
an accumulated deficit stockholders' equity of $1,144,319. See "Selected
Financial Information." There can be no assurance that such profitability will
be sustained. The Company's expense levels are based, in part, on its
expectations as to future revenue levels, which can be difficult to predict due
in part to the Company's strategy of developing product marketing programs and
the success of such programs, which is also dependent upon the market
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demand developed for such products through the marketing programs. If revenue
levels are below expectations, operating results will be adversely affected. In
addition, the Company's operating results may fluctuate as a result of many
factors, including price reductions, delays in the introduction of new products,
delays in purchase decisions due to new product announcements by the Company or
its competitors, increased competition by providers of marketing programs,
failure to reduce product costs or maintain production quality, cancellations or
delays of orders, interruptions or delays in supply of key components, changes
in customer base or product mix and seasonal patterns of customer spending. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN OPERATING RESULTS. Demand for the products offered through
the Company's network purchasing programs is dependent on general economic
conditions. Recessionary periods generally result in fewer members participating
in the purchasing programs, and, therefore, may lead to a reduction in
membership in the respective network purchasing programs and the membership fee
revenues as well as less product purchasing which affect revenues as well as the
ability of the Company to introduce new products into the market place through
the purchasing programs. Because expenses associated with maintaining the
Company's administrative staff are relatively fixed over the short term (which
averaged approximately $100,000 during each of the three months ended September
30, 1996), the Company's net income tends to fluctuate in periods of increased
or decreased membership and product sales volume. These fluctuations are not
always readily predictable and most are not within the control of the Company.
During 1994 and 1995 and the nine months ended September 30, 1996, the Company's
total revenues were $2,677,947, $4,518,203 and $4,458,610, respectively, while
during such periods net income was $80,006, $249,708, and $741,003,
respectively. Although the Company has not experienced declining revenues and
reduced net income during such periods of operations, such results of operations
are not necessarily indicative of future operation results, and there is no
assurance that such revenues and net income will continue to increase or that
the current levels of revenues and net income will be maintained. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Results of Operations."
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends on the
continued availability of certain key management personnel, including John W.
Hail, founder, chief executive officer and director of the Company, and Roger P.
Baresel, president, chief financial officer and director of the Company. The
Company does not maintain any life insurance covering the executive officers of
the Company. The Company's continued growth and profitability also depends on
its ability to attract and retain other management personnel and sales
associates. The Company has not had any difficulty to date in attracting and
retaining management personnel and sales associates, although there can be no
assurance it will continue to be successful in this regard in the future. See
"Business--Marketing" and "Management--Directors and Executive Officers."
PRODUCT INTRODUCTION, OBSOLESCENCE AND MARKETING. The marketing for
products with respect to which the Company develops marketing programs is in
most cases characterized by introduction of competing products. Product
introductions are generally characterized by increased functionality or enhanced
results achieved by use of the product compared to existing competitive
products. The introduction of products embodying increased functionality or
enhanced results from product use may render existing products obsolete and
unmarketable. The Company's ability to successfully develop a marketing
introduction into the market place of new products on a timely basis and achieve
levels of market demand will be a significant factor in the Company's ability to
grow and remain competitive and profitable. In addition, the nature and mix of
the products comprising the available products within the Company's various
product purchasing and distribution programs is a most important factor. The
nature, assortment and mix of products available for purchase through the
Company's marketing program networks affects membership maintenance and
development within the various marketing programs of the Company, which
consequently affects demand for the products offered within each such program.
In the event the Company is unable to successfully increase the product
assortment and mix and maintain competitive product replacement of the products
in a timely manner in response to changes in and introduction of new products,
competitive or otherwise, offered to members of a marketing program the
Company's business and operating results will be materially and adversely
affected. See "Business--Products and Services of the Company" and "--
Marketing."
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NETWORK PURCHASING PROGRAMS; LOSS OF SALES ASSOCIATES. The Company relies
on the members of its network purchasing programs and member sales associates
for the distribution and sale of the products offered pursuant to such programs.
A reduction in the membership of the network purchasing programs and loss of
member sales associates could have a material adverse effect on the Company's
business and operating results. Certain of the sales associates also represent
or may in the future represent other lines of products which are complementary
to or competitive with those offered through the Company's network purchasing
programs. While the Company attempts to encourage sales associates to focus on
selling the products through the Company's network purchasing programs, there is
a risk that these sales associates may give higher priority to other products,
reducing their efforts devoted to selling the products offered through the
Company's network purchasing programs. Typically, the Company has non-exclusive
arrangements with its sales associates which may be canceled by either party at
will and contain no minimum purchase requirements on the part of the sales
associates. There can be no assurance that the Company's network purchasing
programs will continue to be successful or that the Company will be able to
retain or increase its current network purchasing membership or retain its sales
associates, or retain or increase the various product lines offered to the
members of the purchasing programs. See "Business--Products and Services of the
Company" and "--Marketing."
DEPENDENCY ON THIRD-PARTY PROVIDERS; AVAILABILITY OF PRODUCT SOURCES.
Substantially all of the services and products offered and distributed by the
Company are provided by unrelated third-party providers over whom the Company
does not have control. In turn, such unrelated third-party providers may be
dependent upon other unrelated manufacturers or vendors to provide components
for manufacture or services. The Company does not generally enter into long-term
purchase commitments with respect to the consumer 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. See
"Business--Products and Services of the Company" and "--Contractual
Arrangements."
Although the Company believes it would be able to obtain alternative
sources of its 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. See
"Business--Contractual Arrangements."
MULTI-LEVEL MARKETING REGULATION. The Company is required to comply with
state and federal laws governing the Company's multi-level marketing activities.
See " Business--Government Regulation." These laws generally relate to unfair or
deceptive trade practices, lotteries, business opportunities and securities. The
Company has not experienced any material problems with marketing compliance.
However, multi-level marketing regulation at the state and federal level is
subject to change through enactment of additional legislation and adoption of
regulations which may adversely affect the marketing activities of the Company.
The Company cannot predict with any accuracy if such legislation or regulation
will be enacted or adopted or the ultimate effect thereof on Company operations,
but expects to continue to fully comply with the legal requirements of multi-
level marketing to minimize any undesirable impact on the Company and its
operations.
COMPETITION. Providers of product marketing services compete primarily on
the basis of marketing strategies, product advertising and packaging development
and cost of services. The Company believes it competes favorably in
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each of these categories. The Company competes with a variety and number of
companies offering marketing programs and purchasing networks including discount
catalog companies, direct product purchasing, and retail discount stores, many
of which have greater financial resources than the Company. In addition, in some
cases the products offered through the Company's network purchasing programs are
not exclusively offered through such programs. See "Business--Competition."
LACK OF DIVIDENDS. The Company does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain profits, if any, to fund growth and expansion in the future. See "Price
Range of Common Stock and Dividends."
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation and
Bylaws and the provisions of the Oklahoma General Corporation Act may make it
difficult to effect a change in control of the Company and replace incumbent
management. See "Description of Securities--Anti-Takeover Provisions." The
Certificate of Incorporation authorizes the issuance of Preferred Stock in
classes or series, and the Board of Directors to set and determine voting,
redemption and conversion rights and other rights related to such class or
series of Preferred Stock, which in some circumstances, the Preferred Stock
could be issued and have the effect of preventing a merger, tender offer or
other takeover attempt which the Company's Board of Directors opposes. See
"Description of Securities--Anti-Takeover Provisions--Preferred Stock" and
"Description of Securities--Preferred Stock." The Company's directors are
elected for three-year terms, with approximately one-third of the Board standing
for election each year, which may make it difficult to effect a change of
incumbent management and control. See "Description of Securities--Anti-Takeover
Provisions--Classified Board." Following the Warrant Modification Offer or at
some time in the future, the Company may become subject to the anti-takeover
provisions of the Oklahoma General Corporation Act, which in such case and in
some circumstances may discourage a person from making a control share
acquisition (generally an acquisition of voting stock having more than 20
percent of all voting power in the election of directors) without shareholder
approval. See "Description of Securities--Anti-Takeover Provisions--Oklahoma
Anti-Takeover Statutes."
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. See "Business."
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 800,807
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.
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<PAGE>
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, 225,860 shares of Common Stock,
Class A Warrants and Class B Warrant in units, each unit consisting of one share
of Common Stock, one Class A Warrant and one Class B Warrant. See "Description
of Securities." The net proceeds from this offering were approximately $838,290.
Furthermore, in conjunction with such offering, the holders of 300,000 Class A
Warrants and Class B Warrants sold such Public Warrants. As of the date of this
Prospectus, there are 524,610 outstanding Class A Warrants and 525,860
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, 1997. A copy of the Warrant Agreement and the
amendments thereto were filed as an exhibit to the Registration Statement of the
which this Prospectus is a part. A copy of the Warrant Agreement and the
amendments thereto may be examined at the offices, 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 $6.00 and $8.00, respectively, without giving
effect to the Warrant Modification Offer.
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 Marketing Systems, Inc., the partent 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.
MMI ACQUISITION. Pursuant to a Stock Purchase Agreement having an effective
date of May 31, 1996 (the "Purchase Agreement"), the Company acquired all of the
issued and outstanding capital stock of Miracle Mountain International, Inc., a
Colorado corporation ("MMI"), and MMI became a wholly-owned subsidiary of the
Company (the "MMI Acquisition"). MMI is a multi-level marketer of various third-
party manufactured nutritional supplement products. Pursuant to the Purchase
Agreement and in connection with the MMI Acquisition, the Company issued and
delivered to the shareholders of MMI 20,000 shares of Common Stock. In addition,
the Company agreed to issue and deliver an additional 5,000 shares of Common
Stock to the shareholders of MMI on or before December 17, 1996, pending
determination of certain liabilities.
UNDERWRITING LETTER OF INTENT. The Company signed a letter of intent on May
24, 1996, with an underwriter which sets forth in principle the terms and
conditions pursuant to which investment banking services are to be provided and,
subject to a number of conditions, Common Stock is to be purchased from the
Company and sold to the public by the underwriter during 1996. Until a
definitive underwriting agreement is executed with the underwriter, which
generally will be following the declaration of effectiveness of the registration
statement filed by the Company with the Securities and Exchange Commission
covering the Common Stock, the underwriter will have no obligation to purchase
the Common Stock. Therefore, there is no assurance that this offering will be
completed.
USE OF PROCEEDS
The net proceeds of this offering to be received by the Company will be
dependent upon the number of Units purchased by the holders of the Public
Warrants pursuant to exercise of the Public Warrant during the Special Exercise
Period pursuant to the Warrant Modification Offer. Therefore, the net proceeds
of this offering are not determinable as of the date of this Prospectus. In the
event the Public Warrants are exercised in full the net proceeds to the Company,
after deduction of $100,000 estimated offering costs, will be $6,202,820. There
is no assurance that all or any portion of the Public Warrants will be exercised
pursuant to the Warrant Modification Offer, in which case the Company will not
receive any net proceeds from this offering. See "Warrant Modification Offer."
Concurrently with this offering and the Warrant Modification Offer,
pursuant to a separate prospectus which is a part of the Registration Statement
of which this Prospectus is a part, the Company is making the Rights Offering.
The net proceeds of the Rights Offering to be received by the Company will be
dependent upon the number of Rights Offering Units purchased by the holders of
the Rights pursuant to exercise of the Rights pursuant to the Rights
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Offering. In the event the Rights are exercised in full pursuant to the Rights
Offering, the net proceeds to the Company, after deduction of $100,000 estimated
offering costs, will be $14,507,699. See "Description of Securities--Common
Stock--Rights Offering." There is no assurance that all or any portion of the
Rights to be distributed to the Company's shareholders will be exercised
pursuant to the Rights Offering, in which case the Company will not received any
net proceeds from the Rights Offering.
The net proceeds received by the Company from the concurrent offering for
sale of the Units and Rights Offering Units pursuant to the exercise of Public
Warrants and Rights will be used for general corporate purposes, including
working capital and to fund the Company's efforts to expand sales and marketing
activities. The Company estimates that it will use approximately $1.5 million
for expansion of its U.S. distributor network and enhancement of its marketing
materials. The Company intends to use approximately $.5 million to develop new
products and enhance the packaging of its existing products. The Company will
devote approximately $1 million for the expansion into and development of
international markets. In the event the Company raises less than $3.0 million,
the net proceeds will be devoted to each of these areas in the order in which
they are presented. See "Business." Combined net proceeds in excess of $3.0
million will be devoted to general corporate purposes including further
expansion of the Company's distributor network and enhancement of its marketing
materials, development of new products and enhancement of packaging of its
existing products and expansion into and development of international markets.
The Company does not intend to use any of the net proceeds to discharge
existing debt. Pending use of the net proceeds, they will be invested by the
Company in investment grade, short-term, interest-bearing securities.
In the event that the Company does not obtain any net proceeds from these
offerings, it anticipates that it will be able to continue to operate on
internally generated cash. During the nine months ended September 30, 1996, the
Company had an average monthly positive cash flow from operating activities of
approximately $34,400, and an average monthly net positive cash flow of
approximately $600, after investing and financing activities. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK AND PUBLIC WARRANTS AND DIVIDENDS
The Common Stock, Class A Warrants and Class B Warrants are traded in the
over-the-counter market and are quoted by the National Quotation Bureau,
Incorporated under the symbols "AMSO," "AMSOW" and "AMSOZ," respectively. The
following table sets forth, for the periods presented, the high and low closing
bid quotations in the over-the-counter market as quoted by the National
Quotation Bureau, Incorporated, adjusted to give effect to the one to eight
reverse stock dividend on October 29, 1996. The bid quotations reflect inter-
dealer prices without adjustment for retail markups, markdowns or commissions
and may not reflect actual transactions.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK WARRANTS WARRANTS
-------------- ------------- -----------
CLOSING BID CLOSING BID CLOSING BID
-------------- ------------- -----------
HIGH LOW HIGH LOW HIGH LOW
------ ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
1996:
First Quarter Ended
March 31...................... $ 6.48 $5.04 $ .48 $.24 $ .48 $.24
Second Quarter Ended
June 30....................... $ 8.00 $5.04 $1.04 $.24 $1.04 $.24
Third Quarter Ended
September 30.................. $ 7.84 $5.52 $1.00 $.24 $1.00 $.24
1995:
First Quarter Ended
March 31...................... $ 2.00 $1.76 $ .16 $.16 $ .08 $.08
Second Quarter Ended
June 30....................... $ 3.76 $2.00 $ .16 $.16 $ .08 $.08
Third Quarter Ended
September 30.................. $10.00 $3.60 $1.04 $.48 $ .24 $.08
Fourth Quarter Ended
December 31................... $ 7.52 $4.48 $ .48 $.24 $ .08 $.08
</TABLE>
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<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK WARRANTS WARRANTS
-------------- ------------- -----------
CLOSING BID CLOSING BID CLOSING BID
-------------- ------------- -----------
HIGH LOW HIGH LOW HIGH LOW
------ ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
1994:
First Quarter Ended
March 31..................... $1.52 $1.04 $.16 $.16 $.08 $.08
Second Quarter Ended
June 30...................... $2.00 $1.52 $.16 $.16 $.08 $.08
Third Quarter Ended
September 30................. $2.00 $1.52 $.16 $.16 $.08 $.08
Fourth Quarter Ended
December 31.................. $2.48 $1.52 $.16 $.16 $.08 $.08
</TABLE>
On November 8, 1996, the closing bid and asked prices, as quoted by the
National Quotation Bureau, Incorporated, of the Common Stock were $5.76 and
$6.25, respectively, the Class A Warrants were $.24 and $.56, respectively, and
the Class B Warrants were $.24 and $.56, respectively. On October 28, 1996,
there were approximately 1,070, 338 and 269 holders of the Common Stock, the
Class A Warrants and Class B Warrants, respectively.
PENNY STOCK TRADING RULES
Unless other exemptions become available in the future, in the event the
bid price of the Common Stock in the over-the-counter market is less than $5.00,
the Common Stock, Class A Warrants, Class B Warrants, Units and 1996-A Warrants
will be subject to the "penney 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 disclosure 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.
Required compliance with the penny stock trading rules affect or will
affect the ability to resell the Common Stock, Class A Warrants, Class B
Warrants, Units, or 1996-A 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, Class B Warrants, Units, or 1996-A Warrants may be
unable to obtain on resale the quoted bid price because a dealer or group of
dealers may
-22-
<PAGE>
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, Class B Warrants, Units, or 1996-A
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, Class B Warrants,
Units or 1996-A Warrants may not be reliable.
DIVIDEND POLICY
The Company's dividend policy is to retain its earnings to support the
expansion of its operations. The Board of Directors of the Company does not
intend to pay cash dividends on the Common Stock in the foreseeable future. Any
future cash dividends will depend on future earnings, capital requirements, the
Company's financial condition and other factors deemed relevant by the Board of
Directors. See "Risk Factors--Future Operating Results," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, without giving effect to or assuming exercise of the Public
Warrants pursuant to the Warrant Modification Offer or the Rights pursuant to
the Rights Offering and without giving effect to the issuance of the additional
5,000 shares of Common Stock in connection with the MMI Acquisition (see "The
Company--Background--MMI Acquisition"). This table should be read in conjunction
with the unaudited consolidated financial statements and notes thereto of the
Company appearing elsewhere in this Prospectus. See "Unaudited Pro Forma
Consolidated Financial Information of the Company."
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996
-------------
<S> <C>
Current portion of long-term debt........................ 52,091
-----------
Long-term debt, net of current portion................... 85,692
-----------
Stockholders' equity:
Preferred Stock, $.0001 par value, 5,000,000
authorized; none outstanding....................... --
Common Stock, $.0001 par value, 495,000,000
shares authorized; 2,143,191 shares issued
and outstanding at September 30, 1996.............. 214
Paid-in capital in excess of par, common stock......... 1,981,380
Retained earnings (deficit) (1,144,319)
-----------
Total stockholders' equity........................... 837,275
-----------
Total capitalization..................................... $ 975,058
===========
</TABLE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the financial statements and related
notes of Advantage Marketing Systems, Inc. (formerly AMS, Inc.) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein. The selected financial information
presented below is not necessarily indicative of the future results of
operations or financial performance of the Company. See "Risk Factors--Future
Operating Results." The selected financial information as of and for the years
ended December 31, 1994 and 1995, is derived from the audited financial
statements of Advantage Marketing Systems, Inc. (formerly AMS, Inc.) contained
elsewhere in this Prospectus. The selected financial information presented as of
and for the nine months ended September 30, 1995 and 1996, is derived
-23-
<PAGE>
from the unaudited financial statements of the Company, which financial
statements are contained elsewhere in this Prospectus. In the opinion of
management of the Company, the unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------- ---------- ---------- ----------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Programs..................... $2,564,542 $4,382,935 $3,155,934 $4,186,404
Promotional material......... 82,780 109,733 88,893 234,735
Other........................ 30,625 25,535 17,797 37,471
---------- ---------- ---------- ----------
Total revenues............... 2,677,947 4,518,203 3,262,624 4,458,610
---------- ---------- ---------- ----------
Cost and expenses:
Programs..................... 684,128 1,094,157 906,935 968,635
Promotional material......... 83,964 92,087 69,395 142,610
Selling...................... 1,289,616 2,201,510 1,495,084 2,235,879
General and administrative... 515,158 857,743 593,273 789,410
Interest expense............. 25,075 22,998 20,335 19,422
---------- ---------- ---------- ----------
Total expenses............... 2,597,941 4,268,495 3,085,022 4,155,956
---------- ---------- ---------- ----------
Income before income taxes...... 80,006 249,708 177,602 302,654
Tax benefit -- -- -- 438,349
---------- ---------- ---------- ----------
Net income...................... $ 80,006 $ 249,708 $ 177,602 $ 741,003
========== ========== ========== ==========
Weighted average common shares
outstanding(1)................. 2,119,356 2,662,681 2,121,524 3,175,551
Net income per common share..... $ .04 $ .09 $ .08 $ .23
CASH FLOW DATA:
Net cash provided by operating
activities..................... $ 109,252 $ 337,241 $ 239,071 $ 310,375
Net cash used in investing
activities..................... (63,646) (99,561) (4,072) (227,083)
Net cash used in financing
activities..................... (45,606) (125,593) (76,044) (77,414)
DECEMBER 31, SEPTEMBER 30,
-----------------------------------
1994 1995 1996
---- ---- ----
BALANCE SHEET DATA:
Current assets .......................... $ 117,796 $ 283,341 $ 454,800
Working capital deficiency .............. (338,662) (170,734) (137,166)
Total assets ............................ 176,969 532,996 1,514,933
Short-term debt ......................... 138,655 111,048 52,091
Long-term debt .......................... 7,947 104,149 85,692
Stockholders' equity (deficiency) ....... (287,436) (25,228) 837,275
- ------------------------
</TABLE>
(1) Without giving effect to exercise of the Public Warrants pursuant to the
Warrant Modification Offer and exercise of the Rights pursuant to the
Rights Offering and the issuance of an additional 5,000 shares in
connection with the MMI Acquisition, and does not include 1,125,000 shares
reserved for issuance pursuant to the Stock Option Plan. See "Description
of Securities--Common Stock--Rights Offering," and "--Other Options and
Warrants" and "Management--Stock Option Plan."
-24-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto of the Company and "Selected Financial
Information" appearing elsewhere in this Prospectus.
Effective December 11, 1995, Advantage Marketing Systems, Inc., a Delaware
corporation ("AMS Delaware") and the former parent of the Company, merged with
and into the Company, with the Company being the surviving corporation (the
"Merger Reincorporation"). Prior to the Merger Reincorporation, all operations
of AMS (Delaware) were conducted solely as a holding company of the Company as
its wholly-owned subsidiary, and AMS (Delaware) did not have any other operating
activities. Following the Merger Reincorporation, all operating activities of
AMS Delaware and the Company as its wholly-owned subsidiary, were continued by
the Company. The following discussion and analysis of results of operations of
the Company are the consolidated results of operations of AMS Delaware and the
Company prior to the Merger Reincorporation, the predecessor of the Company. See
"The Company--Background--Merger Reincorporation."
RESULTS OF OPERATIONS
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, and (ii) for the nine
months ended September 30, 1995 and 1996, which are derived from the unaudited
consolidated financial statements of the Company, which include, in the opinion
of management of the Company, all normal recurring adjustments considered
necessary for a fair statement of results for such periods. 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, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------- --------------------------------------------
1994 1995 1995 1996
-------------------- --------------------- -------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Programs......................... $2,564,542 95.8% $4,382,935 97.0% $3,155,934 96.7% $4,186,404 93.9%
Promotional material............. 82,780 3.1 109,733 2.4 88,893 2.7 234,735 5.3
Other............................ 30,625 1.1 25,535 .6 17,797 .6 37,471 .8
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total revenues................. 2,677,947 100.0 4,518,203 100.0 3,262,624 100.0 4,458,610 100.0
---------- ----- ---------- ----- ---------- ----- ---------- -----
Costs and Expenses
Programs......................... 684,128 25.6 1,094,157 24.2 906,935 27.8 968,635 21.7
Promotional material............. 83,964 3.1 2.1 2.1 69,395 2.2 142,610 3.3
Selling.......................... 1,289,616 48.2 2,201,510 48.7 1,495,084 45.8 2,235,879 50.1
General and administrative....... 515,158 19.2 857,743 19.0 593,273 18.2 789,410 17.7
Interest Expense................. 25,075 .9 22,998 .5 20,335 .6 19,422 .4
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total expenses................. 2,597,941 97.0 4,268,495 94.5 3,085,022 94.6 4,155,956 93.2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income before taxes................ 80,006 3.0 249,708 5.5 177,602 5.4 302,654 6.8
Tax benefit........................ -- -- -- -- -- -- 438,349 9.8
---------- ----- ---------- ----- ---------- ----- ---------- -----
Net income......................... $ 80,006 3.0% $ 249,708 5.5% $ 177,602 5.4% $ 741,003 16.6%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
During 1994, 1995 and the nine months ended September 30, 1996, the Company
experienced increases in revenues from programs and net income compared to the
preceding year or period. The increases were principally the result of
introduction of the Company's NewTrition Plan in October 1993 and expansion of
the Company's network of its independent sales representatives and associates,
which resulted in achieving substantial increased sales volume of the NewTrition
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.
-25-
<PAGE>
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 Nine Month Period Ended September 30, 1995 and 1996
During 1996, total revenues increased $1,195,986 (a 36.7 percent increase)
as compared to 1995. The increase was primarily 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 distributors. At
September 30, 1996, the Company had 9,214 "active" independent distributors
compared to 6,447 at September 30, 1995. A distributor is considered to be
"active" if he or she has made a product purchase from the Company within the
previous 12 months. During 1996, the Company made aggregate sales under its
NewTrition Plan of $4,146,316 to 7,016 distributors, compared to aggregate sales
in 1995 of $2,748,876 to 4,639 distributors. Promotional material revenue
increased $145,842 (a 164.1 percent increase) to $234,735 in 1996 from $88,893
in 1995. In addition, other revenue increased by $19,674 (a 110.5 percent
increase) from $17,797 in 1995 to $37,471 in 1996, as a result of increased
interest income during 1996.
Total costs and expenses of programs, promotional material and selling
during 1996 increased by $875,710 (a 35.4 percent increase) to $3,347,124 from
$2,471,414 during 1995. This increase was attributable to an increase of (i)
$61,700 (a 6.8 percent increase) in costs of programs and (ii) $740,795 (a 49.5
percent increase) in selling expenses, while promotional material expenses
increased $73,215 (a 105.5 percent increase). The costs and expenses of
programs, promotional materials and selling, as a percentage of program sales
revenue, increased from 78.3 percent during 1995 to 80.0 percent during 1996 due
to an increase in selling costs as a percentage of program sale revenue from
47.4 percent to 53.4 percent, offset by a decrease in the costs of programs as a
percentage of program sale revenue from 28.7 percent to 23.1 percent as a result
of price reductions obtained from vendors on the program costs associated with
the Company's NewTrition Plan. The Company achieved a net profit on sales of
promotional materials of $92,125 during 1996 compared to a net profit of $19,498
during 1995 as a result of the Company's curtailed practice of providing
promotional materials at reduced cost during special promotions.
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 $300,602 (a 38.9 percent
increase) to $1,074,015 in 1996 from $773,413 in 1995. The gross profit on
program and promotional material revenues increased as a percentage of total
revenue from 23.7 percent in 1995 to 24.1 percent in 1996. The increase in the
Company's gross profit margin on program and promotional material revenues
resulted from the combination of a decrease in program and promotional materials
costs as a percentage of programs and promotional material revenues, offset by
an increase in selling costs and expenses as a percentage of programs and
promotional material revenues.
General and administrative expenses increased $196,137 (a 33.1 percent
increase) to $789,410 during 1996 from $593,273 during 1995. 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 seven additional employees. Consequently, payroll and
employee costs increased by $184,055 during 1996 as the Company increased its
number of employees from ten to 17. Interest expense during 1996 decreased $913
(a 4.5 percent decrease) to $19,422 from $20,335 during 1995.
Income before taxes increased $125,052 (a 70.4 percent increase) to
$302,654 during 1996 from $177,602 during 1995. Income before taxes as a
percentage of total revenue increased from 5.4 percent during 1995 to 6.8
percent during 1996.
Net income increased $563,401 (a 317.2 percent increase) to $741,003 during
1996 from $177,602 during 1995. Net income as a percentage of total revenue
increased from 5.4 percent during 1995 to 16.6 percent during 1996. This
increase was primarily the result of the Company recording the tax benefits of
its net operating loss carryforwards
-26-
<PAGE>
for income tax purposes at September 30, 1996. The Company has net operating
loss carryforwards for income tax purposes at September 30, 1996 totaling
approximately $1,369,841, which will begin to expire in 2003. The valuation
allowance recorded at December 31, 1995 was reversed at September 30, 1996 as
management has determined that it is more likely than not that a tax benefit
will be realized from the related deferred tax assets.
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 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 $515,308 (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.
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. However, there can be no
assurance that once the Company's current growth patterns peak that the company
will not be subject to seasonal fluctuations in operations.
-27-
<PAGE>
Income Taxes
The Company's deferred tax assets consist primarily of net operating loss
carryforwards for income tax purposes at September 30, 1996 totaling
approximately $1,369,841, which will begin to expire in 2003. During 1995, the
Company's deferred tax assets and valuation allowance were decreased by
approximately $120,700 and $116,200, respectively.
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax benefits of
its deferred tax assets. Based upon the historical trend of increasing earnings
management has concluded that it is more likely than not that a tax benefit will
be realized from its deferred tax assets and therefore eliminated the previously
recorded valuation allowance for its deferred tax assets. Elimination of the
valuation allowance resulted in a deferred tax asset at September 30, 1996, of
$438,349 and a corresponding tax benefit for the quarter ending September 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a deficit working capital of approximately $137,166 at
September 30, 1996, as compared to a deficit of approximately $170,700 at
December 31, 1995. Of this $137,166 deficit, approximately $17,658 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 the nine months ended September 30,
1996, net cash provided by operating activities was $310,375 of which $227,083
was used in investing activities, and $77,414 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
$5,878. The Company's working capital needs over the next twelve months consist
primarily of administrative and operating overhead. For the three months ended
September 30, 1996, the Company's administrative and operating overhead averaged
approximately $100,000 per month. The Company anticipates that this level of
administrative and operating overhead will continue over the next twelve months.
At September 30, 1996, and December 31, 1995, the balance due on a short-
term loan from the Company's Chief Executive Officer and major shareholder was
$17,658 and $81,929, respectively. 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 the nine months
ended September 30, 1996, the Company did not receive any advances under the
loan, while during 1995, the Company received aggregate advances of $31,963
under the loan. During the nine months ended September 30, 1996 and the year
ended December 31, 1995, the Company made principal payments of $64,271 and
$127,615, respectively, 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, and as of the date of this Prospectus the Company is making
weekly principal and interest payments of $1,500. See "Certain Transactions."
The Company made advances to the John Hail Agency, Inc. ("JHA"), a company
of which the Company's Chief Executive Officer and major shareholder is the sole
director and shareholder, of $22,000, and $87,684 during the nine months ended
September 30, 1996, and the year ended December 31, 1995. During the nine months
ended September 30, 1996, JHA made repayments of $3,040. JHA made repayments of
these advances of $67,401 during the fiscal year ended December 31, 1995.
Furthermore, effective June 30, 1996, the Company adopted a policy to not make
any further advances to JHA, and JHA executed a promissory note payable to the
Company in the principal amount of $73,964, bearing interest at eight percent
per annum and payable in 60 installments of $1,499 per month. See "Certain
Transactions."
The Company's primary source of liquidity is net cash provided by operating
activities. 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 September 30, 1996, the Company did not have any
material commitments for capital expenditures.
-28-
<PAGE>
In the event that the Company does not obtain any net proceeds from this
offering and the Rights Offering, it is anticipated that Company will be able to
continue to operate on internally generated cash. During the nine months ended
September 30, 1996, the Company had an average monthly positive cash flow from
operating activities of approximately $34,000, and an average monthly net
positive cash flow of approximately $650, after investing and financing
activities.
In connection with these offerings the Company has incurred certain direct
costs consisting primarily of legal, accounting and filing fees. These costs
totaled approximately $153,000 and $53,000 at September 30, 1996, and December
31, 1995, respectively, and are included in other assets.
Pursuant to a stock purchase agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the Company
(the "MMI Acquisition"). MMI is a multi-level marketer of various third-party
manufactured nutritional supplement products. Pursuant to the Purchase Agreement
and in connection with the MMI Acquisition, the Company issued and delivered to
the shareholders of MMI 20,000 shares of common stock. In addition, the Company
agreed to issue and deliver an additional 5,000 shares of common stock to the
shareholders of MMI on or before December 17, 1996, pending determination of
certain liabilities.
In connection with the MMI Acquisition, the excess of the purchase price of
$176,103, which includes $56,103 of transaction costs, over a negative $3,059
fair market value of assets of MMI, net of liabilities, has been allocated
$119,162 to goodwill and $60,000 to the covenant not to compete. Goodwill and
the covenant not to compete will be amortized over a seven and four and one-half
year period, respectively. The fair market value of the assets of MMI, net of
liabilities, declined from $16,690 to a negative $3,059 between March 31, 1996
and May 31, 1996.
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.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
Set forth below are certain unaudited pro forma consolidated statements of
operations of the Company, presenting the pro forma effects of the MMI
Acquisition, assuming the MMI Acquisition occurred at the beginning of each
period for which results of operations are presented. The MMI Acquisition was
accounted for using the purchase method of accounting. The information presented
below is derived from, and should be read in conjunction with, the financial
statements of the Company and MMI presented elsewhere in this Prospectus. The
pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations that would have been
achieved if the transactions included in the pro forma adjustments had been
consummated in accordance with the assumptions set forth below, nor is it
necessarily indicative of future operating results.
-29-
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
MIRACLE
ADVANTAGE MOUNTAIN
MARKETING INTERNATIONAL,
SYSTEMS, INC. INC.
DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1995 1995 ADJUSTMENTS COMBINED
------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Programs............... $4,382,935 $ 277,366 $ -- $4,660,301
Promotional material... 109,733 -- -- 109,733
Other.................. 25,535 -- -- 25,535
---------- --------- -------- ----------
Total revenues....... 4,518,203 277,366 -- 4,795,569
---------- --------- -------- ----------
COSTS AND EXPENSES:
Programs............... 1,094,157 103,217 -- 1,197,374
Promotional material... 92,087 -- -- 92,087
Selling................ 2,201,510 145,650 -- 2,347,160
General and
administration........ 857,743 157,725 30,356(a) 1,045,824
Interest expense....... 22,998 1,403 -- 24,401
---------- --------- -------- ----------
Total expenses...... 4,268,495 407,995 30,356 4,706,846
---------- --------- -------- ----------
NET INCOME (LOSS)........ $ 249,708 $(130,629) $(30,356) $ 88,723
========== ========= ======== ==========
Weighted average common
shares outstanding...... 2,662,681 20,000 2,682,681
========== ======== =========
Net income per common
share................... $ .09 $ .03
========== ==========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
-30-
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MIRACLE
MOUNTAIN
INTERNATIONAL,
INC.
ADVANTAGE ---------------
SYSTEMS, INC. PRE-ACQUISITION
FOR THE NINE PERIOD
MONTHS ENDED FOR THE FIVE
SEPTEMBER 30, MONTHS ENDED PRO FORMA PRO FORMA
1996 MAY 31, 1996 ADJUSTMENTS COMBINED
------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Programs $4,186,404 $205,112 $ -- $4,391,516
Promotional material 234,735 -- -- 234,735
Other 37,471 -- -- 37,471
----------
Total revenues 4,458,610 205,112 -- 4,663,722
---------- -------- -------- ----------
COSTS AND EXPENSES:
Programs 968,635 54,743 -- 1,023,378
Promotional material 142,610 -- -- 142,610
Selling 2,235,879 129,758 -- 2,365,637
General and
administration 789,410 49,188 12,648(a) 851,246
Interest expense 19,422 2,110 -- 21,532
Total expenses 4,155,956 235,799 12,648 4,404,403
---------- -------- --------- ----------
INCOME (LOSS) BEFORE TAXES 302,654 (30,687) (12,648) 259,319
TAX BENEFIT 438,349 -- -- 438,349
---------- -------- --------- ----------
NET INCOME (LOSS) $ 741,003 $(30,687) $ (12,648) $ 697,668
========== ======== ========= ==========
Weighted average common
shares outstanding 3,175,551 20,000 3,195,551
========== ========= ==========
Net income per common share $ .23 $ .22
========== ==========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
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ADVXANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS FOR PRESENTATION
The pro forma balance sheet and statement of income present the pro forma
effects of the acquisition by the Company of the issued and outstanding
capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the
Company (the "MMI Acquisition"), pursuant to a Stock Purchase Agreement
with an effective date of May 31, 1996, (the "Purchase Agreement"). MMI is
a multi-level marketer of various third-party manufactured nutritional
supplement products. Pursuant to the Purchase Agreement and in connection
with the MMI Acquisition, the Company issued and delivered to the
shareholders of MMI 20,000 shares of Common Stock. In addition, the Company
agreed to issue and deliver an additional 5,000 shares of Common Stock to
the shareholders of MMI on or before December 17, 1996, pending
determination of certain liabilities.
The accompanying unaudited pro forma statement of income is presented
assuming the MMI Acquisition occurred or was consummated on the first day
of the period presented. The historical information presented for the
Company and MMI as of December 31, 1995, is derived from the audited
financial statements of the Company and MMI as of such date.
The pro forma financial information presented in the unaudited pro forma
financial statements is not necessarily indicative of the results of
operations that would have been achieved had the operations been those of a
single corporate entity. The results of operations presented in the
unaudited pro forma statement of income are not necessarily indicative of
the consolidate results of future operations of the Company following
consummation of the MMI Acquisition.
2. ADJUSTMENTS
The accompanying unaudited pro forma consolidated financial statements have
been adjusted to record and give effect to the following:
(a) The excess of the purchase price of $176,103, which includes $56,103 of
transaction costs, over the negative $3,059 fair market value of the
assets of MMI, net of liabilities, has been allocated $119,162 to
goodwill and $60,000 to the covenant not to compete. Goodwill and the
covenant not to compete will be amortized over a seven year and four
and one-half year period, respectively. The goodwill amortization for
the year ended December 31, 1995, and the five months ended May 31,
1996, was $17,023 and $7,093, respectively. Covenant amortization for
the year ended December 31, 1995, and for the five months ended May 31,
1996, was $13,333 and $5,555, respectively.
3. NET INCOME PER SHARE
Pro forma per share calculations for the Company are based upon the number
of shares of Common Stock to be outstanding after giving effect to the MMI
Acquisition.
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PUBLIC WARRANT REDEMPTION
Pursuant to this Prospectus, the Company is notifying the holders (the
"Warrant Holders") of the Class A Common Stock Purchase Warrants (the "Class A
Warrants") and the Class B Common Stock Purchase Warrants (the "Class B
Warrants") as of , 1996 (the "Record Date"), of the election
of the Company to redeem (the "Warrant Redemption") the Class A Warrants and
Class B Warrants (collectively the "Public Warrants") for $.0008 per warrant
(the "Redemption Price") at 5:00 p.m., Central Standard Time, on ,
1996 (the "Redemption Date"). Each of the Class A Warrants and Class B Warrants
is exercisable for the purchase of one share of Common Stock for $6.00 or $8.00,
respectively (the "Warrant Exercise Price"), on or before expiration of the
Redemption Date, without giving effect to the Warrant Modification Offer. See
"Terms of the Warrant Modification Offer." Pursuant to the Warrant Modification
Offer, during the Special Exercise Period, each Public Warrant will be
exercisable to purchase one Unit (consisting of one share of Common Stock and
one 1996-A Warrant) for $6.00, on or before the Redemption Date. The Redemption
Date may be extended by the Company to a date that is not more than days
following the original Redemption Date. See "Terms of the Warrant Modification
Offer--Expiration; Extensions; Termination; Amendments."
The Public Warrants may only be exercised by a Warrant Holder in the event
the Registration Statement of which this Prospectus is a part is effective with
the Securities and Exchange Commission and the Units (or Common Stock and 1996-A
Warrants comprising the Units) are qualified for sale in the state of residence
of the Warrant Holder. See "Risk Factors--Securities Laws Restrictions on
Exercise of Warrants," "Terms of Warrant Modification Offer--Acceptance of
Public Warrants; Delivery of Units," and "Description of Securities--Public
Warrants." Subject to the foregoing, the Class A Warrants and Class B Warrants
are exercisable at any time by the Warrant Holders prior to the Redemption Date
by delivery of the warrant certificate evidencing the Public Warrant to U.S.
Stock Transfer Corporation (the "Warrant Agent") at 1745 Gardena Avenue,
Glendale, California 91204, with the "Form of Election to Purchase" on the
reverse of the certificate duly completed and signed, accompanied with payment
of the Warrant Price in cash or by certified check or bank draft payable to the
order of the Company. See "Terms of the Warrant Modification Offer--How to
Exercise."
PURPOSES OF THE WARRANT MODIFICATION OFFER
The purposes of the Warrant Modification Offer are to (i) encourage the
exercise of the Public Warrants prior to redemption, (ii) strengthen the
Company's capital structure by increasing stockholders' equity and current
assets, and (iii) provide the Company greater financial flexibility. The net
proceeds of this offering and the Warrant Modification Offer will give the
Company greater financial flexibility in that the Company otherwise would be
required to rely on debt or other sources of capital to expand its sales and
marketing activities. See "Use of Proceeds." It is the Company's belief that the
availability of the 1996-A Warrant and the reduction of the exercise price of
the Class B Warrants to $6.00 will induce Class A and B Warrant holders to
exercise their Public Warrants as opposed to receiving $.0008 per Warrant upon
redemption.
Concurrently with this offering and the Warrant Modification Offer, the
Company is distributing the Rights to its shareholders and offering 2,148,191
Units pursuant to the Rights Offering. See "Description of Securities-- Common
Stock--Rights Offering." In the event the Public Warrants are exercised in full
the net proceeds to the Company, after deduction of $100,000 offering costs,
will be $6,202,820, and in the event the Rights are exercised in full pursuant
to the Rights Offering, the net proceeds to the Company, after deduction of
$100,000 offering costs will be $14,507,699. See "Use of Proceeds." However,
there is no assurance that any of the Public Warrants will be exercised pursuant
to the Warrant Modification Offer or that any of the Rights will be exercised.
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TERMS OF THE WARRANT MODIFICATION OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions
herein set forth, to reduce the Warrant Exercise Price of the Class B Warrants
to $6.00 from the current $8.00 exercise price during the period commencing on
the date of this Prospectus until the Redemption Date (5:00 p.m. Central
Standard Time on , 1996, which may be extended by the Company to a
date that is not more than days following the original Redemption Date (the
"Special Exercise Period"). In addition, the Company will issue as soon as
practicable after expiration of the Special Exercise Period (the "Expiration
Date") one Unit (one share of Common Stock and one 1996-A Warrant) for each
Public Warrant effectively exercised, and not withdrawn, on or prior to the
Redemption Date, subject to certain conditions as set forth herein. The
Company's obligation to consummate the Warrant Modification Offer is not subject
to the exercise of any minimum number of Public Warrants. All Public Warrants
properly tendered for exercise, and not withdrawn, on or prior to the Expiration
Date, will be accepted by the Company upon the terms and subject to the
conditions set forth herein.
Those Public Warrants not exercised on or prior to the Redemption Date will
be redeemed on the Redemption Date for $.0008 per warrant. No dissenters' rights
of appraisal exist with respect to the Warrant Modification Offer.
PLAN OF DISTRIBUTION
The Units are being offered on a best efforts basis by the Company and its
officers and directors, without commissions, selling fees or direct or indirect
remuneration. From the proceeds of the Warrant Modification Offer and the
offering, the Company will pay the costs incurred with respect to the offering,
which are estimated to be $100,000. Offers will be limited to the holders of the
Public Warrants residing in those states in which the Units are registered or
qualified to be offered and sold.
Holders of the Public Warrants will not be required to pay any brokerage
commissions or fees with respect to the exercise of their Public Warrants. The
Company will pay all charges and expenses of the Warrant Agent. See "--
Acceptance of Public Warrants; Delivery of Units," below.
EXPIRATION; EXTENSIONS; TERMINATION; AMENDMENTS
The Warrant Modification Offer will expire on the Redemption Date (at 5:00
p.m., Central Standard Time, on , 1996), unless and until the Company
extends the Redemption Date, in which event the Warrant Modification Offer will
expire at the latest time and date to which the Redemption Date is extended. The
Special Exercise Period will commence on the date of this Prospectus and will
expire on the Redemption Date. The Company expressly reserves the right at any
time and from time to time, regardless of whether or not any of the conditions
specified in "Conditions of the Warrant Modification Offer" below have been
satisfied, (i) to extend the Redemption Date, which will also extend the Special
Exercise Period during which the Warrant Modification Offer may be accepted and
the Public Warrants may be exercised by giving oral or written notice to the
Warrant Agent and by making a public announcement of such extension or (ii) to
amend the Warrant Modification Offer in any respect not materially adverse to
the Warrant Holders by making public announcement of such amendment. The
Company's decision regarding the advisability of extending the Redemption Date
(and effectively extending the Special Exercise Period) will be based upon
factors and considerations that exist and that the Company deems material and
appropriate at that time. As of the date of this Prospectus, such factors and
considerations are undeterminable. There can be no assurance that the Company
will exercise its right to extend or amend the Warrant Modification Offer and
there is no limit on the number of times the Company may extend the Redemption
Date.
Furthermore, the Company reserves the right, in its sole discretion,
in the event any of the conditions set forth below under "--Conditions of the
Warrant Modification Offer" are not met or waived by the Company and so long as
the Public Warrants have not theretofore been accepted for exercise pursuant to
the Warrant Modification Offer, to
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<PAGE>
delay (except as otherwise required by applicable law) acceptance for exercise
of any Public Warrants exercised pursuant to the Warrant Modification Offer or
to terminate the Warrant Modification Offer and not accept for exercise any such
Public Warrants. Any extension, termination or amendment of the Warrant
Modification Offer will be followed as promptly as practicable by notification
thereof in a manner reasonably calculated to inform the Warrant Holders of such
extension, termination or amendment. Without limiting the manner in which the
Company may choose to make any public announcement, the Company will not, unless
otherwise required by applicable law, have any obligation to publish, advertise
or otherwise communicate any such public announcement other than by making a
release to the Dow Jones News Service. In the case of an extension of the
Redemption Date and the Warrant Modification Offer, Securities and Exchange
Commission regulations require a public announcement of such extension no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Redemption Date.
In the event the Company decides to waive, modify or amend a material
provision of the Warrant Modification Offer, it may do so at any time or from
time to time, provided that it gives notice thereof in the manner specified
above and extends the Redemption Date and the Warrant Modification Offer to the
extent required by the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). With respect to a change in the Warrant Exercise Price of the
Public Warrants and/or the Units issuable upon exercise of the Public Warrants,
Rule 13e-4(f)(1) under the Exchange Act generally requires that a tender offer
remain open for at least 10 business days from the date that notice of such
change is first published or sent or given to the Warrant Holders. The minimum
period during which an offer must remain open following other material changes
in the terms of the offer or information concerning the offer will depend upon
the facts and circumstances, including the relative materiality of the change in
the terms or information. Any amendment to the Warrant Modification Offer will
apply to all Public Warrants tendered for exercise pursuant thereto, regardless
of when or in what order the Public Warrants are tendered. The term "business
day" shall mean a day other than Saturday, Sunday or a federal holiday and shall
consist of the time period from 12:01 a.m. through 12:00 midnight Eastern Time.
CONDITIONS OF THE WARRANT MODIFICATION OFFER
Notwithstanding any other provisions of the Warrant Modification Offer, the
Company may cancel, modify or terminate the Warrant Modification Offer and is
not required to accept for exercise any Public Warrants exercised pursuant
thereto if, prior to the Redemption Date:
(i) there shall be in effect any injunction prohibiting, restricting or
delaying consummation of the Warrant Modification Offer;
(ii) there shall have occurred any general suspension of trading in, or
limitation of prices for, securities in the over-the-counter markets; or
(iii) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any governmental authority, which would prohibit
or materially restrict or delay consummation of the Warrant Modification Offer.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
conditions or may be waived by the Company in whole or in part at any time and
from time to time, in its sole discretion. Each right of the Company in
connection with the foregoing conditions will be deemed an ongoing right that
may be asserted any time and from time to time. The failure by the Company, at
any time, to exercise its rights with respect to any of these conditions will
not be deemed a waiver of any such conditions. Any determination by the Company
concerning applicability of the conditions to the events set forth herein will
be final and binding upon all parties.
The Company expressly reserves the right to terminate or amend the Warrant
Modification Offer and not accept for exercise any Public Warrants pursuant to
the Warrant Modification Offer if any of the foregoing conditions
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<PAGE>
are not satisfied. The Company confirms that its reservation of the right to
delay acceptance of tendered Public Warrants is subject to the provisions of
Rule 13e-4(f)(5) and Rule 14e-1(c) under the Exchange Act, which provide that
the Company shall either deliver the Units or return the tendered Public
Warrants promptly after the termination or withdrawal of the Warrant
Modification Offer.
ADVANTAGES AND DISADVANTAGES OF PUBLIC WARRANT EXERCISE
Exercise of the Public Warrants prior to the Redemption Date by the Warrant
Holders may have both significant adverse and advantageous consequences for
Warrant Holders. The adverse consequences to the Warrant Holders who do not
exercise their Public Warrants include (i) the Public Warrants ceasing to be
issued and outstanding, (ii) the Public Warrants becoming worthless resulting in
a loss to the Warrant Holders to the extent of their investments in the Public
Warrants in excess of the $.0008 Redemption Price per Public Warrant, (iii) loss
of any potential appreciation in the Public Warrants as a result of an increase
in the trading market value of the Units purchasable upon exercise of the Public
Warrants pursuant to the Warrant Modification Offer, and (iv) loss of the
ability to sell the Public Warrants as a tradable security. The advantageous
consequences for those Warrant Holders that fail to exercise the Public Warrants
will be entitlement to receipt of the $.0008 Redemption Price per Public
Warrant. See "Public Warrant Redemption."
The advantageous consequences of exercise of the Public Warrants and
receipt of the Units include (i) acquisition and receipt of equity ownership of
the Company represented by the shares of Common Stock and the 1996-A Warrants
(each of which will entitle the holder to purchase an additional share of Common
Stock at an exercise price of $12.00, subject to adjustment in certain events
and possible redemption by the Company at $.0001) comprising the Units, (ii)
participation in future growth of the Company and any potential market value
appreciation of the Common Stock and, if a market develops, the 1996-A Warrant,
and (iii) receive any investment liquidity that the Common Stock has or may have
in the future as well as any such liquidity the 1996-A Warrant may come to have
in the event a public market develops. Although there may be advantages offered
by exercise of the Public Warrants, the Warrant Holders should also understand
and be aware that (i) exercise of the Public Warrants will constitute an
additional investment requiring payment of the $6.00 per Unit Exercise Price of
the Public Warrants in order to receive the Units (and the Common Stock and
1996-A Warrants comprising the Units), (ii) there are various risks associated
with such investment as disclosed in this Prospectus (see "Risk Factors"), (iii)
there is no assurance that a market will develop for the 1996-A Warrants, (iv)
the issuance of Units, Rights Offering Units, Common Stock, and 1996-A Warrants
pursuant to the Warrant Modification Offer and the Rights Offering, and the
exercise of outstanding stock options and other warrants may have an adverse
effect upon the public trading price of the Common Stock, and (v) the Common
Stock and, if a market develops, the 1996-A Warrants are or will be traded in
the over-the-counter market which typically is volitle in nature (see "Risk
Factors--Over-the-Counter Market; Penny Stock Trading Rules" and "Price Range of
Common Stock and Dividends--Penny Stock Trading Rules"). See "Risk Factors" and
"Description of Securities--Common Stock--Rights Offering," "--1996-A Warrants"
and "--Other Options and Warrants."
HOW TO EXERCISE
The acceptance by a Warrant Holder of the Warrant Modification Offer
pursuant to one of the procedures set forth below will constitute an agreement
between the Warrant Holder and the Company in accordance with the terms and
subject to the conditions set forth herein.
For effective exercise, the "Form of Election To Purchase" on the reverse
side of each Public Warrant certificate must be completed and executed as
indicated thereon, and the Public Warrant must be accompanied by payment of the
aggregate Warrant Exercise Price in cash or certified or official bank check
made payable to Advantage Marketing Systems, Inc., together with any other
required documents. The warrant certificate and payment must be transmitted to
and received by the Warrant Agent at its address set forth on the back cover of
this Prospectus on or before the Redemption Date, if the Public Warrant is being
exercised. However, in lieu of the foregoing, a holder may either (i) tender the
Public Warrants to be exercised pursuant to the procedure for book-entry tender
set forth below (and a confirmation of such book-entry tender must be received
by the Warrant Agent on or before the Redemption Date) or
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<PAGE>
(ii) comply with the guaranteed delivery procedure set forth below. The
beneficial holders of Public Warrants that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian are urged to contact such entity promptly if they wish to exercise the
Public Warrants. The Public Warrants certificates, together with the cash or
certified or official bank check and any other required documents to be
delivered, should be delivered only by hand or by courier, or transmitted by
mail, and only to the Warrant Agent and not to the Company. The method of
delivery of the Public Warrants and all other required documents to the Warrant
Agent is at the election and risk of the Warrant Holder, but if such delivery is
by mail it is suggested that the Warrant Holder use properly insured, registered
mail with return receipt requested, and that the mailing be made sufficiently in
advance of the Redemption Date to permit delivery to the Warrant Agent prior to
the Redemption Date.
Each signature of the Warrant Holders on the "Form of Election to Purchase"
of a Public Warrant certificate must be guaranteed by a member firm of any
registered national securities exchange or of the National Association of
Securities Dealers, Inc., or by a commercial bank or trust company having an
office or correspondent in the United States (collectively, "Eligible
Institutions").
In the event the certificates for the Public Warrants are registered in the
name of a person other than the person executing the "Form of Election to
Purchase" of such Public Warrants, or if Public Warrants that are not accepted
for exercise are to be returned to a person other than the registered owner,
then the "Assignment" on the reverse side of the Public Warrant certificates
must be endorsed or accompanied by an appropriate instrument of transfer, signed
exactly as the name of the registered owner appears on the certificates, with
the signatures on the "Assignment" or instruments of transfer guaranteed by an
Eligible Institution.
Book Entry Tender Procedure. Within two business days after the date
hereof, the Warrant Agent will establish accounts with respect to the
Public Warrants at the Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Warrant Modification Offer. Any financial
institution that is a participant in a Book-Entry Transfer Facility's
system may make book-entry delivery of the Public Warrants by causing the
Book-Entry Transfer Facility to transfer the same into the Warrant Agent's
account at such Book-Entry Transfer Facility in accordance with such Book-
Entry Transfer Facility's procedure for such transfer and to confirm such
transfer to the Warrant Agent in writing. Any tender of Public Warrants to
be effected through book-entry delivery at a Book-Entry Transfer Facility
must have either (i) the Public Warrant executed by the holder of record,
together with signature guarantees, and delivered to a Book-Entry Transfer
Facility and the cash or certified or official bank check, together with
all other documents required, transmitted to and received by the Warrant
Agent at its address set forth on the back cover of this Prospectus on or
before the Redemption Date or (ii) complied with the guaranteed delivery
procedure set forth below. Delivery of documents to a Book-Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedure
does not constitute delivery to the Warrant Agent.
Guaranteed Delivery Procedure. In the event a Warrant Holder desires
to exercise such Public Warrants (pursuant to the Warrant Modification
Offer or otherwise) but is unable either to deliver his certificates, the
cash or certified or official bank check and all other required documents
to the Warrant Agent on or before the Redemption Date or to comply with the
procedure for book-entry tender on a timely basis, such Public Warrants may
nevertheless be tendered for exercise, provided that all of the following
conditions are satisfied:
(i) such tenders are made by or through an Eligible Institution;
(ii) prior to the Redemption Date, a properly completed and duly
executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery) setting forth the name and
address of the Warrant Holders and the number of Public Warrants
exercised, stating that the exercise is being made thereby and
guaranteeing that within three New York Stock Exchange trading days
after the Redemption Date, the Public Warrants and the cash or
certified or
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official bank check, together with all other documents required, will
be deposited by the Eligible Institution with the Warrant Agent; and
(iii) the certificates for all exercised Public Warrants in
proper form for transfer (or a written confirmation of book-entry
transfer into the Warrant Agent's account at a Book-Entry Transfer
Facility as described above) and the cash or certified or official bank
check, together with all other documents required, are received by the
Warrant Agent within three New York Stock Exchange trading days after
the Expiration Date or the Redemption Date.
The issuance of Units (the Common Stock and the 1996-A Warrants) in
exchange for Public Warrants exercised will be made only after timely receipt by
the Warrant Agent of the certificates for such Public Warrants (or a
confirmation of a book-entry transfer of such Public Warrants into the Warrant
Agent's account at one of the Book-Entry Transfer Facilities as described above)
and the cash or certified or official bank check, together with all other
documents required. If less than the entire number of Public Warrants evidenced
by a submitted certificate are to be exercised, the tendering Warrant Holder
should indicate on the "Form of Election to Purchase," appearing on the reverse
side of the certificate, the number of Public Warrants being tendered for
exercise.
WITHDRAWAL RIGHTS
The Public Warrants tendered pursuant to the Warrant Modification Offer may
be withdrawn, subject to the procedures described below, at any time before the
Redemption Date. After the Redemption Date, such tenders will be irrevocable,
except that they may be withdrawn after , 1996 (i.e., 40
business days from the date of this Prospectus), unless theretofore accepted for
exercise as provided in this Prospectus. In the event the Company (i) extends
the Redemption Date and the Special Exercise Period during which the Warrant
Modification Offer is open, (ii) is delayed in its acceptance of Public Warrants
for exercise or (iii) is unable to accept Public Warrants for exercise pursuant
to the Warrant Modification Offer for any reason, in such event, without
prejudice to the Company's rights under the Warrant Modification Offer, the
Warrant Agent may, on behalf of the Company, retain all Public Warrants
tendered, and such Public Warrants may not be withdrawn except as otherwise
provided herein, subject to Rule 13e-4(f)(5) and Rule 14e-1(c) under the
Exchange Act.
To be effective, a written, telegraphic or facsimile transmission of a
notice of withdrawal must (i) be timely received by the Warrant Agent at its
address specified on the back cover page of this Prospectus before the Warrant
Agent receives notice of acceptance by the Company of the Public Warrants, (ii)
specify the name of the person who tendered the Public Warrants, (iii) if the
Public Warrants have been deposited with or otherwise identified to the Warrant
Agent, contain the description of the Public Warrants to be withdrawn and
indicate the certificate numbers shown on the certificates evidencing such
Public Warrants (except in the case of book-entry tenders) and (iv) be executed
by the holder of the Public Warrants in the same manner as the original Public
Warrant or be accompanied by evidence satisfactory to the Company that the
person withdrawing the tender has succeeded to the beneficial ownership of the
Public Warrants. If the Public Warrants have been tendered for exercise pursuant
to the book-entry tender, a notice of withdrawal must specify, in lieu of
certificate numbers, the name and account number at a Book-Entry Transfer
Facility to be credited with the withdrawn Public Warrants.
VALIDITY OF EXERCISE
All questions with respect to the validity, form, eligibility (including
time of receipt) and acceptance for exercise of the Public Warrants will be
determined by the Company, in its sole discretion, which determination will be
final and binding upon the Warrant Holder and the Company. The Company reserves
the absolute right to reject any and all tenders of Public Warrants which it
determines not to be in proper form, or the acceptance or exercise of which
would, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the absolute right to waive any defect or irregularity in the exercise
of the Public Warrants. The Company, Warrant Agent, or any other person will not
be under any duty to give notification of any defects or irregularities in
exercise, nor will they incur any liability for failure to give such
notification. Exercise of the Public Warrants will not be deemed to have been
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<PAGE>
properly made until any irregularities have been waived by, or cured to the
satisfaction of, the Company. The Company's interpretation of the terms and
conditions of the Warrant Modification Offer will be final and binding upon the
Warrant Holders and the Company.
ACCEPTANCE OF PUBLIC WARRANTS; DELIVERY OF UNITS
Public Warrants properly tendered for exercise and not withdrawn will be
accepted for exercise on or promptly after the Redemption Date. The Company will
be deemed to have accepted for exercise properly tendered Public Warrants when,
as and if the Company has given oral or written notice thereof to the Warrant
Agent. All tendering Warrant Holders of Public Warrants will be deemed to have
waived any right to receive notice of the acceptance of their Public Warrants.
Certificates for Common Stock and 1996-A Warrants will be issued as promptly as
practicable after the Public Warrants are accepted for exercise. Any Public
Warrants not exercised before the Redemption Date will be redeemed.
In certain cases, the sale of the Units by the Company upon exercise of
Public Warrants could violate the securities laws of certain states or other
jurisdictions. The Company has undertaken registration or qualification of the
Units (or the Common Stock and 1996-A Warrants comprising the Units) for sale in
California, Colorado, Georgia, Kentucky, Illinois, Louisiana, New Hampshire, New
York, Ohio, Oklahoma, Pennsylvania, Tennessee, Virginia, Texas, Washington and
Wisconsin; however, there is no assurance that such registration will become
effective in such states. In addition, the Company may undertake registration of
the Units (or the Common Stock and 1996-A Warrants comprising the Units) in
additional states as determined in the sole discretion of the Company. Those
Warrant Holders residing in states in which the Units have not been registered
or otherwise qualified for sale in such state, will not be permitted to exercise
their Public Warrants. Prior to tendering of Public Warrants for exercise, the
Warrant Holder should either contact the Company or the Warrant Agent to
determine whether the Units have been registered or qualified in the state of
such Warrant Holder's residence. The Company has used and will continue to use
its best efforts to cause the Registration Statement of which this Prospectus is
a part to be declared effective under the laws of various states as may be
required to cause the sale of Units (or the Common Stock and 1996-A Warrants
comprising the Units) upon exercise of Public Warrants to be lawful. However,
the Company is not required to accept the exercise of the Public Warrants, if,
in the opinion of counsel, the sale of the Units (or the Common Stock and 1996-A
Warrants comprising the Units) upon such exercise would be unlawful. In such
cases, the Public Warrants not accepted for exercise will be subject to
redemption. See "Public Warrant Redemption."
The Warrant Agent will act as agent for the tendering Warrant Holders of
the Public Warrants for the purposes of receiving from the Company the Common
Stock and 1996-A Warrants comprising the Units, and transmitting such securities
to the Warrant Holders. Tendered Public Warrants not accepted for exercise by
the Company will be returned and redeemed on the Redemption Date. See "Public
Warrant Redemption."
In the event the Company (i) extends the Special Exercise Period (by
extension of the Redemption Date) during which the Warrant Modification Offer is
open, (ii) is delayed in its acceptance for exercise, or (iii) is unable to
accept for exercise any Public Warrants for any reason, in such event, without
prejudice to the Company's right hereunder, the Warrant Agent, at the request of
the Company, may nevertheless retain Public Warrants tendered for exercise
together with any cash or certified or official bank check and any other
required documents, subject to the withdrawal rights of the Warrant Holder
thereof as set forth herein and applicable securities laws.
TRANSFER TAXES
The Company will pay all transfer taxes applicable to exercise of the
Public Warrants for Units pursuant to the Warrant Modification Offer, except in
the case of deliveries of shares of Common Stock and/or 1996-A Warrants that are
not to be made to any person other than a registered holder of the Public
Warrants.
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MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES
Any holder whose certificates evidencing Public Warrants have been
mutilated, lost, stolen or destroyed should contact the Warrant Agent at its
address or telephone number indicated on the back cover page of this Prospectus
for further instructions.
EXPENSES
The Company will pay the Warrant Agent reasonable and customary fees for
their services and will reimburse them for their reasonable out-of-pocket
expenses in connection therewith. The Company will also reimburse custodians,
nominees and fiduciaries for reasonable out-of pocket expenses incurred by them
in forwarding copies of this Prospectus and related documents to the beneficial
owners of Public Warrants and in handling or forwarding tenders on behalf of
their customers. The Company will also pay legal, accounting, printing, listing,
filing and other similar fees and expenses in connection with the securities
offered pursuant to this Prospectus.
PROHIBITION AGAINST TRADING BY INTERESTED PERSONS
Pursuant to Section 10b of the Exchange Act and Rule 10b-6 thereunder,
subject to certain exceptions, it is unlawful for the Company, any underwriter
and broker-dealer that participates or agrees to participate in the distribution
of the Units (each referred to as a "Distribution Participant"), and an
"affiliated purchaser" (within the meaning of Rule 10b-6(c)(6) under the
Exchange Act), directly or indirectly, either alone or with one or more other
persons, until completion of the distribution of the Units, or its or his
participation in the distribution of the Units, to (i) bid for or purchase for
any account in which it or he has a beneficial interest in the Units, Common
Stock, the Public Warrants, 1996-A Warrants, Rights, stock options or other
warrants, or any right to purchase any such securities, or (ii) induce any
person to purchase any such security or right. However, the Company and any
other Distribution Participant and affiliated purchaser, if not engaged in for
the purpose of creating actual or apparent active trading in or raising the
price of the Common Stock, Public Warrants, Units, 1996-A Warrants or Rights,
are not prohibited from effecting certain transactions in the Company's
securities, including (i) unsolicited privately negotiated block purchases not
effected through a broker-dealer and (ii) the exercise of any right (options,
warrants, etc.) to acquire the securities directly from the Company.
For purposes of the foregoing, "affiliated purchaser" includes (i) any
person, directly or indirectly, acting in concert with a Distribution
Participant in connection with the acquisition or distribution of the Units,
Common Stock, 1996-A Warrants, or the Public Warrants, stock options, other
warrants or any other right to purchase the Units, Common Stock or 1996-A
Warrants, (ii) an affiliate who, directly or indirectly, controls the purchases
of the Units, Common Stock, and 1996-A Warrants by a Distribution Participant,
whose purchases are controlled by a Distribution Participant, or whose purchases
under common control with those of a Distribution Participant, (iii) an
affiliate that is a broker-dealer, subject to a limited exception, or (iv) an
affiliate (other than a broker-dealer) that regularly purchases securities,
through a broker-dealer or otherwise, for its own account, for the account of
others, or recommends or exercises investment discretion with respect to the
purchase or sale of securities, other than an affiliate that is a separate and
distinct organizational entity from, with no officers (or persons performing
similar functions) or employees (other than clerical, ministerial, or support
personnel) in common with, the Distribution Participant, and the affiliate and
the Distribution Participant have separate employee compensation arrangements
and the affiliate's bids for, purchases of, and inducements to purchase the
securities are made in the ordinary course of its business.
DELIVERIES AND ADDITIONAL INFORMATION
All deliveries, correspondence and questions sent or presented to the
Company or the Warrant Agent relating to the Warrant Modification Offer and
exercise and redemption of the Public Warrants should be directed to the Company
or the Warrant Agent at their respective addresses or telephone numbers set
forth on the back cover of this Prospectus.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION. The following summary is a general discussion of the federal
income tax consequences to the Warrant Holders and the Company of the Warrant
Modification Offer and exercise of the Public Warrants. The legal conclusions
expressed in the summary are the opinion of Dunn Swan & Cunningham, A
Professional Corporation, tax counsel to the Company ("Counsel"). The summary is
based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations thereunder, rulings and other pronouncements, and reported decisions
as of the date of this Prospectus, all of which are subject to change.
Furthermore, the following discussion is limited to the material federal income
tax aspects of the Warrant Modification Offer to Warrant Holders who hold the
Public Warrants as "capital assets" (generally, property held for investment as
compared to property held for sale to customers as inventory) within the meaning
of Section 1221 of the Code. The summary does not discuss all aspects of federal
income taxation that may be relevant to a Warrant Holder exercising the Public
Warrants in light of such Warrant Holder's personal investment circumstances or
to certain types of person subject to special treatment under the federal income
tax laws (for example, trusts, life insurance companies, tax-exempt
organizations, financial institutions, or S corporations) and does not discuss
any aspects of applicable state, local or foreign tax laws.
WARRANT MODIFICATION OFFER. Counsel has concluded that there exists a lack
of authority addressing the tax consequences of the Warrant Modification Offer
(and amendment of the terms and provisions of Warrant Agreement pursuant to
which the Public Warrants were issued by the Company), and thus Counsel's
opinion is that there exists several reasonable and diverse reporting positions
for federal income tax purposes. Given the unclear state of the law in this
area, and the technical intricacies of the available reporting positions, it is
particularly important that Warrant Holders consult their own tax advisors
regarding the federal income tax consequences to them relating to the Warrant
Modification Offer.
Counsel has concluded that there exists no conclusive authority which would
indicate whether, for federal income tax purposes, the Warrant Modification
Offer is (i) merely the grant of additional rights to the Warrant Holders which
merely modify the securities to be delivered upon exercise of the Public
Warrants and with respect to the Class B Warrants a reduction modification of
the Exercise Price of such Public Warrants, (ii) the grant of additional
separate and independent warrants to the Warrant Holders, (iii) the exchange of
the Public Warrants as constituted prior to the Warrant Modification Offer for
the Public Warrants as modified by the Warrant Modification Offer, or (iv) with
respect to the Class B Warrants and reduction of the Exercise Price, a dividend
distribution to the holders thereof. Because of the lack of authority addressing
the issue, Counsel has concluded that any of such theories could be applicable
to the Warrant Holders.
Grant of Additional Rights. If the Warrant Modification Offer was
determined by the Internal Revenue Service (the "IRS") to be merely the grant of
additional rights to the Warrant Holders (which merely modify the securities to
be delivered upon exercise of the Public Warrants and with respect to the Class
B Warrants a reduction modification of the Exercise Price of the Public
Warrants), the Warrant Holders would not recognize any loss as a result of the
Warrant Modification Offer until expiration of the Redemption Date and then only
if the Public Warrants are not exercised. Pursuant to this theory the Warrant
Modification Offer would be valued as of the date the Company announced the
Warrant Modification Offer and that value would be reported by the Warrant
Holders as ordinary income. The value of the rights represented by the Warrant
Modification Offer would be determined by comparing the trading prices of the
Class A Warrants and the Class B Warrants immediately before and subsequent to
the announcement of the Warrant Modification Offer. If the trading prices of the
Class A Warrants and the Class B Warrants immediately subsequent to announcement
of the Warrant Modification Offer do not increase above the trading prices
immediately before the announcement of the Warrant Modification Offer, the
Warrant Holders will not be required to report any income due to the Warrant
Modification Offer. Alternatively, if the trading prices of the Class A Warrants
and the Class B Warrants immediately subsequent to announcement of the Warrant
Modification Offer increase above the trading prices immediately before the
announcement of the Warrant Modification Offer, the Warrant Holders will be
required to report the amount of the increase as income due to the Warrant
Modification Offer.
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Grant of Additional Warrants. In the event the Warrant Modification Offer
is determined by the IRS for income tax purposes to constitute the grant of
additional, separate and independent warrants, each Warrant Holder would be
deemed to hold two warrants, the Public Warrants as constituted prior to the
Warrant Modification Offer (the "Original Warrants") and the Public Warrants as
modified by the Warrant Modification Offer (the "Modified Warrants"), both of
which will be deemed to expire on the Redemption Date. In such case, the
expiration of the Public Warrants (i.e., the Original Warrants and the Modified
Warrants) on the Redemption Date would entitle the Warrant Holder to claim a
loss in an amount equal to the Warrant Holder's tax basis in the Original
Warrants and the Modified Warrants. Such loss would be a capital loss if the
Public Warrants (i.e., Original Warrants and Modified Warrants) were held as a
capital asset, and the capital loss would be treated as a long-term loss if the
Warrant Holder's holding period of the Original Warrants was more than one year,
or short-term loss if the Warrant Holder's holding period of the Public Warrants
(i.e., Original Warrants or Modified Warrants) was one year or less.
Furthermore, pursuant to this theory that the Warrant Modification Offer
constituted the grant of new additional warrants (i.e., Modified Warrants),
there are two possible appropriate dates for measuring the amount of income to
recognized by each Warrant Holder. These dates are the date on which the Warrant
Modification Offer was announced and the date on which the Public Warrants
(i.e., Modified Warrant) are exercised, sold, exchanged or otherwise disposed of
by gift or charitable contribution. In the event the date of announcement of the
Warrant Modification Offer is treated as the correct date for recognizing income
to the Warrant Holders, the amount of the income would be measured by the
difference between the trading prices of the Public Warrants immediately before,
and the Public Warrants (as modified by the Warrant Modification Offer)
immediately after, the date of announcement. In the event the correct date for
measuring the income to the Warrant Holders is deemed to be the date on which
the Public Warrants (i.e., the Original Warrants and Modified Warrants) are
exercised, sold, exchanged or otherwise disposed of by the Warrant Holder, under
this theory such Warrant Holder would recognize income equal to the trading
prices of the Public Warrants at the date the Public Warrants were exercised,
sold, exchanged or otherwise disposed of. Under this theory, no income would be
recognized in the event the Public Warrants are held by the Warrant Holder until
the Redemption Date and are not exercised.
In any case in which income is realized and recognized the income
attributable to the Public Warrants as modified pursuant to the Warrant
Modification Offer would be ordinary income and not capital gain. Any income
recognized by a Warrant Holder would be reflected, as appropriate, in the
Warrant Holder's tax basis in the Public Warrants.
Taxable Exchange. Another theory is that the Warrant Modification Offer is
a material change in the terms of the Public Warrants, resulting in an exchange
of the Public Warrants for new warrants on the date of announcement of the
Warrant Modification Offer. Under this theory, in the event the amount realized
as a result of the transaction (i.e., the trading price of the Public Warrants
as modified pursuant to the Warrant Modification Offer) exceeds the Warrant
Holder's tax basis in the Public Warrant, the Warrant Holder would be required
to recognize taxable gain in the amount of such excess. Such gain would probably
be treated as capital gain, but there is a risk such gain would be treated as
ordinary income. If, instead, the fair market value of the Public Warrant as
modified and deemed received in the exchange is less than the Warrant Holder's
tax basis in the Public Warrant (as constituted prior to modification), the
Warrant Holder would probably recognize a loss, likely characterized as capital
in nature, but there is a risk such loss would be disallowed. If a Warrant
Holder recognizes gain (or loss), his or her tax basis in the Public Warrant
would be increased (or reduced) by the amount of such gain (or loss), and the
holding period for the Public Warrant (as modified) would begin on the day after
the Warrant Modification Offer commenced.
Dividend Distribution. Furthermore, another theory is that the reduction in
the Warrant Exercise Price of the Class B Warrants pursuant to the Warrant
Modification Offer constitutes a dividend under Section 305 of the Code, which
would be taxable to each holder of the Class B Warrants in the current year
(whether or not he or she accepts the Warrant Modification Offer by exercising
the Class B Warrant) and which would entitle each such Warrant Holder to a
corresponding increase in the tax basis of the Class B Warrants. Under this
theory, the amount of the dividend would probably be equal to the increase in
the trading price of the Class B Warrants immediately before and
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immediately after announcement of the Warrant Modification Offer. The Company
does not intend to report the reduction in the Warrant Exercise Price as a
taxable dividend distribution.
EXERCISE OF PUBLIC WARRANTS. Warrant Holders will not recognize any gain or
loss upon the exercise of their Public Warrants. The adjusted tax basis of the
Unit received on the exercise of a Public Warrant will equal the sum of the
exercising Warrant Holder's tax basis in the Public Warrant exercised and the
Warrant Exercise Price paid. The Warrant Holder's tax basis in the Units
received upon exercise of the Public Warrants must be allocated between the
share of Common Stock and one 1996-A Warrant comprising the Unit in proportion
to their respective fair market values (trading value) at the time of issuance.
The amount allocated to each component of the Unit will constitute the tax basis
of that component. Upon exercise of a 1996-A Warrant, the basis of the 1996-A
Warrant and the amount paid on the exercise thereof will be the tax basis of the
share of Common Stock issued with respect thereto.
TAX CONSEQUENCE TO THE COMPANY. No gain or loss will be recognized by the
Company as a result of the Warrant Modification Offer or exercise of the Public
Warrants.
Based upon calculations performed by the Company, Counsel is of the opinion
that the Warrant Modification Offer will not adversely affect the Company's
ability to preserve and utilize its net operation loss carryforwards for federal
income tax purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Income Taxes."
BUSINESS
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 94 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 1.9, 8.2 and 30 percent for the three months ended
September 30, 1996, and the year ended December 31, 1995 and 1994, respectively,
and 2.8 and 9.3 percent for the nine months ended September 30, 1996 and 1995,
respectively. The percentage of total revenue contributed from the Company's
nutritional supplement program was 96.7, 89.9 and 69.3 for the nine months ended
September 30, 1996, and the year ended December 31, 1995 and 1994, respectively.
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
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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. of Naperville, Illinois. The pre-
paid legal services are provided by Pre-Paid Legal Services, Inc. of Ada
Oklahoma.
Individuals purchase memberships in the Company's Infinity Plan. They
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 manufactured by J&K Pharmaceutical
Laboratories. The Company and its affiliates have no other relationships with
Consumer Benefit Services, Inc., J&K Pharmaceutical Laboratories , 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, Inc. was elected to the Company's Board of Directors on August 25,
1995.
OTHER PRODUCTS AND SERVICES. As of the date of this Prospectus the Company
has not determined the 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.
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 nine months ended September 30, 1996,
and the year ended December 31, 1995 and 1994, the Company paid commissions to
2,059, 1,863 and 1,871 individuals in the aggregate amount of $1,915,367,
$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
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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 September 30, 1996, the Company had 9,214, "active" sales associates
compared to 7,617 and 6,447 "active" sales associates at December 31, 1995 and
September 30, 1995, respectively. 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 services provided to its multi-level marketing sales
force, 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 tracking 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. During the nine months ended September 30, 1996, and the years ended
December 31, 1995 and 1994, the Company received one-time distributor and
associate fees totaling $398,767, $261,043 and $222,880, respectively. The
Company did not begin charging a monthly $4.00 administrative fee until the
second quarter of 1995. During the nine months ended September 30, 1996 and the
year ended December 31, 1995, the Company received administrative fees totaling
$12,754 and $15,018, respectively.
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 "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."
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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, 1994, the Company had
marketing materials and product inventories of $29,215 and $18,656,
respectively. At December 31, 1995, the Company had marketing materials and
product inventories of $46,440 and $52,181, respectively. At September 30, 1996,
the Company had marketing materials and product inventories of $132,492 and
$173,312, 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 the date of this Prospectus, the consumer benefit services offered
and distributed by the Company are provided by Consumer Benefit Services, Inc.
("CBS") and Pre-Paid Legal Services, Inc. The Company has non-exclusive
contractual 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
manufactured by J&K Pharmaceutical Laboratories. 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
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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 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 50
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
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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 September 30, 1996, the Company had 17 full-time, of whom three were
executive officers, seven were engaged in administrative activities, two were
engaged in marketing activities, three were engaged in customer service
activities, and two were 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.
PROPERTIES
The Company maintains its executive office in 6,303 square feet at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293. The
office premises are occupied pursuant to a long-term lease which terminates on
May 31, 1998, and the monthly rental payment is $4,432. The Company considers
such space to be adequate for its current needs. In the event the Company is
required to relocate its office upon termination of the existing lease, the
Company believes other office space is available under favorable leasing terms
in the Oklahoma City area.
LITIGATION
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 the date of this Prospectus, 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. As of the date of this Prospectus, the Pool holds 178,069
shares of Common Stock for and 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 delivered to such participant for the purpose of effecting such sale.
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 Prospectus,
the investigation is in the discovery stage, legal counsel cannot express an
opinion regarding the ultimate outcome of the investigation.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
executive officer and director of the Company. Directors are generally elected
at the annual shareholders' meeting and hold office until the annual share
holders' meeting three years after election or until their successors are
elected and qualified. Executive officers are elected by the Board of Directors
and serve at its discretion. 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 Harland C. Stonecipher expires in 1999. Messrs. Hail, Wilson and Baresel
devote their full-time to business of the Company. See "--Board of Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------ --- -------------------------
<S> <C> <C>
John W. Hail(1)(2).......... 65 Chairman of the Board, Chief
Executive Officer, and Director
Curtis H. Wilson, Sr.(3).... 69 Vice-Chairman of the Board and
Director
Roger P. Baresel(1)(2)...... 40 President, Chief Financial Officer,
Secretary and Director
R. Terren Dunlap(3)......... 50 Director
Harland C. Stonecipher(4)... 56 Director
</TABLE>
- --------------------------
(1) Member of the Stock Option Committee. See "--Stock Option Plan," below.
(2) Term as a Director expires in 1998.
(3) Term as a Director expires in 1997.
(4) Term as a Director expires in 1999.
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., a public company engaged in the selling of legal services
contracts, and during this period, Mr. Hail also served as Chairman of the Board
of directors of TVC Marketing, Inc., the exclusive marketing agent of Pre-Paid
Legal Services, Inc.
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 of TVC Marketing, Inc., the exclusive marketing agent
of Pre-Paid Legal Services, Inc. From March 1983 to January 1984, Mr. Wilson was
a sales associate of TVC Marketing, Inc. Mr. Wilson retired in April 1982 after
having been employed for 26 years as a salesman, Vice President and ultimately
President of V.J. McGanahan, Inc., a television and appliance wholesale
distributor in Dayton, Ohio.
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<PAGE>
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 a Director since June 1, 1995. He served as
Vice President-International Development from June 1995 through March 1996. 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 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.
COMPENSATION OF EXECUTIVE OFFICERS
Executive Officers of the Company. 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
Compensation(4)
----------------
ANNUAL COMPENSATION Award of Options
--------------------------- ----------------
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) OTHER(3) Number of Shares
- --------------------------- ---- --------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
John W. Hail............... 1995 $-- $ -- $20,283 375,000(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
$53,281, respectively. See "Certain 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 years.
(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) Adjusted to give effect to the one-to-eight reverse stock split on October
29, 1996. During 1995, Mr. Hail transferred by gift 225,000 of the stock
options.
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<PAGE>
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>
POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
--------------------------------------- ---------------------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER GRANTED TO EXERCISE OR
OR OPTIONS EMPLOYEES BASE PRICE EXPIRATION FIVE TEN
GRANTED IN 1995 PER SHARE DATE PERCENT PERCENT
---------- ------------- ----------- ----------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail ........... 375,000(2) 50.3% $2.00(2) February 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
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.
(2) Adjusted to give effect to the one-to-eight reverse stock split on October
29, 1996.
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.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options as of Options as of
December 31, 1995 December 31, 1995(1)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
John W. Hail........ 150,000(2) -- $636,000 $ --
</TABLE>
- -------------
(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 $6.24 after giving effect to the one-to-eight reverse stock
split. Value is calculated on the basis of the remainder of $6.24, minus
the exercise price multiplied by the number of shares of Common Stock
underlying the options.
(2) During 1995, Mr. Hail transferred by gift 225,000 stock options. The value
of these options as of December 31, 1995, were $954,000.
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 1999, 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.
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<PAGE>
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 total number
of shares of Common Stock authorized and reserved for issuance under the Plan is
1,125,000. As of the date of this Prospectus, 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 85 percent of 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
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<PAGE>
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 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.
CERTAIN TRANSACTIONS
Set forth below is a description of transactions entered into between the
Company and certain of its officers, directors and shareholders during the last
two years. Certain of these transactions will continue in effect during and
following completion of the Warrant Modification Offer and may result in
conflicts of interest between the Company and such individuals. Although these
persons have fiduciary duties to the Company and its shareholders, there can be
no assurance that conflicts of interest will always be resolved in favor of the
Company.
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 $22,000, $87,684 and
$66,026 during the nine months ended September 30, 1996, and 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. During the nine months ended September 30, 1996, JHA
made repayments of $3,040. At September 30, 1996, JHA was indebted to the
Company in the amount of $70,923. Effective June 30, 1996, the Company adopted a
policy to not make any further advances to JHA, and JHA executed a promissory
note payable to the Company in the principal amount of $73,964 bearing interest
at eight percent per annum and payable in 60 installments of $1,499 per month.
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<PAGE>
At September 30, 1996, and December 31, 1995, the balance due on a short-
term loan from the Company's Chief Executive Officer and major shareholder was
$17,658 and $81,929, respectively. 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 the nine months
ended September 30, 1996, the Company did not receive any advances under the
loan, while during 1995, the Company received aggregate advances of $31,963
under the loan. During the nine months ended September 30, 1996 and the year
ended December 31, 1995, the Company made principal payments of $64,271 and
$127,615, respectively, 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, and as of the date of this Prospectus the Company is making
weekly principal and interest payments of $1,500.
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.
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 nine
months ended September 30, 1996, and the years ended December 31, 1995 and 1994,
the Company received commissions from PPL on these sales totaling $7,063,
$16,415 and $71,713, respectively.
During the nine months ended September 30, 1996 and during the years ended
December 31, 1995 and 1994, the Company paid Curtis H. Wilson, Sr., a Director
of the Company, sales commissions of $32,064, $51,669, and $26,791,
respectively. During the nine months ended September 30, 1996 and 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 $7,547, $10,662, and $10,398, respectively. During the nine
months ended September 30, 1996 and during 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
$791, $12,433, and $10,000, respectively. In addition, during the nine months
ended September 30, 1996 and 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 $254 and $672, respectively.
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 125,000 and 43,750 shares of Common Stock for $2.00 and $3.60
per share, respectively. During 1995, Mr. Baresel transferred by gift 156,250 of
such stock options to third parties, including 87,500 to his wife, Judith A.
Baresel, and 12,500 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 10,000 shares of Common
Stock for $2.16 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 375,000 shares of Common Stock for $2.00 per share. During 1995,
Mr. Hail transferred by gift 225,000 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 125,000 shares
of Common Stock for $3.60 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 former
executive officer of the Company, five-year stock options exercisable for the
purchase of 37,500 shares of Common Stock for $2.16 per share. All of the
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<PAGE>
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 125,000 shares of Common
Stock for $3.60 per share and 125,000 shares of Common Stock for $4.96 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 49,125 shares of Common Stock for $2.00 per
share and two-year stock options exercisable for the purchase of 6,945 shares of
Common Stock for $2.16 per share. Furthermore, during 1994, Mr. Nance was
granted five-year stock options exercisable for the purchase of 5,358 shares of
Common Stock for $2.80 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.
During 1995, Gene Burson, a director and shareholder of Miracle Mountain
International, Inc. ("MMI"), advanced $56,253 to MMI pursuant to a demand note
bearing nine percent interest. During 1995, MMI did not make any principal or
interest payments on this note. In accordance with the terms of the Stock
Purchase Agreement pursuant to which the Company acquired MMI, Mr. Burson
contributed the note to MMI as additional capitalization of MMI. See "The
Company--Background--MMI Acquisition."
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 the date of this
Prospectus, the Board of Directors is comprised of the five members of which two
are independent directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of the Common Stock as of October 28, 1996, and the beneficial
ownership of the Common Stock, as adjusted to give effect to the Warrant
Modification Offer (assuming the exercise of the Public Warrants in full and the
issuance of 1,050,470 shares of Common Stock pursuant thereto) and the Rights
Offering (assuming the exercise of the Rights in full and the issuance of
2,148,191 shares of Common Stock pursuant thereto), of (i) each person who is
known to the Company to be the beneficial owner of more than five percent
thereof, (ii) each director and executive officer of the Company, and (iii) all
executive officers and directors as a group, together with their percentage
holdings of the outstanding shares, and, as adjusted, after giving effect to
completion of the Warrant Modification Offer. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated, and there are no family relationships between the executive officers
and directors of the Company. For purposes of the following table, the number of
shares and percent of ownership of outstanding Common Stock that the named
person beneficially owned includes shares of Common Stock that such person has
the right to acquire within 60 days of October 28, 1996, pursuant to exercise of
the Public Warrants, options and other warrants, as well as any other rights to
acquire, and are deemed to be outstanding, but are not deemed to be outstanding
for the purposes of computing the number of shares beneficially owned and
percent of outstanding Common Stock of any other named person.
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<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING BENEFICIALLY
OWNED SHARES AFTER GIVING EFFECT TO
------------------------------------------
WARRANT
PERCENT OF SHARES MODIFICATION
OUTSTANDING BENEFICIALLY OFFER(2)
SHARES BENEFICIALLY OWNED AFTER WARRANT AND
NAME AND ADDRESS OF BENEFICIALLY OWNED DISTRIBUTION MODIFICATION RIGHTS RIGHTS
BENEFICIAL OWNER OWNED SHARES OF RIGHTS(1) OFFER(2) OFFERING(3) OFFERING(3)
- ----------------------------- ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail(4)(5)........... 412,659 17.99% 675,318 12.34% 15.22% 12.31%
Bruce Greene(6).............. 331,500 13.40% 331.500 10.38% 7.18% 6.21%
Curtis H. Wilson, Sr.(4)(7).. 272,603 11.39% 295,206 7.92% 6.51% 5.28%
United Financial Advisory
Services(8)................. 250,000 10.45% 250,000 7.26% 5.51% 4.47%
William A. LaReese(9)........ 216,541 9.48% 291,832 6.78% 6.59% 5.47%
Robert and Retha Nance(10)... 193,094 8.76% 324,760 5.93% 7.47% 6.02%
Roger P. Baresel(4)(11)...... 161,250 7.08% 187,500 4.84% 4.24% 3.43%
Pre-Paid Legal Services,
Inc.(12).................... 56,415 2.63% 112,830 1.77% 2.63% 2.11%
Harland C. Stonecipher(12)... 56,415 2.63% 112,830 1.77% 2.63% 2.11%
R. Terren Dunlap(4)(13)...... 37,500 1.72% 37,500 1.16% .87% .70%
Executive Officers and
Directors as a group
(five persons)(5)(7)
(11)(12)(13)(14)............ 940,427 34.63% 1,308,354 29.45% 30.52% 24.52%
</TABLE>
- ------------------
(1) Assumes the distribution of 2,148,191 Rights to the shareholders of the
Company.
(2) Assumes the exercise of the Public Warrants in full and the issuance
pursuant thereto of 1,050,470 shares of Common Stock comprising part the
Units. See "Warrant Modification Offer."
(3) Assumes exercise of the Rights in full and issuance pursuant thereto of
2,148,191 shares of Common Stock comprising in part the Rights Offering
Units pursuant to the Rights Offering. See "Description of Securities--
Common Stock--Rights Offering."
(4) A Director and an executive officer of the Company, with a business address
of 2601 Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112.
(5) The shares and percentage include (i) 262,659 shares of outstanding Common
Stock held by Mr. Hail, (ii) 150,000 shares of Common Stock which are
subject to currently exercisable stock options granted in 1995 to and held
by Mr. Hail, and, after distribution of the Rights in connection with the
Rights Offering, (iii) 262,659 shares of Common Stock issuable upon
exercise of the Rights. As of the date of this Prospectus, Mr. Hail has
reserved all rights with respect to the Rights to be distributed pursuant
to the Rights Offering and has not committed to exercise all or any portion
of the Rights.
(6) Mr. Greene's business address is 1465 Greenbrier Drive Green Oaks, Illinois
60048. The shares consist of and percentages are based on 331,500 shares
of Common Stock which are subject to currently exercisable Public Warrants
held by Mr. Greene. As of the date of this Prospectus, Mr. Greene has
reserved all rights with respect to the Public Warrants and has not
committed to exercise all or any portion of the Public Warrants.
(7) The shares and percentage include (i) 17,065 shares of outstanding Common
Stock held by Mr. Wilson, (ii) 250,000 shares of Common Stock which are
subject to currently exercisable stock options granted to and held by Mr.
Wilson (125,000 of which were granted in 1995), and (iii) 5,538 shares of
outstanding Common Stock held by Ruth Wilson, wife of Mr. Wilson and with
respect to which Mr. Wilson disclaims any beneficial interest, and, after
distribution of the Rights in connection with the Rights Offering and,
after distribution of the Rights in connection with the Rights Offering,
(iv) 17,065 shares of Common Stock issuable upon exercise of the Rights by
Mr. Wilson, and (v) 5,538 shares of Common Stock issuable upon exercise of
the Rights by Mrs. Wilson. As of the date of this Prospectus, Mr. and Mrs.
Wilson have reserved all rights with respect to
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the Rights to be distributed pursuant to the Rights Offering and has not
committed to exercise all or any portion of the Rights.
(8) The business address of United Financial Advisors, Inc. is 1601 Northwest
Expressway, Suite 2101, Oklahoma City, Oklahoma 73118. The shares consist
of and the percentage is based upon 250,000 shares of Common Stock which
are subject to currently exercisable warrants.
(9) Mr. LaReese's business address is 2239 Northwest 30th Street, Oklahoma
City, Oklahoma 73112. The shares and percentage include (i) 75,291 shares
of outstanding Common Stock held by Mr. LaReese, (ii) 141,250 shares of
Common Stock that are subject to currently exercisable Public Warrants,
and, after distribution of the Rights in connection with the Rights
Offering, (iii) 75,291 shares of Common Stock issuable upon exercise of the
Rights. As of the date of this Prospectus, Mr. LaReese has reserved all
rights with respect to the Public Warrants and the Rights to be distributed
pursuant to the Rights Offering and has not committed to exercise all or
any portion of the Public Warrants or Rights.
(10) 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 (i) 75 shares of outstanding Common Stock held by Mr. Nance, (ii)
37,750 shares of outstanding Common Stock owned by Mrs. Nance, (iii) 93,841
shares of outstanding Common Stock owned jointly by Mr. and Mrs. Nance,
(iv) 61,428 shares of Common Stock which are subject to currently
exercisable stock options granted to and held by Mr. Nance, and, after
distribution of the Rights in connection with the Rights Offering, (v)
131,666 shares of Common Stock issuable upon exercise of the Rights. As of
the date of this Prospectus, Mr. and Mrs. Nance have reserved all rights
with respect to the Rights to be distributed pursuant to the Rights
Offering and have not committed to the exercise of all or any portion of
the Rights.
(11) The shares and percentages include (i) 12,500 shares of outstanding Common
Stock jointly held by Mr. Baresel and his wife, Judith A. Baresel, (ii)
35,000 shares of Common Stock which are subject to currently exercisable
stock options granted to and held by Mr. Baresel, of which 12,500, 10,000
and 12,500 options were granted in 1992, 1994 and 1995, respectively, (iii)
13,750 shares of outstanding Common Stock held by Mrs. Baresel, (iv) 87,500
shares of Common Stock which are subject to currently exercisable stock
options held by Mrs. Baresel, (v) 12,500 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, and, after
distribution of the Rights in connection with the Rights Offering, (vi)
26,250 shares of Common Stock issuable upon exercise of the Rights. As of
the date of this Prospectus, Mr. and Mrs. Baresel have reserved all rights
with respect to the Rights to be distributed pursuant to the Rights
Offering and have not committed to exercise all or any portion of the
Rights.
(12) Mr. Stonecipher is a Director of the Company with a business address of 321
East Main Street, Ada, Oklahoma 74820 and Chairman of the Board and Chief
Executive Officer of Pre-Paid Legal Services, Inc. The shares and
percentages include (i) 56,415 shares of outstanding Common Stock held by
Pre-Paid Legal Services, Inc. and, after distribution of the Rights in
connection with the Rights Offering, (ii) 56,415 shares of Common Stock
issuable upon exercise of the Rights. As of the date of this Prospectus,
Pre-Paid Legal Services, Inc. has reserved all rights with respect to the
Rights to be distributed pursuant to the Rights Offering and has not
committed to exercise all or any portion of the Rights.
(13) The shares and percentages include 37,500 shares of outstanding Common
Stock which are subject to a currently exercisable stock options granted in
1995.
(14) The shares and percentage include (i) 367,927 shares of outstanding Common
Stock, (ii) 572,500 shares of Common Stock which are subject to currently
exercisable stock options and, after distribution of the Rights in
connection with the Rights Offering, (ii) 367,927 shares of Common Stock
issuable upon exercise of the Rights.
DESCRIPTION OF SECURITIES
Pursuant to its Certificate of Incorporation, the Company is currently
authorized to issue up to 495,000,000 shares of Common Stock, $.0001 par value
("Common Stock"), and 5,000,000 million shares of Preferred Stock, $.0001 par
value ("Preferred Stock"). As of as of the date of this Prospectus, the
outstanding capital stock of the
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Company consisted of 2,148,191 shares of Common Stock. Pursuant to the Warrant
Modification Offer, the Company is offering pursuant to this Prospectus
1,050,470 Units, each consisting of one share of Common Stock and one 1996-A
Warrant. See "Warrant Modification Offer." Concurrently with this offering and
the Warrant Modification Offer, pursuant to the Rights Offering, the Company is
distributing 2,148,191 Rights to its shareholders and is offering pursuant to a
separate prospectus 2,148,191 Rights Offering Units (each consisting of one
share of Common Stock and one 1996-A Warrant) pursuant to exercise of the
Rights. See "--Common Stock--Rights Offering," below. The share of Common Stock
and the 1996-A Warrant comprising each Unit and Rights Offering Unit will be
immediately detachable and separately tradeable upon issuance and the 1996-A
Warrants will be exercisable 90 days after the date of this Prospectus.
After giving effect to (i) this offering and the Warrant Modification Offer
and assuming the exercise of the Public Warrants in full and the issuance of
1,050,470 Units (1,050,470 shares of Common Stock and 1,050,470 1996-A
Warrants), and (ii) the issuance of the Rights and assuming the exercise of the
Rights in full and the issuance of 2,148,191 Rights Offering Units (2,148,191
shares of Common Stock and 2,148,191 1996-A Warrants) pursuant thereto, the
issued and outstanding capital stock of the Company will consist of 5,346,852
shares of Common Stock, without giving any effect to exercise of the 1996-A
Warrants. Furthermore, after giving effect to (i) this offering and the Warrant
Modification Offer and assuming the exercise of the Public Warrants in full and
the issuance of 1,050,470 Units (1,050,470 shares of Common Stock and 1,050,470
1996-A Warrants), (ii) the issuance of the Rights and assuming the exercise of
the Rights in full and the issuance of 2,148,191 Rights Offering Units
(2,148,191 shares of Common Stock and 2,148,191 1996-A Warrants) pursuant
thereto and (iii) exercise of the 1996-A Warrants in full, the issued and
outstanding capital stock of the Company will consist of 8,545,513 shares of
Common Stock. See "Warrant Modification Offer" and "--Common Stock," "--Common
Stock--Rights Offering," and "--1996-A Warrants," below.
The following description of certain matters relating to the capital stock,
Public Warrants and the 1996-A Warrants is a summary and is qualified in its
entirety by the provisions of the Company's Certificate of Incorporation,
Bylaws, the Warrant Agreements between the Company and U.S. Stock Transfer Corp.
(the "Warrant Agent"), as amended, related to the Public Warrants and the 1996-A
Warrants, and the Rights Agreement between the Company and U.S. Stock Transfer
Corp. (the "Subscription Agent"), all of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
COMMON STOCK
Pursuant to its Certificate of Incorporation, the Company is authorized to
issue up to 495,000,000 shares of Common Stock. The holders of outstanding
shares of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of assets
legally available therefor, subject to the payment of preferential dividends
with respect to any Preferred Stock that may be outstanding. In the event of
liquidation, dissolution and winding-up of the Company, the holders of
outstanding Common Stock are entitled to share ratably in all assets available
for distribution to the Common Stock shareholders after payment of all
liabilities of the Company, subject to the prior distribution rights of the
holders of any Preferred Stock that may be outstanding at that time. Holders of
outstanding Common Stock are entitled to one vote per share on matters submitted
to a vote by the Common Stock shareholders of the Company. The Common Stock has
no preemptive rights and no subscription, redemption or conversion privileges.
The Common Stock does not have cumulative voting rights, which means that
holders of a majority of shares voting for the election of directors can elect
all members of the Board of Directors subject to election. In general, a
majority vote of shares represented at a meeting of Common Stock shareholders at
which a quorum (a majority of the outstanding shares of Common Stock) is present
is sufficient for all actions that require the vote or concurrence of
shareholders, subject to and possibly in connection with the voting rights of
the holders of any Preferred Stock that from time to time may be outstanding and
entitled to vote with the holders of the Common Stock. Upon issuance of the
Common Stock as a component of the Units pursuant to the Warrant Modification
Offer, all of the outstanding shares of Common Stock will be fully paid and
nonassessable.
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<PAGE>
RIGHTS OFFERING. Pursuant to a separate prospectus included within the
Registration Statement of which this Prospectus is a part, the Company will
issue 2,148,191 non-transferrable rights ("Rights") to its shareholders, each
Right exercisable to purchase one unit consisting of one share of Common Stock
and one 1996-A Warrant (the "Rights Offering Units") at $6.80 per share (the
"Rights Offering"). The Rights will be issued as a dividend to the holders (the
"Shareholders") on , 1996 (the "Record Date"), on the basis of one
Right per share of Common Stock ("Share") outstanding on the Record Date. The
Rights are exercisable on or before , 1996, subject to extension by
the Company (the "Rights Exercise Date"), for the purchase of one Rights
Offering Unit (consisting of one share of Common Stock and one 1996-A Warrant).
Those Rights not exercised on or before the Rights Exercise Date will expire and
cease to be outstanding.
PUBLIC WARRANTS
As of the date of this Prospectus, 1996, there are 524,610 Class A Common
Stock Purchase Warrants (the "Class A Warrants") and 525,860 Class B Common
Stock Purchase Warrants (the "Class B Warrants") issued and outstanding. The
terms and conditions of the Class A Warrants and the Class B Warrants
(collectively, the "Public Warrants") are set forth in the Warrant Agreement
between the Company and the Warrant Agent, dated January 26, 1989, as amended
providing for extension of the respective periods during which the Public
Warrants may be exercised. 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, 1997. The Public Warrants are evidenced by warrant certificates in
registered form.
Each Public Warrant entitles the holder to purchase one share of Common
Stock. The number and kind of securities or other property for which the Public
Warrants are exercisable are subject to adjustments in certain events, such as
mergers, reorganizations or stock splits, to prevent dilution. Since issuance of
the Public Warrants and without giving effect to the Warrant Modification Offer,
there has not been any events resulting in adjustment in the number and kind of
securities or other property required to be delivered by the Company upon
exercise of the Public Warrants. The Class A Warrants and Class B Warrants are
exercisable on or before July 26, 1997, for the purchase of one share of Common
Stock for $6.00 and $8.00 per share (the "Warrant Exercise Prices"),
respectively, before giving effect to the Warrant Modification Offer. The
Company has exercised its right to redeem (the "Warrant Redemption") the Public
Warrants, by notice pursuant to and in accordance with this Prospectus, at 5:00
p.m., Central Standard Time, on , 1996, subject to extension by the Company (the
"Redemption Date"), for $.0008 per warrant (the "Redemption Price"). Pursuant to
agreement with the Warrant Agent, the Company has unilaterally reduced the
Warrant Exercise Price of the Class B Warrants to $6.00 per share for the
purchase of a Unit through the Redemption Date. See "Warrant Modification
Offer." Following expiration of the Redemption Date, the unexercised Public
Warrants will expire and cease to be issued and outstanding, and the registered
holders of the unexercised Public Warrants on the Redemption Date will be
entitled to receive the Redemption Price per warrant.
In certain cases, the sale of the Units by the Company upon exercise of
Public Warrants could violate the securities laws of certain states or other
jurisdictions. The Company has used and will continue to use its best efforts to
cause the Registration Statement of which this Prospectus is a part to be
declared effective under the laws of various states as may be required to cause
the sale of securities upon exercise of Public Warrants to be lawful. However,
the Company is not be required to accept the exercise of the Public Warrants,
if, in the opinion of counsel, the sale of securities upon such exercise would
be unlawful. In such cases, the Public Warrants not accepted for exercise will
be subject to redemption. See "Warrant Redemption."
The Public Warrants may be exercised by completing and signing the "Form of
Election to Purchase" on the reverse side of the warrant certificate evidencing
the Public Warrant and mailing or delivering the certificate to the Warrant
Agent in time to reach the Warrant Agent by the Redemption Date, accompanied by
payment in full of the Warrant Exercise Price for the Public Warrants being
exercised in United States funds (in cash or by check or bank draft payable to
the order of the Company). Common Stock certificates and 1996-A Warrant
certificates will be issued, as fully paid and non-assessable, as soon as
practicable after exercise and payment of the Warrant Exercise Price as
described above.
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1996-A WARRANTS
The Board of Directors of the Company has authorized the issuance and sale
of 3,198,661 1996-A Warrants to be issued as components of the Units and Rights
Offering Units (one 1996-A Warrant per Unit and Rights Offering Unit) to be
offered to the Warrant Holders pursuant to the Warrant Modification Offer and
Rights Holders pursuant to the Rights Offering. See "Warrant Modification Offer"
and "--Common Stock--Rights Offering," above. The 1996-A Warrants will be issued
subject to the terms and conditions of the Warrant Agreement between the Company
and the Warrant Agent.
Each 1996-A Warrant entitles the holder to purchase one share of Common
Stock at any time 90 days after the date of this Prospectus and on or before
November 30, 1998, for an exercise price of $12.00. The number and kind of
securities or other property for which the 1996-A Warrants are exercisable are
subject to adjustments in certain events, such as mergers, reorganizations or
stock splits, to prevent dilution. At any time, upon 30 days' written notice,
the Company may redeem in whole and not in part, unexercised 1996-A Warrants for
$.0001 per warrant at any time. If any 1996-A Warrants called for redemption are
not exercised by such time, such 1996-A Warrants will cease to be exercisable,
and the holders thereof will be entitled only to receive the redemption price.
All 1996-A Warrants not exercised or redeemed will expire on November 30, 1998.
Holders of 1996-A Warrants will not, as such, have any of the rights of
shareholders of the Company.
In certain cases, the sale of securities by the Company upon exercise of
1996-A Warrants could violate the securities laws of the United States, certain
states thereof or other jurisdictions. The Company has agreed to use its best
efforts to cause a registration statement with respect to such securities under
the 1933 Act to continue to be effective during the term of the 1996-A Warrants
and to take such other actions under the laws of various states as may be
required to cause the sale of securities upon exercise of 1996-A Warrants to be
lawful. However, the Company will not be required to honor the exercise of 1996-
A Warrants if, in the opinion of counsel, the sale of securities upon such
exercise would be unlawful. In certain cases, the Company may, but is not
required to, purchase 1996-A Warrants submitted for exercise for a cash price
equal to the difference between the market price of the securities obtainable
upon such exercise and the exercise price of such 1996-A Warrants.
The 1996-A Warrants may be exercised by filling out and signing the
appropriate form on the reverse side of the warrant certificate and mailing or
delivering the warrant certificate to the Warrant Agent in time to reach the
Warrant Agent by the expiration or any redemption date, accompanied by payment
in full of the exercise price for the 1996-A Warrants being exercised in United
States funds (in cash or by check or bank draft payable to the order of the
Company). Common Stock certificates will be issued as soon as practicable after
exercise and payment of the exercise price as described above.
PREFERRED STOCK
Pursuant to its Certificate of Incorporation, the Company has an authorized
class of Preferred Stock of 5,000,000 shares, $.0001 par value. The Preferred
Stock may be issued from time to time in one or more series, and the Board of
Directors of the Company, without further approval of its shareholders, is
authorized to fix the relative rights, preferences, privileges and restrictions
applicable to each series of Preferred Stock. Management of the Company believes
that having such a class of Preferred Stock provides the Company with greater
flexibility in financing, acquisitions and other corporate activities. While
there are no current plans, commitments or understandings, written or oral, to
issue any shares of Preferred Stock, in the event of any issuance, the holders
of Common Stock will not have any preemptive or similar rights to acquire any of
such Preferred Stock.
The Board of Directors has the authority to issue shares of Preferred Stock
and to determine its rights and preferences to eliminate delays associated with
a shareholder vote on specific issuances. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend
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payments and payments upon liquidation and could have the effect of delaying,
deferring or preventing a change in control of the Company.
OTHER OPTIONS AND WARRANTS
As of October 28, 1996, the Company has granted stock options and other
warrants to purchase 1,540,177 shares of Common Stock during various periods,
which expire February 1997 through July 2005, at exercise prices of $.1.60 to
$6.48 per share. The average exercise price of the stock options is $2.48, and
the exercise prices of the stock options and warrants were equal to the fair
market value of the Common Stock on the date of the grant of each stock option
or warrant. In addition, the Board of Directors is authorized to issue options
and other stock purchase rights pursuant to the Advantage Marketing Systems,
Inc. 1995 Stock Option Plan. As of the date of this Prospectus, options under
such Stock Option Plan have not been granted. See "Management--Stock Option
Plan."
During 1995, the Company issued options to certain officers and directors
in return for services rendered as a means of retaining their services to the
Company. In lieu of payments of salaries and consulting fees, the Company has
historically used options to attract, retain and compensate its consultants,
officers and directors. The Company also believes that linking the compensation
of its officers and directors to increases in the value of the Common Stock
achieves improved performance.
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of the Company and the Oklahoma
General Corporation Act include a number of provisions which may have the effect
of encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Board of Directors rather than pursue
non-negotiated takeover attempts. The Company believes that the benefits of
these provisions outweigh the potential disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals might
result in an improvement of their terms. The description below related to
provisions of the Certificate of Incorporation and the Bylaws of the Company is
intended as a summary only and is qualified in its entirety by reference to the
Certificate of Incorporation and the Bylaws of the Company, which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. See "Additional Information."
Preferred Stock. The Certificate of Incorporation authorizes the issuance
of the Preferred Stock in classes, and the Board of Directors to set and
determine the voting rights, redemption rights, conversion rights and other
rights relating to such class of Preferred Stock, and to issue such stock in
either private or public transactions. In some circumstances, the Preferred
Stock could be issued and have the effect of preventing a merger, tender offer
or other takeover attempt which the Company's Board of Directors opposes.
Classified Board of Directors. The Bylaws of the Company provide that the
Board of Directors shall be comprised of three classes of directors, each class
constituting approximately one-third of the total number of directors with each
class serving staggered three-year terms. The classification of the directors
make it more difficult for shareholders to change the composition of the Board
of Directors. The Company believes, however, that the longer time required to
elect a majority of a classified board of directors will help ensure continuity
and stability of the Company's management and policies.
The classification provisions may also have the effect of discouraging a
third party from accumulating large blocks of Common Stock or attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. Accordingly, shareholders of the Company
could be deprived of certain opportunities to sell their shares of Common Stock
at a higher market price than might otherwise be the case.
Oklahoma Anti-Takeover Statutes. Following completion of this offering and
the Warrant Modification Offer, the Company may become subject to Section 1090.3
and Sections 1145 through 1155 of the Oklahoma General Corporation Act (the
"OGCA").
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Subject to certain exceptions, Section 1090.3 of the OGCA prohibits a
publicly-held Oklahoma corporation from engaging in a "business combination"
with an "interested shareholder" for a period of three years after the date of
the transaction in which such person became an interested shareholder, unless
the interested shareholder attained such status with approval of the board of
directors or the business combination is approved in a prescribed manner, or
certain other conditions are satisfied. A "business combination" includes
mergers, asset sales, and other transactions resulting in a financial benefit to
the interested shareholder. Subject to certain exceptions, an "interested
shareholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15 percent or more of the corporation's voting
stock.
In general, Sections 1145 through 1155 of the OGCA provide that issued and
outstanding shares ("interested shares") of voting stock acquired (within the
meaning of a "control share acquisition") become nonvoting stock for a period of
three years following such control share acquisition, unless a majority of the
holders of non-interested shares approve a resolution reinstating the interested
shares with the same voting rights that such shares had before such interested
shares became control shares. Any person ("acquiring person") who proposes to
make a control share acquisition may, at the person's election, and any
acquiring person who has made a control share acquisition is required to deliver
an acquiring person statement to the corporation disclosing certain prescribed
information regarding the acquisition. The corporation is required to present to
the next annual meeting of the shareholders the reinstatement of voting rights
with respect to the control shares that resulted in the control share
acquisition, unless the acquiring person requests a special meeting of
shareholders for such purpose and undertakes to pay the costs and expenses of
such special meeting. In the event voting rights of control shares acquired in a
control share acquisition are reinstated in full and the acquiring person has
acquired control shares with a majority or more of all voting power, all
shareholders of the corporation have dissenters' rights entitling them to
receive the fair value of their shares which will not be less than the highest
price paid per share by the acquiring person in the control share
acquisition.
A "control share acquisition" includes the acquisition by any person
(including persons acting as a group) of ownership of, or the power to direct
the exercise of voting power with respect to, "control shares" (generally issued
and outstanding shares having more than 20 percent of all voting power in the
election of directors of a publicly held corporation), subject to certain
exceptions including (i) an acquisition pursuant to an agreement of merger,
consolidation, or share acquisition to which the corporation is a party and is
effected in compliance with certain Sections of the OGCA, (ii) an acquisition by
a person of additional shares within the range of voting power for which such
person has received approval pursuant to a resolution by the majority of the
holders of non-interested shares, (iii) an increase in voting power resulting
from any action taken by the corporation, provided the person whose voting power
is thereby affected is not an affiliate of the corporation, (iv) an acquisition
pursuant to proxy solicitation under and in accordance with the Securities
Exchange Act of 1934, as amended, or the laws of Oklahoma, and (v) an
acquisition from any person whose previous acquisition of shares did not
constitute a control share acquisition, provided the acquisition does not result
in the acquiring person holding voting power within a higher range of voting
power than that of the person from whom the control shares were acquired. The
issuance of the shares of Common Stock comprising in part the Units in
connection with this offering and issuance of shares of Common Stock in
connection with the exercise of the 1996-A Warrants will not constitute "control
shares" within the meaning of Section 1146 of the OGCA because the resulting
increase, if any, in voting power of a Warrant Holder as a result of exercise of
the Public Warrants will result from the actions taken by the Company in the
making of the Warrant Modification Offer. Therefore, the receipt of such shares
by the holders of Public Warrants or by the holders of the 1996-A Warrants will
not constitute a share acquisition within the meaning of Sections 1145 through
115 of the OGCA. Furthermore, the voting rights provisions of the Sections 1145
through 1155 of the OGCA were declared unconstitutional and unenforceable in
1987. In 1991, Sections 1145 through 1155 of the OGCA were amended; however, the
constitutionality and enforceability of the voting rights provisions of such
Sections of the OGCA, as amended, have not been determined as of the date of
this Prospectus.
The anti-takeover provisions of the OGCA may have the effect of
discouraging a third party from acquiring large blocks of Common Stock within a
short period or attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its shareholders. Accordingly,
shareholders of the Company could
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<PAGE>
be deprived of certain opportunities to sell their shares of Common Stock at a
higher market price than might otherwise be the case.
TRANSFER AGENT AND WARRANT AGENT
U.S. Stock Transfer Corp. is the registrar and transfer agent for the
Common Stock and the Warrant Agent for the Public Warrants and the 1996-A
Warrants, whose address is 1745 Gardena Avenue, Suite 200, Glendale, California
91204-2991.
SHARES ELIGIBLE FOR FUTURE SALE
Upon issuance of the Units pursuant to the Warrant Modification Offer (and
assuming and giving effect to the exercise of the Public Warrants in full and
issuance of 1,050,470 shares of Common Stock as components of the Units pursuant
thereto) and upon issuance of the Rights (and assuming and giving effect to the
exercise of the Rights in full and the issuance of 2,148,191 Rights Offering
Units, and shares of Common Stock underlying such units, pursuant thereto), the
Company will have outstanding 5,346,852 shares of Common Stock. The Company has
reserved 3,198,661 shares of Common Stock for issuance upon exercise of the
1996-A Warrants, 1,540,177 shares of Common Stock for exercise of outstanding
stock options and certain other warrants, and 1,125,000 shares of Common Stock
for issuance under the Stock Option Plan. See "Security Ownership of Certain
Beneficial Owners and Management," "Description of Securities--1996-A Warrants,"
and "Management--Stock Option Plan." Additionally, the Company will have
483,789,310 shares of Common Stock available for issuance at such times and upon
such terms as may be approved by the Company's Board of Directors. No prediction
can be made as to the effect, if any, that future sales or the availability of
shares for sale will have on the market price of the Common Stock prevailing
from time to time. Also see "Risk Factors--Absence of Prior Public Market for
Units and 1996-A Warrants; Possible Volatility of Stock Price." Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect the prevailing market price of the Common Stock and could
impair the Company's ability to raise capital through sales of its equity
securities.
The Units (and the component one share of Common Stock and one 1996-A
Warrant) issued pursuant to the Warrant Modification Offer and Rights Offering
Units (and the component one share of Common Stock and one 1996-A Warrant)
issued pursuant to exercise of the Rights pursuant to the Rights Offering, will
be immediately eligible for resale in the public market without restriction or
further registration under the 1933 Act, except for Units, Common Stock, and
1996-A Warrants purchased by an "affiliate" (as that term is defined under the
1933 Act) of the Company, which will be subject to the resale limitations of
Rule 144 promulgated under the 1933 Act. In addition, as of October 28, 1996,
there were 627,834 shares of Common Stock (the "Restricted Shares") outstanding
which have not been registered under the 1933 Act (of which 367,927 were held by
the executive officers, directors and affiliates of the Company), but may be
sold without registration pursuant to Rule 144 promulgated under the 1933 Act,
subject to the limitations thereunder described below.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least two years is entitled to sell within any three-
month period a number of shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock or (ii) an amount equal
to the average weekly reported volume of trading in such shares during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Commission. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company. Restricted Shares properly sold in reliance on
Rule 144 are thereafter freely tradable without restrictions or registration
under the 1933 Act, unless thereafter held by an affiliate of the Company. In
addition, affiliates of the Company must comply with the restrictions and
requirements of Rule 144, other than the two-year holding period requirement, in
order to sell shares of Common Stock which are not Restricted Shares (such as
shares of Common Stock acquired by affiliates of the Company pursuant to
exercise of the Public Warrants). As
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<PAGE>
defined in Rule 144, an "affiliate" of an issuer is a person that directly, or
indirectly through one or more intermediaries, controls or is controlled by or
is under common control with such issuer.
Furthermore, if three years have elapsed since the later of the date of any
acquisition of Restricted Shares from the Company or from any affiliate of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
pursuant to Rule 144(k) without regard to volume limitations, manner of sale
restrictions, or public information or notice requirements. The Securities and
Exchange Commission has recently proposed an amendment to Rule 144 which would
reduce the three-year holding period to two years. The Commission is currently
awaiting comments on proposed amendment. It is anticipated that the proposed
amendment will be adopted, although there can be no assurance that the proposed
amendment will be adopted as proposed or that additional conditions may not be
imposed to permit the sale by non-affiliates after such two year holding period
pursuant to Rule 144.
Pursuant to Rule 144A promulgated under the 1933 Act, under certain
circumstances qualified institutional buyers, as defined in the rule, are
permitted to more easily acquire and sell "restricted securities." The Company
is unable to predict the effect that Rule 144A has or will have on the
prevailing market price of the Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby are be
passed upon for the Company by its counsel, Dunn Swan & Cunningham, A
Professional Corporation.
EXPERTS
The financial statements of Advantage Marketing Systems, Inc. (formerly
AMS, Inc.) as of December 31, 1995 and 1994, and for each of the two years in
the period ended December 31, 1995, and for Miracle Mountain International, Inc.
as of December 31, 1995, and the year then ended included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 (No. 33-80629)
(herein, together with all amendments thereto, the "Registration Statement"), of
which this Prospectus constitutes a part, under the Securities Act of 1933, as
amended (the "1933 Act"), with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., with respect to the securities offered by this
Prospectus. As permitted by the rules and regulations of the Commission, this
Prospectus, filed as part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and in the exhibits
thereto. The statements contained in this Prospectus as to the contents of any
contract or other document referenced herein are not necessarily complete, and
in each instance, if the contract or document was filed as an exhibit, reference
is hereby made to the copy of the contract or other document filed as an exhibit
to the Registration Statement and each such statement is qualified in all
respects by such reference. The Registration Statement (including the exhibits
thereto) may be inspected without charge at the office of the Commission,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549-1004 and at the
regional offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of the Registration Statement and the exhibits and
schedules thereto may be obtained from the Commission at such offices, upon
payment of prescribed rates. In addition, registration statements and certain
other filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system are publicly available through the
Commission's site on the World Wide Web on the Internet, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR. The
Company will provide without charge to each
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<PAGE>
person who receives this Prospectus, upon written or oral request, a copy of any
information incorporated by reference in this Prospectus (excluding exhibits to
information incorporated by reference unless such exhibits are themselves
specifically incorporated by reference). Such requests should be directed to
Advantage Marketing Systems, Inc. at 2601 Northwest Expressway, Suite 1210W,
Oklahoma City, Oklahoma 73112-7293, telephone: (405) 842-0131.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") as a "small business issuer"
as defined under Regulation S-B promulgated under the 1933 Act. In accordance
with the 1934 Act, the Company files reports and other information with the
Commission (File No. 33-25701), and such reports and other information can be
inspected and copied at, and copies of such materials can be obtained at
prescribed rates from, the Public Reference Section of the Commission in
Washington, D.C.
The Company distributes to its shareholders annual reports containing
financial statements audited by its independent public accountants and, upon
request, quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information. Such requests should be
directed to Advantage Marketing Systems, Inc. at 2601 Northwest Expressway,
Suite 1210W, Oklahoma City, Oklahoma 73112-7293, telephone: (405) 842-0131.
-65-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
PAGE
----
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1995.......................................... 30
Unaudited Pro Forma Consolidated Statement of Operations
for the Nine Months Ended September 30, 1996..................... 31
Notes to Unaudited Pro Forma Consolidated Financial Statements........ 32
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1996 and December 31,
1995 (Unaudited)................................................. F-2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited).......................... F-3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited).......................... F-4
Notes to Consolidated Financial Statements for the Nine Months
Ended September 30, 1996 and 1995 (Unaudited).................... F-5
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report.......................................... F-7
Consolidated Balance Sheets as of December 31, 1995 and 1994.......... F-8
Consolidated Statements of Operations for Years Ended December 31,
1995 and 1994.................................................... F-9
Consolidated Statements of Stockholders' Deficiency for Years Ended
December 31, 1995 and 1994....................................... F-10
Consolidated Statements of Cash Flows for Years Ended December 31,
1995 and 1994.................................................... F-11
Notes to Consolidated Financial Statements for Years Ended
December 31, 1995 and 1994....................................... F-12
MIRACLE MOUNTAIN INTERNATIONAL, INC. AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report.......................................... F-19
Balance Sheet as of December 31, 1995................................. F-20
Statement of Operations for the Year Ended December 31, 1995.......... F-21
Statement of Stockholders' Deficiency for the Year Ended
December 31, 1995................................................ F-22
Statement of Cash Flows for the Year Ended December 31, 1995.......... F-23
Notes to Financial Statements for the Year Ended December 31, 1995.... F-24
MIRACLE MOUNTAIN INTERNATIONAL, INC. UNAUDITED FINANCIAL STATEMENTS:
Balance Sheets as of May 31, 1996 and December 31, 1995 (Unaudited)... F-26
Statements of Operations for the Five Months Ended May 31,
1996 and 1995 (Unaudited)........................................ F-27
Statements of Cash Flows for the Five Months Ended May 31,
1996 and 1995 (Unaudited)........................................ F-28
Notes to Financial Statements......................................... F-29
F-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................... $ 117,965 $ 112,087
Receivables - net of allowance of
$25,804 in 1996 and $27,434 in 1995.. 12,774 18,299
Receivable from affiliate............... -- 51,963
Inventory............................... 305,804 98,621
Prepaid expenses........................ 18,257 2,371
---------- -----------
Total current assets................ 454,800 283,341
---------- -----------
COMMISSION ADVANCES TO RELATED
PARTIES -- NONCURRENT.................... 29,481 65
RECEIVABLE FROM AFFILIATE................... 70,923 --
RECEIVABLES -- NONCURRENT................... 18,742 22,620
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $326,002 in 1996 and
$280,606 in 1995........................ 176,932 159,797
GOODWILL.................................... 113,488 --
COVENANT NOT TO COMPETE..................... 55,556 --
DEFERRED TAXES.............................. 438,349 --
OTHER ASSETS................................ 156,662 67,173
---------- -----------
TOTAL ASSETS................................ $1,514,933 $ 532,996
========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable........................ $ 206,634 $ 91,949
Accrued expenses........................ 276,379 151,654
Accrued promotion expense............... 56,862 99,424
Notes payable:
Stockholder......................... 17,658 81,929
Other............................... 9,401 8,440
Current obligations under capital lease 25,032 20,679
Total current liabilities....... 591,966 454,075
LONG-TERM LIABILITIES:
Notes payable - other................... 23,880 28,500
Capital lease........................... 61,812 75,649
---------- -----------
Total long-term liabilities..... 85,692 104,149
---------- -----------
TOTAL LIABILITIES........................... 677,658 558,224
---------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - $.0001 par value;
authorized 5,000,000 shares;
none issued........................... -- --
Common stock - $.0001 par value;
authorized 495,000,000 shares;
2,143,191 and 2,123,191 shares
issued and outstanding, respectively.. 214 212
Paid-in capital......................... 1,981,380 1,859,882
Accumulated deficit..................... (1,144,319) (1,885,322)
----------- -----------
Total stockholders' equity
(deficiency)...................... 837,275 (25,228)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $ 1,514,933 $ 532,996
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
REVENUE:
Sale of programs.......................... $4,186,404 $3,155,934
Sale of promotional material.............. 234,735 88,893
Other..................................... 37,471 17,797
---------- ----------
Total................................. 4,458,610 3,262,624
---------- ----------
EXPENSES:
Cost of programs.......................... 968,635 906,935
Cost of promotional material.............. 142,610 69,395
Selling................................... 2,235,879 1,495,084
Interest expense.......................... 19,422 20,335
General and administrative................ 789,410 593,273
---------- ----------
Total................................. 4,155,956 3,085,022
---------- ----------
INCOME BEFORE TAXES........................... 302,654 177,602
TAX BENEFIT................................... 438,349 --
---------- ----------
NET INCOME.................................... $ 741,003 $ 177,602
========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES (thousands).................. 3,176 2,121
========== ==========
NET INCOME PER COMMON SHARE................... $ .23 $ .08
========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income........................................ $ 741,003 $ 177,602
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization................. 53,955 29,149
Changes in assets and liabilities
which provided (used) cash:.................
Inventory................................. (207,183) (11,000)
Receivables, advances and prepaids........ (35,899) 1,204
Deferred taxes............................ (438,349) --
Other assets.............................. -- (18,082)
Checks outstanding........................ -- (46,663)
Accounts payable and accrued expenses..... 196,848 106,861
Net cash provided (used) by operating --------- ---------
activities................................... 310,375 239,071
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................ (62,531) (4,072)
Advances to affiliate............................. (22,000) --
Repayment of advances to affiliate................ 3,040 --
Purchase of Miracle Mountain International, Inc. . (56,103) --
Purchase of other assets.......................... (89,489) --
--------- ---------
Net cash used by investing activities......... (227,083) (4,072)
CASH FLOWS FROM FINANCING ACTIVITIES: --------- ---------
Loans from stockholders........................... -- 46,244
Payment on notes payable.......................... (3,659) (2,088)
Payment on capital leases......................... (9,484) (9,050)
Payment on notes payable -- stockholders.......... (64,271) (111,150)
--------- ---------
Net cash used by financing activities......... (77,414) (76,044)
--------- ---------
NET INCREASE IN CASH.............................. 5,878 158,955
BEGINNING CASH BALANCE............................ 112,087 --
--------- ---------
ENDING CASH BALANCE............................... $ 117,965 $ 158,955
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Reclassify interest payable to notes payable --
stockholders..................................... $ -- $ 51,806
========= =========
Property and equipment acquired by capital lease.. $ -- $ 91,263
========= =========
Fair value of capital stock issued to purchase
Miracle Mountain International, Inc........... $ 120,000 $ --
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ---------------------------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The accompanying financial statements and
related notes should be read in conjunction with the audited financial
statements of the Company, and notes thereto, for the fiscal year ended
December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the
amounts that will be reported for the fiscal year ending December 31,
1996. See Note 5 regarding the reverse stock split.
2. MIRACLE MOUNTAIN INTERNATIONAL, INC.
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued
and outstanding capital stock of Miracle Mountain International, Inc., a
Colorado corporation ("MMI"), and MMI became a wholly-owned subsidiary of
the Company (the "MMI Acquisition"). MMI is a multi-level marketer of
various third-party manufactured nutritional supplement products. Pursuant
to the Purchase Agreement and in connection with the MMI Acquisition, the
Company issued and delivered to the shareholders of MMI 20,000 shares of
Common Stock. In addition, the Company agreed to issue and deliver an
additional 5,000 shares to the shareholders of MMI on or before December
17, 1996, pending determination of certain liabilities.
The excess of the purchase price of $176,103, which includes $56,103 of
transaction costs, over the negative $3,059 fair market value of the
assets of MMI, net of liabilities, has been allocated $119,162 to goodwill
and $60,000 to the covenant not to compete. Goodwill and the covenant not
to compete will be amortized over a 7 and 4.5 year period, respectively.
The fair market value of the assets of MMI, net of liabilities, declined
from $16,690 to negative $3,059 between March 31, 1996 and May 31, 1996.
3. INCOME TAXES
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax
benefits of its deferred tax assets. Based upon the historical trend of
increasing earnings, management has concluded that it is more likely than
not that a tax benefit will be realized from its deferred tax assets and
has therefore eliminated the previously recorded valuation allowance for
its deferred tax assets.
The Company's deferred tax assets consist primarily of net operating loss
carryforwards for income tax purposes at September 30, 1996, totaling
approximately $1,369,841, which will begin to expire in 2003. Elimination
of the valuation allowance results in a deferred tax asset at September
30, 1996, of $438,349 and a corresponding tax benefit for the quarter
ended September 30, 1996.
4. RECEIVABLE FROM AFFILIATE
The Company made advances to the John Hail Agency, Inc. ("JHA"), a company
of which the Company's Chief Executive Officer and major shareholder is
the sole director and shareholder, of $22,000 and $87,684 during the nine
months ended September 30, 1996, and the year ended December 31, 1995,
respectively. During the nine months ended September 30, 1996, JHA made
repayments of $3,040. JHA made repayments
F-5
<PAGE>
of these advances of $67,401 during the year ended December 31, 1995.
Furthermore, effective June 30, 1996, the Company adopted a policy to not
make any further advances to JHA, and Jha executed a promissory note
payable to the Company in the principal amount of $73,964, bearing
interest at eight percent per annum and payable in 60 installments of
$1,499 per month.
5. SUBSEQUENT EVENTS
On October 29, 1996, the Board of Directors of the Company approved a one-
for-eight reverse split of the Company's issued and outstanding common
stock, options and warrants, effective as of 5:00 p.m. New York City time
on October 29, 1996. In addition, the number of the Company's issued and
outstanding options and warrants have been reduced by a factor of eight
and their exercise price per share has been increased by a factor of eight
pursuant to this action.
The one-for-eight reverse split is reflected in the accompanying financial
statements on a retroactive basis. The Company's previously reported
number of shares of common stock issued and outstanding at September 30,
1996 and December 31, 1995, of 17,145,524 and 16,985,524 has been adjusted
to 2,143,191 and 2,123,191, respectively. Previously reported weighted
average number of outstanding shares of common stock for the nine months
ended September 30, 1995, of 16,966,000 has been adjusted to 2,121,000.
Previously reported earnings per share for the nine months ended September
30, 1995, of $.01 has been restated to $.08.
F-6
<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 the years then ended. 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 the years then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 29, 1996, except as to Note 11,
for which the date is October 29, 1996
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
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 2,123,191 and 2,120,691 shares,
respectively (see Note 11)...................... 212 212
Paid-in capital................................... 1,859,882 1,847,382
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-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
REVENUES:
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.............................. 2,662,681 2,119,356
Net income per common share................ $ .09 $ .04
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<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
----------------- ----------- ----------------- ------------ --------------
(Note 11)
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994............... 2,105,598 $211 $1,823,236 $(2,215,036) $(391,589)
Conversion of payables
into stock.................... 1,343 - 2,147 - 2,147
Issuance of capital stock
for services received......... 13,750 1 21,999 - 22,000
Net income for the year ended
December 31, 1994............. - - - 80,006 80,006
--------- ---- ---------- ----------- ---------
BALANCE,
DECEMBER 31, 1994............. 2,120,691 212 1,847,382 (2,135,030) (287,436)
Warrants exercised................. 1,250 - 7,500 - 7,500
Issuance of capital stock for
cash.......................... 1,250 - 5,000 - 5,000
Net income for the year ended
December 31, 1995............. - - - 249,708 249,708
--------- ---- ---------- ----------- ---------
BALANCE,
DECEMBER 31, 1995............. 2,123,191 $212 $1,859,882 $(1,885,322) $ (25,228)
========= ==== ========== =========== =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<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-11
<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 by the weighted average number of shares outstanding during the period
after giving effect to the reverse stock split discussed in Note 11.
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
539,500. Warrants have not been considered as their effect is anti-dilutive.
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, in management's opinion, it is
more likely than not that some portion of the deferred tax asset will not be
realized.
F-12
<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
--------- ---------
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-13
<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
See related information concerning the October 29, 1996, reverse stock split
in Note 11. All shares and per share information has been restated
retroactively to give effect to the stock split.
COMMON STOCK - During 1994, $2,147 of accounts payable were settled by the
Company through the issuance of 1,343 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 7,500 shares of its common stock to a
consultant for services rendered and 6,250 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 $2.00 per share to $6.48 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 34,108 shares of the Company's
common stock at exercise prices ranging from $2.16 per share to $2.80 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................ 350,358 $1.60 - 2.16 316,250 $1.60
Options granted
during the year: 706,624 2.00 - -
44,445 2.16 28,750 2.16
- - 5,358 2.80
302,500 3.60 - -
125,000 4.96 - -
11,250 6.48 - -
--------- -------
1,189,819 34,108
--------- -------
Options outstanding
at end of year...... 1,540,177 $1.60 - 6.48 345,358 $1.60 - 2.80
========= =======
</TABLE>
F-14
<PAGE>
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, distribution of common stock rights. See
discussion at Proposed Redemption and Offerings below.
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
OUTSTANDING PRICE EXERCISE PERIOD
--------------- ----------- -----------------
<S> <C> <C> <C>
DECEMBER 31, 1995:
Class A Warrants at beginning of year....... 525,860 $6.00 4/26/89 - 7/26/96
Class A Warrants exercised during the year.. (1,250) $6.00
-------
Class A Warrants at end of year............. 524,610
=======
Class B Warrants............................ 525,860 $8.00 4/26/89 - 7/26/97
=======
During 1995, Class A and B warrants exercise periods were extended by one year to 1996 and 1997,
respectively, by Board of Director approval.
DECEMBER 31, 1994:
Class A Warrants............................ 525,860 $6.00 4/26/89 - 7/26/95
=======
Class B Warrants............................ 525,860 $8.00 4/26/89 - 7/26/96
=======
During 1994, Class A and B warrants exercise periods were 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 $.0008 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 temporarily 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 November 30, 1998, to purchase one share of common
stock at $12.00 per share. The proposed redemption 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.
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.
F-15
<PAGE>
6. STOCK OPTION PLAN
See related information concerning the October 29, 1996, reverse stock split
in Note 11. All shares and per share information has been restated
retroactively to give effect to the stock split.
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options 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 1,125,000 shares of the common stock, $.0001 par value, of
the Company. The Plan limits participation to employees, independent
contractors, and consultants. Nonemployee directors 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.
F-16
<PAGE>
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.
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>
DECEMBER 31,
----------------------
1995 1994
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Commissions advanced..................... $ - $ (4,500)
--------- ---------
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.
11. SUBSEQUENT EVENTS
On October 29, 1996, the Board of Directors of the Company approved a one-
for-eight reverse split of the Company's outstanding common stock, options
and warrants, effective as of 5:00 p.m. New York City time on October 29,
1996. In addition, the number of the Company's outstanding options and
warrants have been reduced by a factor of eight and their exercise price per
share has been increased by a factor of eight pursuant to this action.
This one-for-eight reverse split is reflected in the accompanying financial
statements on a retroactive basis. The Company's previously reported number
of shares of common stock issued and outstanding at December 31, 1995 and
1994, of 16,985,524 and 16,965,524 has been adjusted to 2,123,191 and
2,120,691, respectively. Previously
F-17
<PAGE>
reported weighted average number of outstanding shares of common stock for the
years ended December 31, 1995 and 1994, of 21,301,441 and 16,954,848 have been
adjusted to 2,662,681 and 2,119,356, respectively. Previously reported earnings
per share for the years ended December 31, 1995 and 1994 of $.01 and NIL have
been adjusted to $.09 and $.04, respectively.
* * * * * *
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Miracle Mountain International, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Miracle Mountain
International, Inc. (the "Company") as of December 31, 1995 and the related
statements of operations, stockholders' deficiency and cash flows for the year
then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Miracle Mountain International, Inc. at
December 31, 1995 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
June 21, 1996
F-19
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash..................................................... $ 3,334
Inventory................................................ 2,186
---------
Total current assets................................... 5,520
PROPERTY AND EQUIPMENT, net................................ 39,898
OTHER ASSETS............................................... 725
---------
TOTAL...................................................... $ 46,143
=========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable......................................... 1,558
Accrued commissions...................................... 16,477
Accrued payroll taxes.................................... 2,346
Interest payable......................................... 1,318
Notes payable to related parties......................... 62,418
---------
Total current liabilities.............................. 84,117
STOCKHOLDERS' DEFICIENCY:
Common stock - no par value; authorized 1,000,000 shares;
issued and outstanding 200,000 shares.................. 92,655
Accumulated deficit...................................... (130,629)
---------
Total stockholders' deficiency........................ (37,974)
---------
TOTAL...................................................... $ 46,143
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-20
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
TOTAL REVENUE........................................... $ 277,366
---------
COSTS AND EXPENSES:
Programs.............................................. 103,217
Selling............................................... 145,650
General and administrative............................ 157,725
Interest expense...................................... 1,403
---------
Total expenses................................ 407,995
---------
NET LOSS................................................ $(130,629)
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-21
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
SHARES STOCK DEFICIT DEFICIENCY
------- ------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995..... - $ - $ - $ -
Capital contributions........ 200,000 92,655 - 92,655
Net loss for the year ended
December 31, 1995.......... - - (130,629) (130,629)
------- ------- --------- ---------
BALANCE, DECEMBER 31, 1995... 200,000 $92,655 $(130,629) $ (37,974)
======= ======= ========== =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-22
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss................................................... $(130,629)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization.......................... 1,926
Changes in assets and liabilities
which provided (used) cash:
Inventory............................................ (2,186)
Other assets......................................... (725)
Accounts payable..................................... 1,558
Accrued expenses..................................... 18,823
Interest payable..................................... 1,318
---------
Net cash used in operating activities.............. (109,915)
---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment........................ (41,824)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from capital contributions........................ 92,655
Proceeds from notes payable................................ 65,253
Payment on notes payable................................... (2,835)
Net cash provided by financing activities.......... 155,073
---------
NET INCREASE IN CASH......................................... 3,334
BEGINNING CASH BALANCE....................................... -
---------
ENDING CASH BALANCE.......................................... $ 3,334
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest..................... $ 85
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-23
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company is engaged in marketing nutritional
supplements through a multi-level sales organization of independent sales
associates developed by the Company. During the first three months of
operations, the Company primarily paid start-up expenses relating to
organization and recruitment of sales associates. The Company did not have
significant sales until April of 1995.
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 - Revenue is recognized when goods are shipped.
INVENTORY - Inventory consists of consumer product inventory. 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.
Property and equipment are depreciated over five years using a straight-line
basis.
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.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Office furniture, fixtures, and equipment................. $41,824
Accumulated depreciation and amortization................. (1,926)
Total property, net....................................... $39,898
=======
</TABLE>
3. NOTES PAYABLE TO STOCKHOLDERS
The Company has a note payable to a stockholder and director in the amount
of $56,253 as of December 31, 1995. This note is due on demand and bears
interest at 9.0%. No principal or interest payments were made on the note
during the year ended December 31, 1995.
The Company is also making note payments to a bank on behalf of a
stockholder and director in exchange for an advance of $9,000. The principal
balance of the note at December 31, 1995 is $6,165. Payments of principal
and interest totaling $2,835 and $85, respectively, were made during the
year. No written agreement exists between the parties.
F-24
<PAGE>
4. LEASE AGREEMENTS
The Company leases office space under a cancelable operating lease. The
Company can cancel the lease with 30 days written notice. The lease terms
provide for monthly payments of $825.
Additionally, the Company leases office equipment under separate operating
leases. The leases are cancelable at any time by the Company. The lease
terms provide for combined monthly payments of $441.
Rental expense under operating leases for the year ended December 31, 1995
was $16,535.
5. RELATED PARTIES
Certain stockholders and directors receive commissions on revenue of the
Company. Such commissions are recognized as compensation to the stockholders
and directors and are included in selling expense. Total commissions paid to
stockholders and directors during 1995 totaled approximately $27,000.
6. INCOME TAXES
The Company experienced a net loss for the year ended December 31, 1995 and
consequently paid no income tax.
The Company has a net operating loss carryforward at December 31, 1995
totaling approximately $130,000 which is available to reduce Federal income
tax in future periods and will expire in 2010. 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 carryforward and has,
therefore, provided a valuation allowance of approximately $44,000 to fully
reserve the net deferred tax asset.
7. SUBSEQUENT EVENTS
On June 20, 1996, the Company's stockholders exchanged 100% of their
outstanding stock in the Company for a total of 200,000 shares of common
stock of Advantage Marketing Systems, Inc. ("AMS"). As part of the
agreement, AMS withheld 40,000 shares which will be delivered 120 days after
closing, provided that liabilities of the Company, which will be assumed by
AMS, do not exceed $19,000. Upon delivery, the shares withheld will be
reduced by one share for every $.88 of liabilities in excess of $19,000.
Also, the agreement provides that certain officers, directors and
stockholders will not compete with AMS for a limited time.
* * * * * *
F-25
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
BALANCE SHEETS, MAY 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
MAY 31, DECEMBER 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................... $ - $ 3,334
Inventory............................................... 3,320 2,186
---------- ---------
Total current assets................................ 3,320 5,520
---------- ---------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $5,411 in 1996 and 1,926 in 1995........ 36,413 39,898
OTHER ASSETS................................................ 725 725
---------- ---------
TOTAL ASSETS................................................ $ 40,458 $ 46,143
========== =========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Bank overdrafts......................................... $ 11,067 $ -
Accounts payable........................................ 8,646 1,558
Accrued expenses........................................ - -
Accrued commissions..................................... 22,623 16,477
Accrued payroll taxes................................... 2,025 2.346
Interest payable........................................ 2,340 1,318
Notes payable to related parties........................ 62,418 62,418
-------- ----------
Total current liabilities....................... 109,119 84,117
-------- ----------
STOCKHOLDERS' DEFICIENCY:
Common stock - no par value; authorized 1,000,000 shares;
issued and outstanding 200,000 shares............... 92,655 92,655
Accumulated deficit..................................... (161,316) (130,629)
-------- ----------
Total stockholders' deficiency...................... (68,661) (37,974)
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 40,458 $ 46,143
========= ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-26
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE FIVE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS ENDED
MAY 31,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
REVENUE........................... $205,112 $ 64,839
EXPENSES:
Products...................... 54,743 9,274
Selling....................... 129,758 21,343
General and administrative.... 49,188 29,272
Interest expense.............. 2,110 197
-------- --------
Total..................... 235,799 60,086
-------- --------
NET INCOME (LOSS)................. $ (30,687) $ 4,753
========= ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-27
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1996 1995
------- -------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)................................... $(30,687) $ 4,753
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization................... 3,485 545
Changes in assets and liabilities which
provided (used) cash:
Inventory................................... (1,134) (19,440)
Commissions advances........................ - (13,257)
Other assets................................ - (725)
Checks outstanding.......................... 11,067 -
Interest payable............................ 1,022 332
Accounts payable and accrued expenses....... 12,913 2,007
-------- --------
Net cash used by operating activities........... (3,334) (25,785)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................. - (3,022)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable......................... - 7,000
Payment on note payable............................. - -
Proceeds from capital contributions................. - 32,655
Net cash provided by financing activities....... - 39,655
-------- --------
NET INCREASE (DECREASE) IN CASH..................... (3,334) 10,848
BEGINNING CASH BALANCE.............................. 3,334 -
-------- --------
ENDING CASH BALANCE................................. $ - $ 10,848
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Property and equipment acquired by capital lease.... $ 6,700 $ 42,815
======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-28
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The accompanying financial statements and related
notes should be read in conjunction with the audited financial statements of
the Company, and notes thereto, for the fiscal year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the amounts
that will be reported for the fiscal year ended December 31, 1996.
2. ACCOUNTING POLICIES ADOPTED
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-
Based Compensation. SFAS 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. No options or warrants were issued during the first
quarter of 1996.
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to such
assets. Management does not believe this pronouncement will have a material
effect on the Company's financial statements.
3. SUBSEQUENT EVENTS
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company was acquired by Advantage
Marketing Systems, Inc., an Oklahoma corporation ("AMS"), and became a
wholly-owned subsidiary of AMS. All liabilities of the Company, other than
commissions payable to associates, were assumed by certain of the Company's
former shareholders, and certain officers, directors and stockholders were
required to sign agreements not to compete with AMS.
F-29
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
------------------------
THE WARRANT AGENT FOR THE WARRANT MODIFICATION
OFFER OR THE WARRANT REDEMPTION IS:
U. S. STOCK TRANSFER CORP.
1745 GARDENA AVENUE, SUITE 200
GLENDALE, CALIFORNIA 91204-2991
TELEPHONE: (818) 502-1404
------------------------
UNTIL , 1996, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
1,050,470 UNITS
EACH UNIT CONSISTING OF
ONE SHARE OF
COMMON STOCK AND
ONE 1996-A WARRANT
ISSUABLE UPON EXERCISE OF
CLASS A AND CLASS B COMMON
STOCK PURCHASE WARRANTS
ADVANTAGE MARKETING
SYSTEMS, INC.
------------------------
PROSPECTUS
------------------------
Holders of Class A Common Stock Purchase Warrants
and/or Class B Common Stock Purchase Warrants who
require information about procedures for exercise
should contact the Warrant Agent.
Requests for general information or additional copies
of this Prospectus should be directed to the Company by
calling or by writing the Company at:
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
ATTENTION: CORPORATE SECRETARY
TELEPHONE: (405) 842-0131
----------------------
, 1996
===============================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 8, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS
2,148,191 UNITS
(EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE 1996-A WARRANT)
ISSUABLE UPON EXERCISE OF RIGHTS
ADVANTAGE MARKETING SYSTEMS, INC.
Advantage Marketing Systems, Inc., an Oklahoma corporation (the "Company"),
is distributing at no cost non-transferable rights (the "Rights") to holders of
record at 5:00 p.m., Central Standard Time, on _____________, 1996 (the "Record
Date") of shares of its common stock, par value $.0001 per share (the "Common
Stock"). The Rights entitle the holders (the "Rights Holders") to subscribe for
and purchase in the aggregate up to 2,148,191 Units (each consisting of
one share of Common Stock and one 1996-A Warrant) (the "Units") for the price of
$6.80 per Unit (the "Subscription Price"). The Record Date holders of
Common Stock (the "Record Date Holders") will receive one Right for each share
of Common Stock held by them as of the Record Date. Pursuant to the Rights,
Rights Holders may purchase one Unit for each Right held (the "Subscription
Privilege"). The election of a Rights Holder to exercise Rights is irrevocable
upon receipt of a valid subscription by the independent subscription agent (the
"Subscription Agent").
The Rights will expire at 5:00 p.m., Central Standard Time, on___________
__, 1996, unless extended by the Company to a time and date not later than
____________, 1996 (the "Expiration Date"). The election of a Rights Holder to
exercise Rights is irrevocable. Any Rights not exercised prior to the Expiration
Date will expire and be worthless in the hands of such non-exercising Rights
holders. Shareholders of the Company who do not exercise all of their Rights may
own a reduced equity ownership interest, and a correspondingly smaller
percentage voting interest, in the Company after completion of this offering.
There is no minimum number of Units required to be sold as a condition of this
offering. See "Rights Offering." (Continued on inside cover)
------------------------
SEE "RISK FACTORS," BEGINNING AT PAGE 12, FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE UNITS OFFERED HEREBY.
------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS COMPANY (1)
- -------------------------------------------------------------------------------
Per Unit $6.80 -- $6.80
- -------------------------------------------------------------------------------
Total $14,607,699 -- $14,607,699
- -------------------------------------------------------------------------------
</TABLE>
(1) Before deducting offering expenses payable by the Company estimated to be
$100,000. See "Use of Proceeds."
It is expected that delivery of the certificates representing the Common
Stock and the 1996-A Warrants will be made immediately following exercise of the
Rights and payment of the Subscription Price.
, 1996
<PAGE>
(Continued from front cover)
The Share of Common Stock and 1996-A Warrant comprising each Unit will
be separately transferable immediately after the sale of the Units to the Rights
Holders. Each 1996-A Warrant is exercisable at any time 90 days after the
date of this Prospectus and on or before November 30, 1998, to
purchase one share of Common Stock for $12.00, subject to adjustment in
certain events, and may be redeemed by the Company at any time upon 30 days'
notice, at a price of $.0001 per 1996-A Warrant. This offering is part of a
plan of financing pursuant to which the Company intends to raise additional
capital through the issuance of the Units. Concurrently with this offering, the
Company is offering to the holders of its Class A Common Stock Purchase Warrants
(the "Class A Warrants") and Class B Common Stock Purchase Warrants (the "Class
B Warrants") the right to purchase 1,050,470 Units (the "Warrant
Modification Units") pursuant to modification of the terms of the Class A
Warrants and Class B Warrants (the "Warrant Modification Offering"). See "Use
of Proceeds" and "Description of Securities--Public Warrants--Warrant
Modification Offer."
The Common Stock is quoted by the National Daily Quotation Bureau,
Incorporated under the symbols "AMSO." On November 8, 1996, the closing high bid
price of the Common Stock was $6.38. Prior to the Rights Offering, there has
been no public market for the 1996-A Warrants, and none may develop. The Company
has applied for quotation of the Units and 1996-A Warrants by the National
Quotation Bureau, Incorporated to be quoted under the proposed symbol "_____ "
and "______." See "Description of Securities."
Unless other exemptions become available in the future, any time that the
bid price of the Common Stock in the over-the-counter market is less than $5.00,
the Company's equity securities will be subject to the "penney stock" trading
rules. The "penny stock" trading rules impose additional duties and
responsibilities upon broker-dealers and salespersons effecting purchase and
sale transactions in such equity securities of the Company, including
determination of the purchaser's investment suitability, delivery of certain
information and disclosures to the purchaser, and receipt of a specific purchase
agreement from the purchaser prior to effecting the purchase transaction, all of
which affect or will affect the ability to resell the Common Stock, Units and
1996-A Warrants. See "Risk Factors--Over-the-Counter Market; Penny Stock Trading
Rules," and "Price Range of Common Stock--Penny Stock Trading Rules."
------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page Page
---- ----
<S> <C> <C> <C>
Prospectus Summary 3 Certain Federal Income Tax Consequences 37
Risk Factors 12 Business 38
The Company 17 Management 44
Use of Proceeds 18 Certain Transactions 48
Price Range of Common Stock and Dividends 19 Security Ownership of Certain Beneficial
Capitalization 21 Owners and Management 50
Selected Financial Information 21 Description of Securities 52
Management's Discussion and Analysis of Shares Eligible for Future Sale 57
Financial Condition and Results of Operations 23 Legal Matters 58
Unaudited Pro Forma Consolidated Financial Experts 59
Information of the Company 27 Additional Information 59
Rights Offering 31 Index to Financial Statements F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Prospective investors should carefully consider the
information set forth in "Risk Factors." All references in this Prospectus to
fiscal years are to the Company's fiscal year ended December 31 of each year.
Unless otherwise indicated, all information in this Prospectus gives effect to
the issuance of an additional 5,000 shares of Common Stock by December
17, 1996, in connection with the acquisition by the Company of Miracle
Mountain International, Inc. and the reverse stock split of one for eight on
October 29, 1996.
THE COMPANY
Pursuant to an Agreement and Plan of Reorganization, dated May 1, 1989, the
shareholders of the Company exchanged their common stock for 800,807 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. See "The Company--Background--Exchange."
Prior to the Exchange, Advantage Marketing Systems, Inc. (formerly Pacific
Coast International, Inc. and parent of the Company) sold, in a public offering,
225,860 shares of Common Stock, Class A Warrants and Class B Warrant in units,
each unit consisting of one share of Common Stock, one Class A Warrant and one
Class B Warrant. See "Description of Securities." The net proceeds from this
offering were approximately $838,290. Furthermore, in conjunction with such
offering, the holders of 300,000 Class A Warrants and Class B Warrants sold such
Public Warrants. As of the date of this Prospectus, there are 524,610
outstanding Class A Warrants and 525,860 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. 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, 1997. Each Class A Warrant and Class B Warrant entitles the holder thereof
to purchase one share of Common Stock at an exercise price of $6.00 and $8.00,
respectively, without giving effect to the Warrant Modification Offer. See "The
Company--Background--Initial Issuance of Public Warrants."
Effective December 11, 1995, Advantage Marketing Systems, Inc., the 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
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. 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.
See "The Company-- Background--Merger Reincorporation."
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the Company
(the "MMI Acquisition"). MMI is a multi-level marketer of various third-party
manufactured nutritional supplement products. Pursuant to the Purchase Agreement
and in connection with the MMI Acquisition, the Company issued and delivered to
the shareholders of MMI 20,000 shares of Common Stock. In addition, the Company
agreed to issue and deliver
3
<PAGE>
an additional 5,000 shares of Common Stock to the shareholders of MMI on or
before December 17, 1996, pending determination of certain liabilities. See
"The Company--Background--MMI Acquisition."
The Company's principal executive offices are located at 2601 Northwest
Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293 and its telephone
number is (405) 842-0131.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN
EVALUATING THE COMPANY AND ITS BUSINESS.
DIVIDEND DISTRIBUTION OF SUBSCRIPTION RIGHTS TO SHAREHOLDERS AND RIGHTS OFFERING
The Company is distributing at no cost non-transferable rights (the
"Rights") to the holders of record at 5:00 p.m., Central Standard Time, on
, 1996 (the "Record Date"), of shares of its Common Stock, par value $.0001 per
share (the "Common Stock"). The Rights entitle the holders (the "Rights
Holders") to subscribe for and purchase in the aggregate up to 2,148,191
units (the "Units"), each consisting of one share of Common Stock and one 1996-A
Warrant, for the price of $6.80 per Unit (the "Subscription Price"). The
Rights will expire at 5:00 p.m., Central Standard Time, on , 1996,
unless extended by the Company to a time and date not later than
, 1996 (the "Expiration Date"). The Record Date holders of Common Stock will
receive one Right for each share of Common Stock held by them as of the Record
Date.
The Units are being offered on a best efforts basis by the Company and its
officers and directors, without commissions, selling fees or direct or indirect
remuneration. Holders of the Public Warrants will not be required to pay any
brokerage commissions or fees with respect to the exercise of their Public
Warrants. The Company will pay all charges and expenses of the Warrant Agent.
See "Rights Offering--Plan of Distribution" and " --Acceptance of Rights;
Delivery of Units."
The Rights may only be exercised by a Rights Holder in the event the
Registration Statement of which this Prospectus is a part is effective with the
Securities and Exchange Commission and the Units (or Common Stock and 1996-A
Warrants) are qualified for sale in the state of residence of the Rights Holder.
See "Risk Factors--Securities Laws Restrictions on Exercise of Rights," and
"Rights Offering--Acceptance of Rights; Delivery of Units." Subject to the
foregoing, the Rights are exercisable at any time by the Rights Holders, prior
to the Expiration Date, by delivery of the rights certificate evidencing the
Rights to U.S. Stock Transfer Corporation (the "Subscription Agent") at 1745
Gardena Avenue, Glendale, California 91204, with the "Form of Election to
Purchase" on the reverse of the certificate duly completed and signed,
accompanied with payment of the Exercise Price in cash or by certified check or
bank draft payable to the order of the Company.
WARRANT MODIFICATION OFFERING
Pursuant to a separate prospectus included within the Registration
Statement of which this Prospectus is a part and concurrently with this
offering, the Company has elected to redeem its outstanding 524,610 Class
A Common Stock Warrants and 525,860 Class B Common Stock Purchase
Warrants for $.0008 per warrant (the "Warrant Redemption") at 5:00 p.m.,
Central Standard Time, on , 1996 (the "Redemption
Date"). However, in connection with the Warrant Redemption, during the period
ending on the Redemption Date, the Company, pursuant to modification of the
terms of the Class A Common Stock Purchase Warrants and the Class B Common Stock
Purchase Warrants ("Public Warrants"), the Company is offering to the Public
Warrant holders (the "Warrant Holders") the right to exercise the Public
Warrants to purchase units (the "Warrant Offering Units"), each comprised of one
share of Common Stock and one 1996-A Warrant, at an exercise price of
$6.00 per Warrant Offering Unit (the "Warrant Modification Offering").
The Redemption Date may be extended such number of times as determined in the
sole discretion of the Company to a date that is not later than
1996.
4
<PAGE>
THIS OFFERING
Securities Offered 2,148,191 Rights to be issued to the holders of Common
Stock of the Company at 5:00 p.m., Central Standard
Time, on , 1996 (the "Record Date"), each exercisable
for the purchase of one unit consisting of one share
of Common Stock and one 1996-A Warrant of the Company
(the "Units"). Each 1996-A Warrant is exercisable at
any time 90 days after the date of this Prospectus and
on or before November 30, 1998, to purchase one share
of Common Stock for $12.00, subject to adjustment in
certain events, and may be redeemed by the Company at
any time upon 30 days' notice, at a price of $.0001
per 1996-A Warrant. See "Description of Securities--
Common Stock" and "--1996-A Warrants."
Each share of Common Stock and 1996-A Warrant
comprising a Unit will be immediately transferrable
after issuance and delivery of the Unit.
Subscription Right One Right per outstanding share of Common Stock issued
as a dividend to each holder of Common Stock on the
Record Date. The Rights entitle the holders of the
Rights (the "Rights Holders") to purchase one Unit per
Right for $6.80 (the "Subscription Price"). See
"Rights Offering."
Rights Expiration Date _________________, 1996, at 5:00 p.m., Central
Standard Time, or such later date as the Company may
determine in its sole discretion but beyond , 1996.
The Company has reserved the right, exercisable in its
sole discretion, to extend the Expiration Date and
effectively extend the period of exercise of the
Rights in the event any of the conditions specified in
"Rights Offering--Conditions of the Rights Offering"
are not met or waived by the Company and so long as
the Rights have not theretofore been accepted for
exercise, as well as for any other reason based upon
factors and considerations that exist and that the
Company deems material and appropriate at the time,
which as of the date of this Prospectus are
undeterminable. After such time, the Rights will
become void and have no value. The period of exercise
of the Rights will effectively be extended if and when
the Expiration Date is extended by the Company. See
"Rights Offering--Expiration Date; Extensions;
Termination; Amendments."
Quoted Closing High $5.52 on December 20, 1995, (the day prior to
Bid of Common Stock announcement of the Rights Offering).
$6.38 on November 8, 1996.
5
<PAGE>
Securities outstanding:
Common Stock Outstanding 2,148,191 shares of Common Stock are outstanding as
of the date of this Prospectus.
After giving effect to distribution of the Rights and
assuming the exercise of the Rights in full and the
issuance of 2,148,191 Units (2,148,191 shares of
Common Stock and 2,148,191 1996-A Warrants) pursuant
thereto, there will be 4,296,382 shares of Common
Stock outstanding and 2,148,191 1996-A Warrants
outstanding; however, there is no assurance than any
of the Rights will be exercised.
In addition, after giving effect to the Warrant
Modification Offering and assuming the exercise of
the Public Warrants in full and the issuance pursuant
thereto of 1,050,470 Units (1,050,470 shares of
Common Stock and 1,050,470 1996-A Warrants), there
will be 5,346,852 outstanding shares of Common Stock
and 3,198,661 1996-A Warrants outstanding; however,
there is no assurance than any of the Public Warrants
will be exercised.
Furthermore, after giving effect to (i) distribution
of the Rights and assuming the exercise of the Rights
in full and the issuance of 2,148,191 Units
(2,148,191 shares of Common Stock and 2,148,191 1996-
A Warrants), (ii) the Warrant Modification Offering
and assuming the exercise of the Public Warrants in
full and the issuance of 1,050,470 Warrant Offering
Units (1,050,470 shares of Common Stock and 1,050,470
1996-A Warrants) pursuant thereto and (iii) exercise
of the 1996-A Warrants in full, the issued and
outstanding capital stock of the Company will consist
of 8,545,513 shares of Common Stock; however, there
is no assurance than any of the 1996-A Warrants will
be exercised. See "Rights Offering" and "Description
of Securities--Public Warrants--Warrant Modification
Offering," and "--1996-A Warrants."
The forgoing does not include (i) 1,540,177 shares
reserved for issuance to holders of outstanding stock
options and other warrants and (ii) 1,125,000 shares
reserved for issuance pursuant to the Advantage
Marketing Systems, Inc. 1995 Stock Option Plan (the
"Stock Option Plan"). See "Management--Stock Option
Plan" and "Description of Securities--Other Stock
Options and Warrants."
1996-A Warrants 2,148,191 assuming exercise of the Rights in full;
however, there is no assurance that any of the Rights
will be exercised. Assuming and giving effect to the
exercise of the Public Warrants in full pursuant to
the Warrant Modification Offering, the number of
issued and
6
<PAGE>
outstanding 1996-A Warrants will be 3,198,661. See
"Description of Securities--Public Warrants--Warrant
Modification Offering," and "Management--Stock Option
Plan."
Net proceeds indeterminable
$14,507,699, after deduction of offering expenses
estimated at $100,000, assuming exercise of the
Rights in full. However, there is no assurance that
any of the Rights will be exercised, in which case
the Company will not receive any proceeds from this
offering.
Use of proceeds Assuming exercise of the Rights in full pursuant to
this offering, the estimated net proceeds to the
Company would be $14,507,699; however, there is no
assurance with any of the Public Warrants will be
exercised in which case there will not be any net
proceeds from this offering received by the Company.
See "Use of Proceeds" and "Rights Offering."
Concurrently with this offering , the Company is
offering 1,050,470 Warrant Modification Units
pursuant to the Warrant Modification Offering. See
"Rights Offering" and "Description of Securities--
Common Stock--Public Warrants--Warrant Modification
Offering." Assuming exercise of the Public Warrants
in full pursuant to the Warrant Modification
Offering, the estimated net proceeds to the Company
from the Warrant Modification Offering would be
$6,202,820, after reduction by estimated offering
expenses of $100,000; however, there is no assurance
that any of the Warrants will be exercised in which
case there will not be any net proceeds from the
Warrant Modification Offering received by the
Company.
The net proceeds received by the Company from this
offering and the Rights Offering will be used for
general corporate purposes, including working capital
and to fund the Company's efforts to expand sales and
marketing activities. The Company estimates that it
will use approximately (i) $1.5 million for expansion
of its U.S. distributor network and enhancement of
its marketing materials, (ii) $.5 million to develop
new products and enhance the packaging of its
existing products and (iii) $1 million for the
expansion into and development of international
markets. In the event the Company receives combined
net proceeds of less than $3.0 million pursuant to
this offering and the Rights Offering, the net
proceeds will be devoted to each of these purposes in
the order in which presented. Combined net proceeds
in excess of $3.0 million will be devoted to general
corporate purposes including further expansion of the
Company's distributor network and enhancement of its
marketing materials, development of new products and
enhancement of packaging of its existing products and
expansion into and development of international
markets. The Company does
7
<PAGE>
not intend to use any of the proceeds to discharge
existing debt. Pending use of the net proceeds, they
will be invested by the Company in investment grade,
short-term, interest-bearing securities. See "Use of
Proceeds."
Consequences to Non-
Exercising Rights Shareholders of the Company who do not exercise their
Rights in full or that are unable to exercise the
Rights because of securities laws restrictions or
limitations (see "-Acceptance of Rights," below, and
"Risk Factors - Securities Laws Restrictions on
Exercise of Rights" and "Rights Offering -Acceptance
of Rights; Delivery of Units") may own a reduced
equity ownership interest in the Company after
completion of this offering See "Rights Offering -
Advantages and Disadvantages of Rights Exercise.
Method of Exercise of
Rights Any Rights Holder electing to exercise Rights should
either (i) complete and duly execute the Rights
Certificate accompanying this Prospectus and forward
it along with cash or a certified or official bank
check in the amount of the Subscription Price for
each Unit subscribed for pursuant to exercise of the
Right to the Subscription Agent, or (ii) request a
broker or bank to effect the transaction. Holders of
Rights registered in the name of a broker, dealer,
bank, trust company or nominee should instruct such
institutions to exercise the Rights. See "Rights
Offering--Method of Exercising Rights."
Acceptance of Exercise The Company will accept any and all Rights exercised
on or prior to the Expiration Date, subject to
certain conditions. In certain cases, the issuance of
the Units or the sale of Units (and the shares of
Common Stock and 1996-A Warrants comprising the
Units) pursuant to exercise of the Rights could
violate the securities laws of certain states or
other jurisdictions. The Company has undertaken
registration or qualification of the Units for sale
in California, Colorado, Georgia, Kentucky, Illinois,
Louisiana, New Hampshire, New York, Ohio, Oklahoma,
Pennsylvania, Virginia, Tennessee, Texas, Washington,
and Wisconsin; however, there is no assurance that
such registration or qualification will become
effective in any such states. In addition, the
Company may undertake registration of the Units in
additional states as determined in the sole
discretion of the Company. Those Rights Holders
residing in states in which the Units have not been
registered or otherwise qualified for sale in such
state, will not be permitted to exercise their
Rights. Prior to tendering of Rights for exercise,
the Rights Holder should either contact the Company
or the Warrant Agent to determine whether the Units
have been registered or qualified in the state of
such Rights Holder's residence. The Company ha s
8
<PAGE>
used and will continue to use its best efforts to
cause the issuance of the Rights and the sale of the
Underling Shares to be lawful. The Company is not
required to accept the exercise of the Rights, if, in
the opinion of counsel, the sale of the Units upon
such exercise would be unlawful. In such cases, the
exercise of the Rights will not be accepted for
exercise, and the Rights Holders will be required to
hold the Rights until the Expiration Date without the
ability to exercise or transfer. See "Risk Factors--
Securities Laws Restrictions on Exercise of Rights,"
"Rights Offering--Conditions of the Rights Offering"
and "--Acceptance of Rights; Delivery of Units."
Conditions of the
Rights Offering The Company has reserved certain rights and imposed
certain conditions with respect to this offering and
the Rights and the Company's obligations associated
therewith, including any prohibitive injunction,
suspension of trading of the Common Stock and
enactment or adoption of any statute or regulation
prohibiting, materially restricting or delaying
consummation of this offering. See "Rights Offering--
Conditions of the Rights Offering."
Delivery of Securities The Company will deliver the certificates for the
shares of Common Stock and 1996-A Warrants comprising
the Units upon exercise of the Rights as promptly as
practicable after the Expiration Date and acceptance
of their exercise by the Company. See "Rights
Offering --Acceptance of Rights; Delivery of
Securities."
Withdrawal Rights Proper exercise of Rights by a Rights Holder will be
irrevocable. The Company may withdraw and terminate
the Rights and this offering at any time prior to the
Expiration Date for any reason. See "Rights Offering
Withdrawal Rights."
Subscription Agent U.S. Stock Transfer Corporation (the "Subscription
Agent"). The Subscription Agent may be contacted at
the address and telephone number set forth on the
back cover of this Prospectus.
National Daily Quotation
Bureau symbols: ......... Common Stock ............. AMSO
1996-A Warrant............ (proposed)
SUMMARY HISTORICAL FINANCIAL AND OPERATING INFORMATION OF THE COMPANY
The following table sets forth summary historical financial and operating
information of the Company for the fiscal years ended December 31, 1994 and
1995, and the nine months ended September 30, 1995 and 1996. See "Selected
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The financial and operating information
for the fiscal years ended December 31, 1994 and 1995, is derived from the
audited financial statements of the Company appearing elsewhere in this
Prospectus. The financial and operating information for the nine months ended
September 30, 1995 and 1996, are derived from the unaudited
9
<PAGE>
financial statements of the Company appearing elsewhere in this Prospectus
which, in the opinion of management, include all adjustment (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of the Company for the unaudited interim
periods. The following information should be read in conjunction with the
financial statements and the related notes thereto of the Company, and other
information relating to the Company presented elsewhere in this Prospectus. The
statements of operations information for any particular period is not
necessarily indicative of the results of operation for any future period.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- -------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Programs..................... $ 2,564,542 $ 4,382,935 $ 3,155,934 $ 4,186,404
Promotional material......... 82,780 109,733 88,893 234,735
Other........................ 30,625 25,535 17,797 37,471
----------- ----------- ----------- -----------
Total revenues............... 2,677,947 4,518,203 3,262,624 4,458,610
----------- ------------ ----------- -----------
Cost and expenses:
Programs..................... 684,128 1,094,157 906,935 968,635
Promotional material......... 83,964 92,087 69,395 142,610
Selling...................... 1,289,616 2,201,510 1,495,084 2,235,879
General and administrative... 515,158 857,743 593,273 789,410
Interest expense............. 25,075 22,998 20,335 19,422
----------- ----------- ----------- -----------
Total expenses............... 2,597,941 4,268,495 3,085,022 4,155,956
----------- ----------- ----------- -----------
Income before income taxes...... 80,006 249,708 177,602 302,654
Tax benefit..................... -- -- -- 438,349
----------- ----------- ----------- -----------
Net income...................... $ 80,006 $ 249,708 $ 177,602 $ 741,003
============ =========== =========== ===========
Weighted average common shares.. 2,119,356 2,662,681 2,121,524 3,175,551
outstanding(1)
Net income per common share..... $ .04 $ .09 $ .08 $ .23
CASH FLOW DATA:
Net cash provided by operating
activities..................... $ 109,252 $ 337,241 $ 239,071 $ 310,375
Net cash used in investing
activities..................... (63,646) (99,561) (4,072) (227,083)
Net cash used in financing
activities..................... (45,606) (125,593) (76,044) (77,414)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- ----------------------
1994 1995 1996
---------- ---------- ----------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................... $ 117,796 $ 283,341 $ 454,800
Working capital deficiency....... (338,662) (170,734) (137,166)
Total assets..................... 176,969 532,996 1,514,933
Short-term debt.................. 138,655 111,048 52,091
Long-term debt................... 7,947 104,149 85,692
Stockholders' equity (deficiency) (287,436) (25,228) 837,275
- ------------------------
</TABLE>
(1) Without giving effect to exercise of the Rights pursuant to this offering
and exercise of the Public Warrants pursuant to the Warrant Modification
Offering and the issuance of an additional 5,000 shares in
connection with the MMI Acquisition, and does not include 1,125,000
shares reserved for issuance pursuant to the Stock Option Plan. See
"Description of Securities--Common Stock--Rights Offering," and "--Other
Options and Warrants" and "Management--Stock Option Plan."-
10
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following table presents selected pro forma information for the Company
on the assumption that the MMI Acquisition occurred at the beginning of each
period for which results of operations are presented. The information presented
below is derived from and should be read in conjunction with, the consolidated
financial statements of the Company and MMI, the unaudited pro forma
consolidated statements of operations and other information related to
the Company and MMI, all presented elsewhere in this Prospectus. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations that would have been achieved if the MMI
Acquisition had been consummated in accordance with the assumptions set forth in
the notes to the unaudited pro forma consolidated statements of operations
of the Company, nor is it necessarily indicative of future operating
results. See "Unaudited Pro Forma Consolidated Financial Information of the
Company."
<TABLE>
<CAPTION>
PRO FORMA COMBINED
-------------------------------------
STATEMENTS OF OPERATIONS DATA: DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S>............................................. <C> <C>
Revenues........................................ $4,795,569 $4,663,722
Costs and expenses.............................. 4,704,024 4,403,227
Net Income...................................... 91,545 710,316
Weighted average common shares outstanding(1)... 2,682,681 3,195,551
Net income per common share..................... .03 .22
- ------------------------
</TABLE>
(1) Without giving effect to exercise of the Rights and exercise of the Public
Warrants pursuant to the Warrant Modification Offering and the issuance
of an additional 5,000 shares in connection with the MMI Acquisition,
and does not include 1,125,000 shares reserved for issuance
pursuant to the Stock Option Plan. See "Description of Securities--Common
Stock--Rights Offering," and "--Other Options and Warrants" and
"Management--Stock Option Plan."-
11
<PAGE>
RISK FACTORS
Purchase of Units pursuant to exercise of the Rights offered hereby
involves a high degree of risk. In addition to the other information set forth
elsewhere in this Prospectus, the following factors relating to the Company and
this offering should be considered when evaluating exercise of the Rights and
investment in the Units offered hereby.
SECURITIES LAWS RESTRICTIONS ON EXERCISE OF RIGHTS. In certain cases, the
sale of the Units and the Common Stock and 1996-A Warrants comprising the Units
by the Company upon exercise of Rights could violate the securities laws of
certain states or other jurisdictions. The Company has used and will continue
to use its best efforts to cause the Registration Statement of which this
Prospectus is a part to be declared effective under the laws of various states
as may be required to cause the sale of securities upon exercise of the Rights
and the 1996-A Warrants to be lawful. However, the Company is not required to
accept the exercise of the Rights or the 1996-A Warrants, if, in the opinion of
counsel, the sale of the Units and the Common Stock and 1996-A comprising the
Units upon such exercise would be unlawful. In such cases, the Rights will not
be accepted for exercise, and the Rights Holders will be required to hold the
Rights until expiration and will not be permitted to transfer the Rights. See
"Rights Offering--Conditions of the Rights Offering," and "--Acceptance of
Rights; Delivery of Units."
CONSEQUENCES TO NON-EXERCISING RIGHTS HOLDERS. Rights Holders that do not
exercise the Rights (or that are not exercisable because of securities laws
restrictions or limitations) will be required to hold the Rights and will not be
permitted to transfer the Rights. Unexercised or unexercisable Rights will
expire on the Expiration Date and on such date will become null and void. Such
Rights Holders may own a reduced equity ownership interest, and a
correspondingly smaller percentage voting interest, in the Company after
completion of this offering. See "Rights Offering--Advantages and
Disadvantages of Rights Exercise."
ABSENCE OF PRIOR PUBLIC MARKET FOR UNITS AND 1996-A WARRANTS; POSSIBLE
VOLATILITY OF STOCK PRICE. Although the Common Stock is currently traded in the
over-the-counter market, there currently is no public market for the Units or
the 1996-A Warrants offered pursuant to this offering, and there is no assurance
that a market will develop or be sustained. See "Price Range of Common Stock
and Public Warrants and Dividends." The market price of the Common Stock (as
well as the Units and 1996-A Warrants, if a market develops) may be
significantly affected by factors such as announcements of new products, product
lines or marketing strategies offered by the Company or its competitors,
increase or decrease in membership and sales associates of the network
purchasing programs offered by the Company, quarter-to-quarter variations in the
Company's anticipated or actual results of operations and conditions in the
marketing of products and product lines.
1996-A WARRANT EXERCISE AND REDEMPTION PROVISIONS. Each 1996-A Warrant
entitles the holder to purchase one share of Common Stock, subject to certain
anti-dilution adjustments, at a price of $12.00 per share, on 90 days
after the date of this Prospectus and or before November 30, 1998.
See "Description of Securities--1996-A Warrants." Holders of 1996-A Warrants
may exercise such warrants only with respect to shares of Common Stock
that are registered or qualified for sale under the state securities laws
of the states in which the holders of the 1996-A Warrants reside. There can
be no assurance that the Company will maintain effectiveness, under the state
securities laws of the states in which the holders of the 1996-A Warrants
reside, of this Prospectus or any other prospectus covering the shares
underlying the 1996-A Warrants at all times that the 1996-A Warrants are
outstanding. However, the Company will make a good faith effort to maintain
an effective registration statement and current prospectus in such states
at such times, if ever, that the price of the Common Stock exceeds the
1996-A Warrant exercise price. The 1996-A Warrants may be deprived of any
value in the event this Prospectus or another prospectus covering the shares
issuable upon exercise of the 1996-A Warrants is not kept effective in the
states in which the holders of the 1996-A Warrants reside. The 1996-A
Warrants will initially be sold and issued only in those jurisdictions that
1996-A Warrants are registered or otherwise qualified in connection with the
Warrant Modification Offer, which may not include a jurisdiction in which the
holder of a 1996-A Warrant currently resides and in which the Units (and the
share of Common Stock and 1996-A Warrant comprising each Unit) offered pursuant
to this Prospectus are registered or qualified. If the Company is unable or
chooses not to register or qualify or maintain the registration or qualification
12
<PAGE>
of the Units (and the shares of Common Stock and 1996-A Warrant comprising each
Unit) offered pursuant to this Prospectus for sale in a state in which holders
of a 1996-A Warrant resides, the Company will not permit such 1996-A Warrants to
be exercised, and such holders may have no choice but to either sell their
Warrants in the open market or let them be redeemed. A holder of 1996-A
Warrants and other interested persons who wish to know whether the Common Stock
underlying such warrants may be issued to the holder, upon the exercise, in a
particular state, should send a written inquiry to the Company. Additionally,
the 1996-A Warrants may be redeemed by the Company, in whole but not in part,
upon not less than 30 days' prior written notice at a price of $.0001 per 1996-A
Warrant at any time. See "Description of Securities--1996-A Warrants."
MANAGEMENT DISCRETION OVER APPLICATION OF PROCEEDS. The Company
will allocate the net proceeds of exercise of the Rights to general corporate
purposes and working capital. See "Use of Proceeds." The application of such
proceeds will be at the sole discretion of management of the Company.
Individual shareholders will have no control over decisions regarding the
application or use of the net proceeds obtained pursuant to exercise of the
Rights.
OVER-THE-COUNTER MARKET; PENNY STOCK TRADING RULES. The Common Stock is
and it is anticipated, although there is no assurance a market will develop,
that the Units and 1996-A Warrants will also be traded in the over-the-counter
market and will be subject to the "penny stock" trading rules. See "Price Range
of Common stock and Public Warrants and Dividends--Penny Stock Trading Rules."
The over-the-counter market is characterized as volatile in that securities
traded in such market are subject to substantial and sudden price increases and
decreases and at times price (bid and asked) information for such securities may
not be available. In addition, when there are only one or two market makers (a
dealer holding itself out as ready to buy and sell the securities on a regular
basis), there is a risk that the dealer or group of dealers may control the
market in the security and set prices that are not based on competitive forces
and the available offered price may be substantially below the quoted bid price.
There is no assurance that immediately following exercise of a Right, the Rights
Holder will be able to resell the Common Stock and/or 1996-A Warrant or if sold
whether a profit will be realized (i.e., sale of the Common Stock or 1996-A
Warrant at a price, after dealer compensation or markdown, in excess of the
exercise price of the Public Warrant allocable to the Common Stock or the 1996-A
Warrant).
Generally, at any time the bid price of the Common Stock in the over-
the-counter market is less than $5.00, the Company's equity securities will be
subject to the "penney stock" trading rules, unless the Company meets certain
other exemptions under the penney stock trading rules. The penny stock
trading rules impose additional duties and responsibilities upon broker-dealers
and salespersons effecting purchase and sale transactions in such equity
securities of the Company, including determination of the purchaser's investment
suitability, delivery of certain information and disclosures to the purchaser,
and receipt of a specific purchase agreement from the purchaser prior to
effecting the purchase transaction. Compliance with the penny stock trading
rules affect or will affect the ability to resell the Units, Common Stock, or
1996-A 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 ability of a holder to resell the Company's equity securities, and
the liquidity typically associated with other publicly traded equity securities
may not exist. Therefore, a Rights Holder electing to exercise a Right may be
required to hold the Unit, Common Stock and/or 1996-A Warrant for an indefinite
time and even then may realize a loss, which loss could be substantial. See
"Price Range of Common Stock and Dividends--Penny Stock Trading Rules."
WARRANT MODIFICATION OFFERING. Concurrently with this offering, pursuant to
a separate prospectus included within the Registration Statement of which this
Prospectus is a part, the Company is offering to the holders of its Class A
Common Stock Purchase Warrants (the "Class A Warrants") and Class B Common Stock
Purchase Warrants (the "Class B Warrants") the right to purchase 1,050,470
units, each consisting of one share of Common Stock and one 1996-A Warrant, (the
"Warrant Modification Units") for $6.00 each pursuant to modification of the
terms of the Class A Warrants and Class B Warrants (the "Warrant Modification
Offering"). See "Description of Securities--Public
13
<PAGE>
Warrants--Warrant Modification Offering." Although there is no assurance that
any of the Public Warrants will be exercised, in the event of exercise all or
any portion of the Class A Warrants and Class B Warrants (the "Public
Warrants"), additional shares of Common Stock and the 1996-A Warrants will be
issued and outstanding, which may be diluting on an earnings per share basis and
in such case may adversely affect the public market trading price of the Common
Stock. See "Description of Securities--Public Warrants--Warrant Modification
Offer."
OUTSTANDING STOCK OPTIONS AND WARRANTS. Furthermore, as of October
28, 1996, there were 1,540,177 outstanding stock options and other
warrants (of which 535,000 are held by current management of the Company)
exercisable to purchase Common Stock at an exercise price of from $1.60 to
$6.48 per share during periods that expire in February 1997 through July
2005. See "Description of Securities--Other Stock Options and Warrants."
During the term of the outstanding stock options and other warrants, the holders
are given the opportunity to profit from a rise in the market price of the
Common Stock. Exercise of such stock options and warrants may dilute the net
book value per share of outstanding Common Stock at the time of exercise and
will be diluting on an earnings per share basis, which may adversely affect the
public market trading price of the Common Stock. The existence of these stock
options and warrants may adversely affect the terms on which the Company may
obtain additional equity financing. Furthermore, the holders are likely to
exercise their stock options or warrants at a time when the Company would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise of such stock options and warrants. See
"Description of Securities--Other Stock Options and Warrants."
COMMON STOCK ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Common Stock in the public market following completion of this offering and
the Warrant Modification Offering could adversely affect the market price
of the Common Stock. See "Shares Eligible for Future Sale." At October
28, 1996, 627,834 shares of the Company's outstanding Common Stock
were "restricted securities" which may in the future be sold in compliance with
Rule 144 as promulgated by the Commission pursuant to the 1933 Act. Rule 144
generally provides that beneficial owners of shares who have held such shares
for two years may sell within a three-month period a number of shares not
exceeding one percent of the total outstanding shares or the average trading
volume of the shares during the four calendar weeks preceding such sale. See
"Shares Eligible for Future Sale."
The executive officers and directors of the Company, who in the aggregate
hold of record 367,927 shares of Common Stock as of October 28,
1996 (see "Security Ownership of Certain Beneficial Owners and Management"), are
eligible for sale in the open market pursuant to an effective registration
statement under the 1933 Act or upon satisfaction of the applicable holding
period and other requirements of Rule 144. Subject to the Rule 144 sale
limitations, 627,834 outstanding shares of Common Stock were eligible for
sale under Rule 144. Future sales of substantial amounts of Common Stock in the
public market following completion of this offering and the Warrant Modification
Offering could adversely affect the market price of the Common Stock. See
"Shares Eligible for Future Sale."
DEFICIT WORKING CAPITAL; FUTURE OPERATING RESULTS. At September
30, 1996, the Company had a deficit working capital of $137,166. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources and Liquidity." There is no assurance that
revenues from operations will be sufficient to cover the deficit working
capital. The Company attained profitability in 1994, and, as of
September 30, 1996, the Company had an accumulated deficit stockholders'
equity of $1,144,319. See "Selected Financial Information." There can
be no assurance that such profitability will be sustained. The Company's
expense levels are based, in part, on its expectations as to future revenue
levels, which can be difficult to predict due in part to the Company's strategy
of developing product marketing programs and the success of such programs, which
is also dependent upon the market demand developed for such products through the
marketing programs. If revenue levels are below expectations, operating results
will be adversely affected. In addition, the Company's operating results may
fluctuate as a result of many factors, including price reductions, delays in the
introduction of new products, delays in purchase decisions due to new product
announcements by the Company or its competitors, increased competition by
providers of marketing programs, failure to reduce product costs or maintain
production quality, cancellations or delays of orders, interruptions
14
<PAGE>
or delays in supply of key components, changes in customer base or product mix
and seasonal patterns of customer spending. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS. Demand for the products offered through
the Company's network purchasing programs is dependent on general economic
conditions. Recessionary periods generally result in fewer members participating
in the purchasing programs, and, therefore, may lead to a reduction in
membership in the respective network purchasing programs and the membership fee
revenues as well as less product purchasing which affect revenues as well as the
ability of the Company to introduce new products into the market place through
the purchasing programs. Because expenses associated with maintaining the
Company's administrative staff are relatively fixed over the short term (which
averaged approximately $100,000 during each of the three months ended September
30, 1996), the Company's net income tends to fluctuate in periods of increased
or decreased membership and product sales volume. These fluctuations are not
always readily predictable and most are not within the control of the Company.
During 1994 and 1995 and the nine months ended September 30, 1996, the Company's
total revenues were $2,677,947, $4,518,203 and $4,458,610, respectively, while
during such periods net income was $80,006, $249,708, and $741,003,
respectively. Although the Company has not experienced declining revenues and
reduced net income during such periods of operations, such results of operations
are not necessarily indicative of future operation results, and there is no
assurance that such revenues and net income will continue to increase or that
the current levels of revenues and net income will be maintained. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Results of Operations."
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends on the
continued availability of certain key management personnel, including John W.
Hail, founder, chief executive officer and director of the Company, and Roger P.
Baresel, president, chief financial officer and director of the Company. The
Company does not maintain any life insurance covering the executive officers of
the Company. The Company's continued growth and profitability also depends on
its ability to attract and retain other management personnel and sales
associates. The Company has not had any difficulty to date in attracting and
retaining management personnel and sales associates, although there can be no
assurance it will continue to be successful in this regard in the future.
See "Business--Marketing" and "Management--Directors and Executive Officers."
PRODUCT INTRODUCTION, OBSOLESCENCE AND MARKETING. The marketing for
products with respect to which the Company develops marketing programs is in
most cases characterized by introduction of competing products. Product
introductions are generally characterized by increased functionality or enhanced
results achieved by use of the product compared to existing competitive
products. The introduction of products embodying increased functionality or
enhanced results from product use may render existing products obsolete and
unmarketable. The Company's ability to successfully develop a marketing
introduction into the market place of new products on a timely basis and achieve
levels of market demand will be a significant factor in the Company's ability to
grow and remain competitive and profitable. In addition, the nature and mix of
the products comprising the available products within the Company's various
product purchasing and distribution programs is a most important factor. The
nature, assortment and mix of products available for purchase through the
Company's marketing program networks affects membership maintenance and
development within the various marketing programs of the Company, which
consequently affects demand for the products offered within each such program.
In the event the Company is unable to successfully increase the product
assortment and mix and maintain competitive product replacement of the products
in a timely manner in response to changes in and introduction of new products,
competitive or otherwise, offered to members of a marketing program the
Company's business and operating results will be materially and adversely
affected. See "Business--Products and Services of the Company" and "--
Marketing."
NETWORK PURCHASING PROGRAMS; LOSS OF SALES ASSOCIATES. The Company relies
on the members of its network purchasing programs and member sales associates
for the distribution and sale of the products offered pursuant to such programs.
A reduction in the membership of the network purchasing programs and loss of
member sales associates could have a material adverse effect on the Company's
business and operating results. Certain of the sales associates also represent
or may in the future represent other lines of products which are complementary
to or
15
<PAGE>
competitive with those offered through the Company's network purchasing
programs. While the Company attempts to encourage sales associates to focus on
selling the products through the Company's network purchasing programs, there is
a risk that these sales associates may give higher priority to other products,
reducing their efforts devoted to selling the products offered through the
Company's network purchasing programs. Typically, the Company has non-exclusive
arrangements with its sales associates which may be canceled by either party at
will and contain no minimum purchase requirements on the part of the sales
associates. There can be no assurance that the Company's network purchasing
programs will continue to be successful or that the Company will be able to
retain or increase its current network purchasing membership or retain its sales
associates, or retain or increase the various product lines offered to the
members of the purchasing programs. See "Business--Products and Services of the
Company" and "--Marketing."
DEPENDENCY ON THIRD-PARTY PROVIDERS; AVAILABILITY OF PRODUCT SOURCES.
Substantially all of the services and products offered and distributed by the
Company are provided by unrelated third-party providers over whom the Company
does not have control. In turn, such unrelated third-party providers may be
dependent upon other unrelated manufacturers or vendors to provide components
for manufacture or services. The Company does not generally enter into long-
term purchase commitments with respect to the consumer 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.
See "Business--Products and Services of the Company" and "--Contractual
Arrangements."
Although the Company believes it would be able to obtain alternative
sources of its 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. See
"Business--Contractual Arrangements."
MULTI-LEVEL MARKETING REGULATION. The Company is required to comply with
state and federal laws governing the Company's multi-level marketing activities.
See " Business--Government Regulation." These laws generally relate to unfair
or deceptive trade practices, lotteries, business opportunities and securities.
The Company has not experienced any material problems with marketing compliance.
However, multi-level marketing regulation at the state and federal level is
subject to change through enactment of additional legislation and adoption of
regulations which may adversely affect the marketing activities of the Company.
The Company cannot predict with any accuracy if such legislation or regulation
will be enacted or adopted or the ultimate effect thereof on Company operations,
but expects to continue to fully comply with the legal requirements of multi-
level marketing to minimize any undesirable impact on the Company and its
operations.
COMPETITION. Providers of product marketing services compete primarily on
the basis of marketing strategies, product advertising and packaging development
and cost of services. The Company believes it competes favorably in each of
these categories. The Company competes with a variety and number of companies
offering marketing programs and purchasing networks including discount catalog
companies, direct product purchasing, and retail discount stores, many of which
have greater financial resources than the Company. In addition, in some cases
the products offered through the Company's network purchasing programs are not
exclusively offered through such programs. See "Business--Competition."
16
<PAGE>
LACK OF DIVIDENDS. The Company does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain profits, if any, to fund growth and expansion in the future. See "Price
Range of Common Stock and Dividends."
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation and
Bylaws and the provisions of the Oklahoma General Corporation Act may make it
difficult to effect a change in control of the Company and replace incumbent
management. See "Description of Securities--Anti-Takeover Provisions." The
Certificate of Incorporation authorizes the issuance of Preferred Stock in
classes or series, and the Board of Directors to set and determine voting,
redemption and conversion rights and other rights related to such class or
series of Preferred Stock, which in some circumstances, the Preferred Stock
could be issued and have the effect of preventing a merger, tender offer or
other takeover attempt which the Company's Board of Directors opposes. See
"Description of Securities --Anti-Takeover Provisions--Preferred Stock" and
"Description of Securities--Preferred Stock." The Company's directors are
elected for three-year terms, with approximately one-third of the Board standing
for election each year, which may make it difficult to effect a change of
incumbent management and control. See "Description of Securities --Anti-
Takeover Provisions--Classified Board." Following the Warrant Modification
Offering or at some time in the future, the Company may become subject to the
anti-takeover provisions of the Oklahoma General Corporation Act, which in such
case and in some circumstances may discourage a person from making a control
share acquisition (generally an acquisition of voting stock having more than 20
percent of all voting power in the election of directors) without shareholder
approval. See "Description of Securities--Anti-Takeover Provisions--Oklahoma
Anti-Takeover Statutes."
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. See "Business."
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
800,807 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, 225,860 shares of Common
Stock, Class A Warrants and Class B Warrant in units, each unit consisting of
one share of Common Stock, one Class A Warrant and one Class B Warrant. See
"Description of Securities." The net proceeds from this offering were
approximately $838,290. Furthermore, in conjunction with such offering, the
holders of 300,000 Class A Warrants
17
<PAGE>
and Class B Warrants sold such Public Warrants. As of the date of this
Prospectus, there are 524,610 outstanding Class A Warrants and 525,860
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, 1997. A copy of the Warrant Agreement and the
amendments thereto were filed as an exhibit to the Registration Statement of the
which this Prospectus is a part. A copy of the Warrant Agreement and the
amendments thereto may be examined at the offices, 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 $6.00 and $8.00, respectively, without giving
effect to the Warrant Modification Offer.
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 Marketing Systems, Inc., the partent 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.
MMI ACQUISITION. Pursuant to a Stock Purchase Agreement having an effective
date of May 31, 1996 (the "Purchase Agreement"), the Company acquired all of the
issued and outstanding capital stock of Miracle Mountain International, Inc., a
Colorado corporation ("MMI"), and MMI became a wholly-owned subsidiary of the
Company (the "MMI Acquisition"). MMI is a multi-level marketer of various third-
party manufactured nutritional supplement products. Pursuant to the Purchase
Agreement and in connection with the MMI Acquisition, the Company issued and
delivered to the shareholders of MMI 20,000 shares of Common Stock. In addition,
the Company agreed to issue and deliver an additional 5,000 shares of Common
Stock to the shareholders of MMI on or before December 17, 1996, pending
determination of certain liabilities.
UNDERWRITING LETTER OF INTENT. The Company signed a letter of intent on May
24, 1996, with an underwriter which sets forth in principle the terms and
conditions pursuant to which investment banking services are to be provided and,
subject to a number of conditions, Common Stock is to be purchased from the
Company and sold to the public by the underwriter during 1996. Until a
definitive underwriting agreement is executed with the underwriter, which
generally will be following the declaration of effectiveness of the registration
statement filed by the Company with the Securities and Exchange Commission
covering the Common Stock, the underwriter will have no obligation to purchase
the Common Stock. Therefore, there is no assurance that this offering will be
completed.
USE OF PROCEEDS
The net proceeds of this offering to be received by the Company will be
dependent upon the number of Units purchased by the Rights Holders pursuant to
exercise of the Rights. Therefore, the net proceeds of this offering are not
determinable as of the date of this Prospectus. In the event the Rights are
exercised in full the net proceeds to the Company, after deduction of $100,000
estimated offering costs, will be $14,507,699. There is no assurance that all or
any portion of the Rights will be exercised pursuant to this offering, in which
case the Company will not receive any net proceeds form this offering.
Concurrently with this offering, pursuant to a separate prospectus which is
a part of the Registration Statement of which this Prospectus is a part, the
Company is making the Warrant Modification Offering . The net proceeds of the
Warrant Modification Offering to be received by the Company will be dependent
upon the number of Warrant Offering Units purchased by the holders of the Public
Warrants pursuant to exercise of the Public Warrants and the Warrant
Modification Offering. In the event the Public Warrants are exercised in full
pursuant to the Warrant Modification Offering, the net proceeds to the Company,
after deduction of $100,000 estimated offering costs, will be $6,202,840. See
"Description of Securities--Public Warrants--Warrant Modification Offering."
There is no assurance that all or any portion of the Public Warrants pursuant to
the Warrant Modification Offering will be exercised.
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<PAGE>
The net proceeds received by the Company from the concurrent offering
for sale of the Units and Warrant Offering Units pursuant to the exercise of the
Rights and Public Warrants will be used for general corporate purposes,
including working capital and to fund the Company's efforts to expand sales and
marketing activities. The Company estimates that it will use approximately $1.5
million for expansion of its U.S. distributor network and enhancement of its
marketing materials. The Company intends to use approximately $.5 million to
develop new products and enhance the packaging of its existing products. The
Company will devote approximately $1 million for the expansion into and
development of international markets. In the event the Company raises less than
$3.0 million, the net proceeds will be devoted to each of these areas in the
order in which they are presented. See "Business." Combined net proceeds in
excess of $3.0 million will be devoted to general corporate purposes including
further expansion of the Company's distributor network and enhancement of its
marketing materials, development of new products and enhancement of packaging of
its existing products and expansion into and development of international
markets.
The Company does not intend to use any of the net proceeds to discharge
existing debt. Pending use of the net proceeds, they will be invested by the
Company in investment grade, short-term, interest-bearing securities.
In the event that the Company does not obtain any net proceeds from these
offerings, it anticipates that it will be able to continue to operate on
internally generated cash. During the nine months ended September 30, 1996, the
Company had an average monthly positive cash flow from operating activities of
approximately $34,400, and an average monthly net positive cash flow of
approximately $600, after investing and financing activities. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is traded in the over-the-counter market and is quoted by
the National Bureau Quotation, Incorporated under the symbols "AMSO." The
following table sets forth, for the periods presented, the high and low closing
bid quotations in the over-the-counter market as quoted by the National
Quotation Bureau, Incorporated. The bid quotations reflect inter-dealer prices
without adjustment for retail markups, markdowns or commissions and may not
reflect actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
------------------
CLOSING BID
------------------
HIGH LOW
-------- -------
<S> <C> <C>
1996:
First Quarter Ended March 31................. $ 6.48 $ 5.04
Second Quarter Ended June 30................. $ 8.00 $ 5.04
Third Quarter Ended September 30............. $ 7.84 $ 5.52
1995:
First Quarter Ended March 31................. $ 2.00 $ 1.76
Second Quarter Ended June 30................. $ 3.76 $ 2.00
Third Quarter Ended September 30............. $10.00 $ 3.60
Fourth Quarter Ended December 31............. $ 7.52 $ 4.48
1994:
First Quarter Ended March 31................. $ 1.52 $ 1.04
Second Quarter Ended June 30................. $ 2.00 $ 1.52
Third Quarter Ended September 30............. $ 2.00 $ 1.52
Fourth Quarter Ended December 31............. $ 2.48 $ 1.52
</TABLE>
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<PAGE>
On October 28, 1996, the closing bid and asked prices, as quoted by the
National Quotation Bureau, Incorporated, of the Common Stock were $5.76 and
$6.25, respectively. On October 28, 1996, there were approximately 1,070 holders
of Common Stock.
PENNY STOCK TRADING RULES
Unless other exemptions become available in the future, in the event the
bid price of the Common Stock in the over-the-counter market is less than $5.00,
the Common Stock, Units and 1996-A Warrants will be subject to the "penney
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.
Required compliance with the penny stock trading rules affect or will
affect the ability to resell the Common Stock, Units, or 1996-A 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, Units, or 1996-A 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, Units, or 1996-A 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 may
not Common Stock, Units, or 1996-A Warrants may not be reliable.
DIVIDEND POLICY
The Company's dividend policy is to retain its earnings to support the
expansion of its operations. The Board of Directors of the Company does not
intend to pay cash dividends on the Common Stock in the foreseeable future. Any
future cash dividends will depend on future earnings, capital requirements, the
Company's financial condition and
20
<PAGE>
other factors deemed relevant by the Board of Directors. See "Risk Factors--
Future Operating Results," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of September, 1996, giving effect to the MMI Acquisition except for the
additional 5,000 shares of Common Stock to be issued in connection therewith
(see "The Company--Background--MMI Acquisition"), however, without giving effect
to or assuming exercise of the Rights pursuant to this offering and the Public
Warrants pursuant to the Warrant Modification Offering. This table should be
read in conjunction with the unaudited pro forma consolidated financial
statements and notes thereto of the Company appearing elsewhere in this
Prospectus. See "Unaudited Pro Forma Consolidated Financial Information of the
Company."
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996
-------------
<S> <C>
Current portion of long-term debt........................... 52,091
-------------
Long-term debt, net of current portion...................... 85,692
-------------
Stockholders' equity:
Preferred Stock, $.0001 par value, 5,000,000
authorized; none outstanding.......................... --
Common Stock, $.0001 par value, 495,000,000
shares authorized; 2,143,191 shares issued
and outstanding at September 30, 1996................. 214
Paid-in capital in excess of par, common stock............ 1,981,380
Retained earnings (deficit)............................... (1,144,319)
-------------
Total stockholders' equity.............................. 837,275
-------------
Total capitalization........................................ $ 975,058
=============
</TABLE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the financial statements and related
notes of Advantage Marketing Systems, Inc. (formerly AMS, Inc.) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein. The selected financial information
presented below is not necessarily indicative of the future results of
operations or financial performance of the Company. See "Risk Factors--Future
Operating Results." The selected financial information as of and for the years
ended December 31, 1994 and 1995, is derived from the audited financial
statements of Advantage Marketing Systems, Inc. (formerly AMS, Inc.) contained
elsewhere in this Prospectus. The selected financial information presented as
of and for the nine months ended September 30, 1995 and 1996, is
derived from the unaudited financial statements of the Company, which financial
statements are contained elsewhere in this Prospectus. In the opinion of
management of the Company, the unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information.
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<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------- --------------------
1994 1995 1995 1996
----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Programs.................................. $2,564,542 $4,382,935 $3,155,934 $4,186,404
Promotional material...................... 82,780 109,733 88,893 234,735
Other..................................... 30,625 25,535 17,797 37,471
---------- ---------- ---------- ----------
Total revenues........................ 2,677,947 4,518,203 3,262,624 4,458,610
---------- ---------- ---------- ----------
Cost and expenses:
Programs.................................. 684,128 1,094,157 906,935 968,635
Promotional material...................... 83,964 92,087 69,395 142,610
Selling................................... 1,289,616 2,201,510 1,495,084 2,235,879
General and administrative................ 515,158 857,743 593,273 789,410
Interest expense.......................... 25,075 22,998 20,335 19,422
---------- ---------- ---------- ----------
Total expenses........................ 2,597,941 4,268,495 3,085,022 4,155,956
---------- ---------- ---------- ----------
Income before income taxes.................... 80,006 249,708 177,602 302,654
Tax benefit................................... -- -- -- 438,349
---------- ---------- ---------- ----------
Net income.................................... $ 80,006 $ 249,708 $ 177,602 $ 741,003
========== ========== ========== ==========
Weighted average common shares outstanding(1). 2,119,356 2,662,681 2,121,524 3,175,551
Net income per common share................... $.04 $.09 $.08 $.23
CASH FLOW DATA:
Net cash provided by operating activities..... $ 109,252 $ 337,241 $ 239,071 $ 310,375
Net cash used in investing activities......... (63,646) (99,561) (4,072) (227,083)
Net cash used in financing activities......... (45,606) (125,593) (76,044) (77,414)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................ $ 117,796 $ 283,341 $ 454,800
Working capital deficiency.................... (338,662) (170,734) (137,166)
Total assets.................................. 176,969 532,996 1,514,933
Short-term debt............................... 138,655 111,048 52,091
Long-term debt................................ 7,947 104,149 85,692
Stockholders' equity (deficiency)............. (287,436) (25,228) 837,275
- ------------------------
</TABLE>
(1) Without giving effect to exercise of the Rights and exercise of the Public
Warrants pursuant to the Warrant Modification Offering and the issuance of
an additional 5,000 shares in connection with the MMI Acquisition, and does
not include 1,125,000 shares reserved for issuance pursuant to the Stock
Option Plan. See "Rights Offering," "Description of Securities--Public
Warrants--Warrant Modification Offering," and "--Other Options and
Warrants" and "Management--Stock Option Plan."-
-22-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto of the Company and "Selected Financial
Information" appearing elsewhere in this Prospectus.
Effective December 11, 1995, Advantage Marketing Systems, Inc., a Delaware
corporation ("AMS Delaware") and the former parent of the Company, merged with
and into the Company, with the Company being the surviving corporation (the
"Merger Reincorporation"). Prior to the Merger Reincorporation, all operations
of AMS (Delaware) were conducted solely as a holding company of the Company as
its wholly-owned subsidiary, and AMS (Delaware) did not have any other operating
activities. Following the Merger Reincorporation, all operating activities of
AMS Delaware and the Company as its wholly-owned subsidiary, were continued by
the Company. The following discussion and analysis of results of operations of
the Company are the consolidated results of operations of AMS Delaware and the
Company prior to the Merger Reincorporation, the predecessor of the Company.
See "The Company--Background--Merger Reincorporation."
RESULTS OF OPERATIONS
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, and (ii) for the nine
months ended September 30, 1995 and 1996, which are derived from the unaudited
consolidated financial statements of the Company, which include, in the opinion
of management of the Company, all normal recurring adjustments considered
necessary for a fair statement of results for such periods. 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, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- ------------------------------------------
1994 1995 1995 1996
-------------------------------------------- ------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- -------- ----------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Programs.................. $2,564,542 95.8% $4,382,935 97.0% $3,155,934 96.7% $4,186,404 93.9%
Promotional material...... 82,780 3.1 109,733 2.4 88,893 2.7 234,735 5.3
Other..................... 30,625 1.1 25,535 .6 17,797 .6 37,471 .8
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total revenues.......... 2,677,947 100.0 4,518,203 100.0 3,262,624 100.0 4,458,610 100.0
---------- ----- ---------- ----- ---------- ----- ---------- -----
Costs and Expenses
Programs.................. 684,128 25.6 1,094,157 24.2 906,935 27.8 968,635 21.7
Promotional material...... 83,964 3.1 92,087 2.1 69,395 2.2 142,610 3.3
Selling................... 1,289,616 48.2 2,201,510 48.7 1,495,084 45.8 2,235,879 50.1
General and............... 515,158 19.2 857,743 19.0 593,273 18.2 789,410 17.7
administrative
Interest Expense.......... 25,075 .9 22,998 .5 20,335 .6 19,422 .4
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total expenses.......... 2,597,941 97.0 4,268,495 94.5 3,085,022 94.6 4,155,956 93.2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income before taxes......... 80,006 3.0 249,708 5.5 177,602 5.4 302,654 6.8
Tax benefit................. -- -- -- -- -- -- 438,349 9.8
---------- ----- ---------- ----- ---------- ----- ---------- -----
Net income.................. $ 80,006 3.0% $ 249,708 5.5% $ 177,602 5.4% $ 741,003 16.6%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
During 1994, 1995 and the nine months ended September 30, 1996, the Company
experienced increases in revenues from programs and net income compared to the
preceding year or period. The increases were principally the result of
introduction of the Company's NewTrition Plan in October 1993 and expansion of
the Company's network of its independent sales representatives and associates,
which resulted in achieving substantial increased sales volume of the NewTrition
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.
-23-
<PAGE>
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 Nine Month Period Ended September 30, 1995 and 1996
During 1996, total revenues increased $1,195,986 (a 36.7 percent increase)
as compared to 1995. The increase was primarily 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 distributors.
At September 30, 1996, the Company had 9,214 "active" independent distributors
compared to 6,447 at September 30, 1995. A distributor is considered to be
"active" if he or she has made a product purchase from the Company within the
previous 12 months. During 1996, the Company made aggregate sales under its
NewTrition Plan of $4,146,316 to 7,016 distributors, compared to aggregate sales
in 1995 of $2,748,876 to 4,639 distributors. Promotional material revenue
increased $145,842 (a 164.1 percent increase) to $234,735 in 1996 from $88,893
in 1995. In addition, other revenue increased by $19,674 (a 110.5 percent
increase) from $17,797 in 1995 to $37,471 in 1996, as a result of increased
interest income during 1996.
Total costs and expenses of programs, promotional material and selling
during 1996 increased by $875,710 (a 35.4 percent increase) to $3,347,124 from
$2,471,414 during 1995. This increase was attributable to an increase of (i)
$61,700 (a 6.8 percent increase) in costs of programs and (ii) $740,795 (a 49.5
percent increase) in selling expenses, while promotional material expenses
increased $73,215 (a 105.5 percent increase). The costs and expenses of
programs, promotional materials and selling, as a percentage of program sales
revenue, increased from 78.3 percent during 1995 to 80.0 percent during 1996 due
to an increase in selling costs as a percentage of program sale revenue from
47.4 percent to 53.4 percent, offset by a decrease in the costs of programs as a
percentage of program sale revenue from 28.7 percent to 23.1 percent as a
result of price reductions obtained from vendors on the program costs associated
with the Company's NewTrition Plan. The Company achieved a net profit on sales
of promotional materials of $92,125 during 1996 compared to a net profit of
$19,498 during 1995 as a result of the Company's curtailed practice of providing
promotional materials at reduced cost during special promotions.
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 $300,602 (a 38.9 percent
increase) to $1,074,015 in 1996 from $773,413 in 1995. The gross profit on
program and promotional material revenues increased as a percentage of total
revenue from 23.7 percent in 1995 to 24.1 percent in 1996. The increase in the
Company's gross profit margin on program and promotional material revenues
resulted from the combination of a decrease in program and promotional materials
costs as a percentage of programs and promotional material revenues, offset by
an increase in selling costs and expenses as a percentage of programs and
promotional material revenues.
General and administrative expenses increased $196,137 (a 33.1 percent
increase) to $789,410 during 1996 from $593,273 during 1995. 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 seven additional employees. Consequently, payroll and
employee costs increased by $184,055 during 1996 as the Company increased its
number of employees from ten to 17. Interest expense during 1996 decreased $913
(a 4.5 percent decrease) to $19,422 from $20,335 during 1995.
Income before taxes increased $125,052 (a 70.4 percent increase) to
$302,654 during 1996 from $177,602 during 1995. Income before taxes as a
percentage of total revenue increased from 5.4 percent during 1995 to 6.8
percent during 1996.
Net income increased $563,401 (a 317.2 percent increase) to $741,003 during
1996 from $177,602 during 1995. Net income as a percentage of total revenue
increased from 5.4 percent during 1995 to 16.6 percent during 1996. This
increase was primarily the result of the Company recording the tax benefits of
its net operating loss carryforwards
-24-
<PAGE>
for income tax purposes at September 30, 1996. The Company has net operating
loss carryforwards for income tax purposes at September 30, 1996 totaling
approximately $1,369,841, which will begin to expire in 2003. The valuation
allowance recorded at December 31, 1995 was reversed at September 30, 1996 as
management has determined that it is more likely than not that a tax benefit
will be realized from the related deferred tax assets.
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 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 $515,308 (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.
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. However, there can be no
assurance that once the Company's current growth patterns peak that the company
will not be subject to seasonal fluctuations in operations.
-25-
<PAGE>
Income Taxes
The Company's deferred tax assets consist primarily of net operating loss
carryforwards for income tax purposes at September 30, 1996 totaling
approximately $1,369,841, which will begin to expire in 2003. During 1995, the
Company's deferred tax assets and valuation allowance were decreased by
approximately $120,700 and $116,200, respectively.
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax benefits of
its deferred tax assets. Based upon the historical trend of increasing earnings
management has concluded that it is more likely than not that a tax benefit will
be realized from its deferred tax assets and therefore eliminated the previously
recorded valuation allowance for its deferred tax assets. Elimination of the
valuation allowance resulted in a deferred tax asset at September 30, 1996, of
$438,349 and a corresponding tax benefit for the quarter ending September 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a deficit working capital of approximately $137,166 at
September 30, 1996, as compared to a deficit of approximately $170,700 at
December 31, 1995. Of this $137,166 deficit, approximately $17,658 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 the nine months ended September 30,
1996, net cash provided by operating activities was $310,375 of which $227,083
was used in investing activities, and $77,414 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 $5,878. The Company's working capital needs over the next twelve months
consist primarily of administrative and operating overhead. For the three
months ended September 30, 1996, the Company's administrative and operating
overhead averaged approximately $100,000 per month. The Company anticipates
that this level of administrative and operating overhead will continue over the
next twelve months.
At September 30, 1996, and December 31, 1995, the balance due on a short-
term loan from the Company's Chief Executive Officer and major shareholder was
$17,658 and $81,929, respectively. 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 the nine months
ended September 30, 1996, the Company did not receive any advances under the
loan, while during 1995, the Company received aggregate advances of $31,963
under the loan. During the nine months ended September 30, 1996 and the year
ended December 31, 1995, the Company made principal payments of $64,271 and
$127,615, respectively, 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, and as of the date of this Prospectus the Company is
making weekly principal and interest payments of $1,500. See "Certain
Transactions."
The Company made advances to the John Hail Agency, Inc. ("JHA"), a company
of which the Company's Chief Executive Officer and major shareholder is the sole
director and shareholder, of $22,000, and $87,684 during the nine months ended
September 30, 1996, and the year ended December 31, 1995. During the nine
months ended September 30, 1996, JHA made repayments of $3,040. JHA made
repayments of these advances of $67,401 during the fiscal year ended December
31, 1995. Furthermore, effective June 30, 1996, the Company adopted a policy to
not make any further advances to JHA, and JHA executed a promissory note payable
to the Company in the principal amount of $73,964, bearing interest at eight
percent per annum and payable in 60 installments of $1,499 per month. See
"Certain Transactions."
The Company's primary source of liquidity is net cash provided by operating
activities. 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 September 30, 1996, the Company did not have any
material commitments for capital expenditures.
-26-
<PAGE>
In the event that the Company does not obtain any net proceeds from this
offering and the Rights Offering, it is anticipated that Company will be able
to continue to operate on internally generated cash. During the nine months
ended September 30, 1996, the Company had an average monthly positive cash flow
from operating activities of approximately $34,000, and an average monthly net
positive cash flow of approximately $650, after investing and financing
activities.
In connection with these offerings the Company has incurred certain direct
costs consisting primarily of legal, accounting and filing fees. These costs
totaled approximately $153,000 and $53,000 at September 30, 1996, and December
31, 1995, respectively, and are included in other assets in the Company's
financial statements.
Pursuant to a stock purchase agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the Company
(the "MMI Acquisition"). MMI is a multi-level marketer of various third-party
manufactured nutritional supplement products. Pursuant to the Purchase
Agreement and in connection with the MMI Acquisition, the Company issued and
delivered to the shareholders of MMI 20,000 shares of common stock. In
addition, the Company agreed to issue and deliver an additional 5,000 shares of
common stock to the shareholders of MMI on or before December 17, 1996, pending
determination of certain liabilities.
In connection with the MMI Acquisition, the excess of the purchase price of
$176,103, which includes $56,103 of transaction costs, over the negative $3,059
fair market value of assets of MMI, net of liabilities, has been allocated
$119,162 to goodwill and $60,000 to the covenant not to compete. Goodwill and
the covenant not to compete will be amortized over a seven and four and one
half-year period, respectively. The fair market value of the assets of MMI, net
of liabilities, declined from $16,690 to a negative $3,059 between March 31,
1996 and May 31, 1996.
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.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
Set forth below are certain unaudited pro forma consolidated statements of
operations of the Company, presenting the pro forma effects of the MMI
Acquisition, assuming the MMI Acquisition occurred at the beginning of each
period for which results of operations are presented. The MMI Acquisition was
accounted for using the purchase method of accounting. The information presented
below is derived from, and should be read in conjunction with, the financial
statements of the Company and MMI presented elsewhere in this Prospectus. The
pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations that would have been
achieved if the transactions included in the pro forma adjustments had been
consummated in accordance with the assumptions set forth below, nor is it
necessarily indicative of future operating results.
-27-
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------
ADVANTAGE MIRACLE
MARKETING MOUNTAIN
SYSTEMS, INC. INTERNATIONAL, INC. PRO FORMA PRO FORMA
DECEMBER 31, 1995 DECEMBER 31, 1995 ADJUSTMENTS COMBINED
----------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C>
Note 2
REVENUES:
Programs.................. $4,382,935 $ 277,366 $ -- $4,660,301
Promotional material...... 109,733 -- -- 109,733
Other..................... 25,535 -- -- 25,535
---------- --------- --------- ----------
Total revenues.. 4,518,203 277,366 -- 4,795,569
---------- --------- --------- ----------
COSTS AND EXPENSES:
Programs.................. 1,094,157 103,217 -- 1,197,374
Promotional material...... 92,087 -- -- 92,087
Selling................... 2,201,510 145,650 -- 2,347,160
General and
administration........... 857,743 157,725 30,356 (a) 1,045,824
Interest expense.......... 22,998 1,403 -- 24,401
---------- --------- --------- ---------
Total expenses.. 4,268,495 407,995 30,356 4,706,846
---------- --------- --------- ----------
NET INCOME (LOSS)........... $ 249,708 $(130,629) $ (30,356) $ 88,723
========== ========= ========= ==========
Weighted average common
shares outstanding......... 2,662,681 20,000 2,682,681
========== ========= ==========
Net income per common share. $.09 $ .03
========== ==========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
-28-
<PAGE>
<TABLE>
<CAPTION>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
HISTORICAL
--------------------------------------------------
MIRACLE
MOUNTAIN
ADVANTAGE INTERNATIONAL, INC.
-------------------
MARKETING PRE-ACQUISITION
SYSTEMS, INC. PERIOD
FOR THE NINE FOR THE FIVE
MONTHS ENDED MONTHS ENDED PRO FORMA PRO FORMA
SEPTEMBER 30, 1996 MAY 31, 1996 ADJUSTMENTS COMBINED
------------------ ------------------- ----------- ---------
<S> <C> <C> <C> <C>
Note 2
REVENUES:
Programs $4,186,404 $205,112 $ -- $4,391,516
Promotional material 234,735 -- -- 234,735
Other 37,471 -- -- 37,471
---------- -------- ------ ----------
Total revenues 4,458,610 205,112 -- 4,663,722
---------- -------- ------ ----------
COSTS AND EXPENSES:
Programs 968,635 54,743 -- 1,023,378
Promotional material 142,610 -- -- 142,610
Selling 2,235,879 129,758 -- 2,365,637
General and administration 789,410 49,188 12,648 (a) 851,246
Interest expense 19,422 2,110 -- 21,532
Total expenses 4,155,956 235,799 12,648 4,404,403
---------- -------- ------- ----------
INCOME (LOSS) BEFORE TAXES 302,654 (30,687) (12,648) 259,319
TAX BENEFIT 438,349 -- -- 438,349
---------- -------- ------- ----------
NET INCOME (LOSS) $ 741,003 (30,687) $(12,648) $ 697,668
========== ======== ======== ==========
Weighted average common shares
outstanding 3,175,551 20,000 3,195,551
========== ======== ==========
Net income per common share $ .23 $ .22
========== ==========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
-29-
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
1. BASIS FOR PRESENTATION
The pro forma balance sheet and statement of income present the pro forma
effects of the acquisition by the Company of the issued and outstanding
capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the Company
(the "MMI Acquisition"), pursuant to a Stock Purchase Agreement with an
effective date of May 31, 1996, (the "Purchase Agreement"). MMI is a multi-
level marketer of various third-party manufactured nutritional supplement
products. Pursuant to the Purchase Agreement and in connection with the MMI
Acquisition, the Company issued and delivered to the shareholders of MMI
20,000 shares of Common Stock. In addition, the Company agreed to issue and
deliver an additional 5,000 shares of Common Stock to the shareholders of
MMI on or before December 17, 1996, pending determination of certain
liabilities.
The accompanying unaudited pro forma statement of income is presented
assuming the MMI Acquisition occurred or was consummated on the first day of
the period presented. The historical information presented for the Company
and MMI as of December 31, 1995, is derived from the audited financial
statements of the Company and MMI as of such date.
The pro forma financial information presented in the unaudited pro forma
financial statements is not necessarily indicative of the results of
operations that would have been achieved had the operations been those of a
single corporate entity. The results of operations presented in the
unaudited pro forma statement of income are not necessarily indicative of
the consolidate results of future operations of the Company following
consummation of the MMI Acquisition.
2. ADJUSTMENTS
The accompanying unaudited pro forma consolidated financial statements have
been adjusted to record and give effect to the following:
(a) The excess of the purchase price of $176,103, which includes $56,103 of
transaction costs, over the negative $3,059 fair market value of the
assets of MMI, net of liabilities, has been allocated $119,162 to
goodwill and $60,000 to the covenant not to compete. Goodwill and the
covenant not to compete will be amortized over a seven year and four and
one-half year period, respectively. The goodwill amortization for the
year ended December 31, 1995, and the five months ended May 31, 1996,
was $17,023 and $7,093, respectively. Covenant amortization for the year
ended December 31, 1995, and for the five months ended May 31, 1996, was
$13,333 and $5,555, respectively.
3. NET INCOME PER SHARE
Pro forma per share calculations for the Company are based upon the number
of shares of Common Stock to be outstanding after giving effect to the MMI
Acquisition.
-30-
<PAGE>
RIGHTS OFFERING
GENERAL
The Company is issuing as a dividend, at no cost, to each holder of Common
Stock of record as of the 5:00 p.m., Central Standard Time, on , 1996
(the "Record Date"), one Right per share of Common Stock held on the Record
Date. Each of the Rights entitles the holders of the Rights (the "Rights
Holders") to purchase one Unit (comprised of one share of Common Stock and one
1996-A Warrant) at $6.80 per Unit (the "Exercise Price"). The Rights are
evidenced by non-transferable certificates (the "Rights Certificates"), which
the shareholders will receive with delivery of this Prospectus. The Rights may
only be exercised by a Rights Holder in the event the Registration Statement of
which this Prospectus is a part is effective with the Securities and Exchange
Commission and the Units (or Common Stock and 1996-A Warrant comprising the
Units) are qualified for sale in the state of residence of the Warrant Holder.
See "Risk Factors--Securities Laws Restrictions on Exercise of Rights," "--
Acceptance of Rights; Delivery of Units," below. Subject to foregoing, a
shareholder may (i) purchase Units through exercise of all of such shareholder's
Rights, thereby preserving approximately the same relative equity ownership
interest in the Company (except as may be adjusted to give effect to the
exercise of the Public Warrants pursuant to the Warrant Modification Offering,
outstanding options and other warrants, or otherwise ), or (ii) purchase Units
through the exercise of a portion of the shareholder's Rights and allow part or
all of the shareholder's Rights to expire unexercised. In the latter case, the
shareholder's relative equity ownership interest in the Company would be less
than if the Rights Holder exercised the Rights in full (except as may be
adjusted to give effect to the exercise of the Public Warrants pursuant to the
Warrant Modification Offering, the exercise of outstanding stock options and
other warrants, or otherwise). See "Description of Securities--Public Warrants-
- -Warrant Modification Offering."
PLAN OF DISTRIBUTION
The Units are being offered on a best efforts basis by the Company and its
officers and directors, without commissions, selling fees or direct or indirect
remuneration. From the proceeds of this offering, the Company will pay the
costs incurred with respect to the offering, which are estimated to be $100,000.
Offers will be limited to the holders of the Rights residing in those states in
which the Units are registered or qualified to be offered and sold.
Holders of the Rights will not be required to pay any brokerage commissions
or fees with respect to the exercise of their Rights. The Company will pay all
charges and expenses of the Subscription Agent. See "--Acceptance of Rights;
Delivery of Units," below.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENT
The Rights will expire at 5:00 p.m., Central Standard Time, on
, 1996, unless extended by the Company (the "Expiration Date"). The Expiration
Date may be extended by the Company in its sole and absolute discretion, but not
beyond , 1996. After the Expiration Date, the Rights will have
no value. The Company expressly reserves the right at any time and from time to
time, regardless of whether or not any of the conditions specified in
"Conditions of the Rights Offering" below have been satisfied, (i) to extend the
Expiration Date, which will also extend the period during which the Rights may
be exercised by giving oral or written notice to the Subscription Agent and by
making a public announcement of such extension or (ii) to amend the terms of the
Rights and this offering in any respect not materially adverse to the Rights
Holders by making public announcement of such amendment of such extension no
later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. The Company's decision regarding the
advisability of extending the Expiration Date (and effectively extending the
exercise period of the Rights) will be based upon factors and considerations
that exist and that the Company deems material and appropriate at that time. As
of the date of this Prospectus, such factors and considerations are
undeterminable. There can be no assurance that the Company will exercise its
right to extend the Expiration Date or amend the terms of the Rights and this
offering and there is no limit on the number of times the Company may extend the
Expiration Date.
Furthermore, the Company reserves the right, in its sole discretion, in the
event any of the conditions set forth below under "--Conditions of the Rights
Offering" are not met or waived by the Company and so long as the Rights
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have not theretofore been accepted for exercise, to delay (except as otherwise
required by applicable law) acceptance for exercise of any Rights, or to
terminate the Rights Offering and not accept for exercise any Rights. Any
extension, termination or amendment of the Rights Offering will be followed as
promptly as practicable by notification thereof in a manner reasonably
calculated to inform the Rights Holders of such extension, termination or
amendment. Without limiting the manner in which the Company may choose to make
any public announcement, the Company will not, unless otherwise required by
applicable law, have any obligation to publish, advertise or otherwise
communicate any such public announcement other than by making a release to the
Dow Jones News Service. Any amendment to the Rights Offering will apply to all
Rights tendered for exercise pursuant thereto, regardless of when or in what
order the Rights are tendered.
CONDITIONS OF THE RIGHTS OFFERING
Notwithstanding any other provisions of the Rights Offering, the Company
may cancel, modify or terminate the Rights Offering and is not required to
accept for exercise any Rights if, prior to the Expiration Date:
(i) there shall be in effect any injunction prohibiting, restricting or
delaying consummation of the Rights Offering;
(ii) there shall have occurred any general suspension of trading in, or
limitation of prices for, securities in the over-the-counter markets; or
(iii) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any governmental authority, which would prohibit
or materially restrict or delay consummation of the Rights Offering.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
conditions or may be waived by the Company in whole or in part at any time and
from time to time, in its sole discretion. Each right of the Company in
connection with the foregoing conditions will be deemed an ongoing right that
may be asserted any time and from time to time. The failure by the Company, at
any time, to exercise its rights with respect to any of these conditions will
not be deemed a waiver of any such conditions. Any determination by the Company
concerning applicability of the conditions to the events set forth herein will
be final and binding upon all parties. The Company expressly reserves the right
to terminate or amend the Rights Offering and not accept for exercise any Rights
if any of the foregoing conditions are not satisfied.
ADVANTAGE AND DISADVANTAGES OF RIGHTS EXERCISE
Exercise of the Rights may have both significant adverse consequences for
the Rights Holders. The adverse consequences to the Rights Holders who do not
exercise Rights or that are unable to exercise the Rights because of securities
laws restrictions or limitations (see "--Acceptance of the Rights; Delivery of
Units," below) include (i) a reduced equity ownership interests in the Company
and (ii) a correspondingly smaller percentage voting interests in the Company
after completion of this offering. Furthermore, in the event any of the Public
Warrants are exercise pursuant to the Warrant Modification Offering, the equity
ownership interests and voting interests in the Company of the Rights Holders
(in their capacities as shareholders of the Company), will be further reduced.
Those Rights that are not exercised by the Rights Holders will become worthless
after the Expiration Date and all rights to purchase the Units pursuant to the
Rights and this offering will terminate.
The advantageous consequences of exercise of the Rights and receipt of the
Units include (i) the acquisition and receipt of additional equity ownership of
the Company represented by the shares of Common Stock and the 1996-A Warrants
(each of which will entitle the holder to purchase an additional share of Common
Stock at an exercise price of $12.00, subject to adjustment in certain events
and possible redemption by the Company at $.0001) comprising the Units, (ii)
participation in future growth of the Company and any potential market value
appreciation of the Common Stock and 1996-A Warrants, (iii) receive any
investment liquidity that the Common Stock has or may have in the future, as
well as any such liquidity the 1996-A Warrants may come to have in the event a
public market develops for the 1996-A Warrants, and (iv) maintenance and
possible increase of the Rights Holders' equity ownership interest and
percentage of voting interest in the Company. However, in the event any of the
Public Warrants are exercise pursuant
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to the Warrant Modification Offering, the equity ownership interests and voting
interests in the Company of the Rights Holders (in their capacities as
shareholders of the Company), may be reduced. Although there may be advantages
offered by exercise of the Rights, the Rights Holders should also understand and
be aware that (i) exercise of the Rights will constitute an additional
investment requiring payment of the $6.80 per Unit Exercise Price of the Rights
in order to receive the shares of Common Stock and 1996-A Warrants comprising
the Units, (ii) there are various risks associated with such investment as
disclosed in this Prospectus (see "Risk Factors"), (iii) there is no assurance
that a market will develop for the 1996-A Warrants, (iv) the issuance of Common
Stock and 1996-A Warrants pursuant to this offering, the Warrant Modification
Offering and in connection with the exercise of outstanding options and warrants
may have an adverse effect upon the public trading price of the Common Stock,
and (v) the Common Stock and, if a market develops, the 1996-A Warrants are or
will be traded in the over-the-counter market which typically is volatile in
nature (see "Risk Factors--Over-the-Counter Market; Penny Stock Trading Rules"
and "Price Range of Common Stock and Dividends--Penny Stock Trading Rules"). See
"Risk Factors" and "Description of Securities--1996-A Warrants--Warrant
Modification Offering" and "--Other Options and Warrants."
METHOD OF EXERCISING RIGHTS
The exercise of the Rights by a Rights Holder pursuant to one of the
procedures set forth below will constitute an agreement between the Rights
Holder and the Company in accordance with the terms and subject to the
conditions set forth herein.
For effective exercise, the Subscription Form on the reverse side of the
Rights Certificate accompanying this Prospectus must be completed and executed
as indicated thereon, and the Rights Certificate must be accompanied by payment
of the aggregate Exercise Price for each Unit subscribed for pursuant to
exercise of the Rights in cash or certified or official bank check made payable
to the order of "Advantage Marketing Systems, Inc.", together with any other
required documents. The Rights Certificate and payment must be transmitted to
and received by the Subscription Agent at its address set forth on the back
cover of this Prospectus on or before the Expiration Date. However, in lieu of
the foregoing, a holder may either (i) tender the Rights Certificate to be
exercised pursuant to the procedure for book-entry tender set forth below (and a
confirmation of such book-entry tender must be received by the Subscription
Agent on or before the Expiration Date) or (ii) comply with the guaranteed
delivery procedure set forth below. The beneficial holders of Rights that are
held by or registered in the name of a broker, dealer, commercial bank, trust
company or other nominee or custodian are urged to contact such entity promptly
if they wish to exercise the Rights. The Rights Certificates, together with the
cash or certified or official bank check and any other required documents to be
delivered, should be delivered only by hand or by courier, or transmitted by
mail, and only to the Subscription Agent and not to the Company. The method of
delivery of the Rights Certificates and all other required documents to the
Subscription Agent is at the election and risk of the Rights Holder, but if such
delivery is by mail it is suggested that the Rights Holder use properly insured,
registered mail with return receipt requested, and that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Subscription Agent prior to the Expiration Date.
Each signature of the Rights Holders on the Rights Certificate must be
guaranteed by a member firm of any registered national securities exchange or of
the National Association of Securities Dealers, Inc., or by a commercial bank or
trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions").
Book-Entry Tender Procedure. Within two business days after the date of
this Prospectus, the Subscription Agent will establish accounts with respect to
the Rights at the Depository Trust Company (the "Book-Entry Transfer Facility")
for purposes of the Rights Offering. Any financial institution that is a
participant in a Book-Entry Transfer Facility's system may make book-entry
delivery of the Rights by causing the Book-Entry Transfer Facility to transfer
the same into the Subscription Agent's account at such Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedure for
such transfer and to confirm such transfer to the Subscription Agent in writing.
Any tender of Rights to be effected through book-entry delivery at a Book-Entry
Transfer Facility must have either (i) the Rights Certificate executed by the
holder of record, together with signature guarantees, and delivered to a Book-
Entry Transfer Facility and the cash or certified or official bank check,
together with all other documents required, transmitted to and received by the
Subscription Agent at its address set forth on the back cover of this Prospectus
on or before the Expiration Date or (ii) complied with the guaranteed delivery
procedure set forth below. Delivery of
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documents to a Book-Transfer Facility in accordance with such Book-Entry
Transfer Facility's procedure does not constitute delivery to the Subscription
Agent.
Guaranteed Delivery Procedure. In the event a Rights Holder desires to
exercise the Rights, but is unable either to deliver his certificates, the cash
or certified or official bank check and all other required documents to the
Subscription Agent on or before the Expiration Date or to comply with the
procedure for book-entry tender on a timely basis, such Rights may nevertheless
be tendered for exercise, provided that all of the following conditions are
satisfied:
(i) such tenders are made by or through an Eligible
Institution;
(ii) prior to the Expiration Date, a properly completed and duly
executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery) setting forth the name and address
of the Rights Holder and the number of Units being purchased pursuant to
exercise of the Rights, stating that the exercise is being made thereby
and guaranteeing that within three New York Stock Exchange trading days
after the Expiration Date, the Rights Certificate and the cash or
certified or official bank check, together with all other documents
required, will be deposited by the Eligible Institution with the
Subscription Agent; and
(iii) the certificates for all exercised Rights in proper form
for transfer (or a written confirmation of book-entry transfer into the
Subscription Agent's account at a Book-Entry Transfer Facility as
described above) and the cash or certified or official bank check,
together with all other documents required, are received by the
Subscription Agent within three New York Stock Exchange trading days
after the Expiration Date.
The issuance of Units pursuant to exercise of the Rights will be made only
after timely receipt by the Subscription Agent of the Rights Certificates (or a
confirmation of a book-entry transfer of such Rights into the Subscription
Agent's account at one of the Book-Entry Transfer Facilities as described above)
and the cash or certified or official bank check, together with all other
documents required. If less than the entire number of Rights evidenced by a
submitted Rights Certificate are to be exercised, the tendering Rights Holder
should indicate on the Rights Certificate, the number of Rights being tendered
for exercise.
WITHDRAWAL RIGHTS
The Company reserves the right to withdraw the Rights Offering at any time
prior to or on the Expiration Date and for any reason (including, without
limitation, the market price of the Common Stock), in which event all funds
received from subscribing Rights Holders will be refunded by the Subscription
Agent immediately without interest. Except as described below, Rights Holders
exercising the Rights and subscribing to Units will have no rights to revoke
their subscriptions after delivery to the Subscription Agent of a completed
Subscription Form and any other required documents.
In the event the Company (i) extends the Expiration Date for exercise of
the Rights or otherwise modifies the Rights, (ii) is delayed in its acceptance
of Rights for exercise on or after the Expiration Date (without extension) or
(iii) is unable to accept the Rights for exercise for any reason on the
Expiration Date, in such event, without prejudice to the Company's rights, the
Subscription Agent may, on behalf of the Company, retain all Rights tendered for
exercise, and such Public Warrants may not be withdrawn, subject delivery of the
Units to the Rights Holders or, if the Rights and this offering are terminated
or withdrawn by the Company, return the tendered certificates of the Rights, the
funds received in certified or official bank check and all other documents
tendered in exercise of the Rights. In the event of (i), (ii) or (iii) above,
the Rights tendered for exercise may be withdrawn at any time before the
extended Expiration Date. After the extended Expiration Date, such tenders are
irrevocable, except that they may be withdrawn after , 1996 (40
business days from the date of this Prospectus if not yet accepted for payment),
unless theretofore accepted for exercise as provided in this Prospectus.
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To be effective, a written, telegraphic or facsimile transmission of a
notice of withdrawal must (i) be timely received by the Subscription Agent at
its address specified on the back cover page of this Prospectus before the
Subscription Agent receives notice of acceptance by the Company of the Rights,
(ii) specify the name of the person who tendered the Rights, (iii) if the Rights
have been deposited with or otherwise identified to the Subscription Agent,
contain the description of the Rights to be withdrawn and indicate the
certificate numbers shown on the Rights Certificates evidencing such Rights
(except in the case of book-entry tenders) and (iv) be executed by the holder of
the Rights in the same manner as the original Rights Certificate or be
accompanied by evidence satisfactory to the Company that the person withdrawing
the tender has succeeded to the beneficial ownership of the Rights. If the
Rights have been tendered for exercise pursuant to the book-entry tender, a
notice of withdrawal must specify, in lieu of certificate numbers, the name and
account number at a Book-Entry Transfer Facility to be credited with the
withdrawn Rights.
VALIDITY OF EXERCISE OR WITHDRAWAL
All questions with respect to the validity, form, eligibility (including
time of receipt) and acceptance for exercise (or, if applicable, withdrawal of
the exercise) of the Rights will be determined by the Company, in its sole
discretion, which determination will be final and binding upon the Rights
Holder, the Subscription Agent and the Company. The Company reserves the
absolute right to reject any and all tenders of Rights (and, if applicable, the
withdrawal thereof) which it determines not to be in proper form, or the
acceptance or exercise of which would, in the opinion of the Company's counsel,
be unlawful. The Company also reserves the absolute right to waive any defect
or irregularity in the exercise of the Rights (or, if applicable, any withdrawal
thereof). The Company, Subscription Agent or any other person will not be under
any duty to give notification of any defects or irregularities in exercise (or,
if applicable, withdrawal), nor will they incur any liability for failure to
give such notification. Exercise of the Rights (or, if applicable withdrawal
thereof) will not be deemed to have been properly made until any irregularities
have been waived by, or cured to the satisfaction of, the Company. The
Company's interpretation of the terms and conditions of the this offering will
be final and binding upon the Rights Holders and the Company.
SUBSCRIPTION PROCEEDS
All proceeds received by the Subscription Agent with respect to the
exercise of Rights will be held by the Subscription Agent. Tendered Rights not
accepted for exercise by the Company, together with any cash or certified or
official bank check and any other required documents, will be returned
immediately after the Expiration Date.
If the Company (i) extends the Expiration Date or otherwise modifies the
Rights, (ii) is delayed in its acceptance for exercise of the Rights after the
extended Expiration Date, or (iii) is unable to accept for exercise any Rights
for any reason, in such event, without prejudice to the Company's right
hereunder, the Subscription Agent, at the request of the Company, may
nevertheless retain Rights tendered for exercise together with any cash or
certified or official bank check and any other required documents, subject to
the withdrawal rights of the Rights Holder thereof as set forth herein and
applicable securities laws.
ACCEPTANCE OF RIGHTS; DELIVERY OF UNITS
Rights properly tendered for exercise (and not withdrawn pursuant to the
limited withdrawal rights described under "--Withdrawal Rights," above) will be
accepted for exercise on or promptly after the Expiration Date. The Company
will be deemed to have accepted for exercise properly tendered Rights when, as
and if the Company has given oral or written notice thereof to the Subscription
Agent. All tendering Rights Holders will be deemed to have waived any right to
receive notice of the acceptance of their Rights. Certificates for Common Stock
and 1996-A Warrants comprising the Units will be issued as promptly as
practicable after the Rights are accepted for exercise. Any Rights not
exercised before the Expiration Date (including any extension thereof) will
become worthless.
In certain cases, the sale of the Units by the Company upon exercise of
Rights could violate the securities laws of certain states or other
jurisdictions. The Company has undertaken registration or qualification of the
Units (or the Common Stock and 1996-A Warrants comprising the Units) for sale in
California, Colorado, Georgia, Kentucky, Illinois, Louisiana, New Hampshire, New
York, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia,
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Washington and Wisconsin; however, there is no assurance that such registration
will become effective in such states. In addition, the Company may undertake
registration of the Units (or the Common Stock and 1996-A Warrants comprising
the Units) in additional states as determined in the sole discretion of the
Company. Those Rights Holders residing in states in which the Units have not
been registered or otherwise qualified for sale in such state, will not be
permitted to exercise their Rights. Prior to tendering of Rights for exercise,
the Rights Holder should either contact the Company or the Subscription Agent to
determine whether the Units have been registered or qualified in the state of
such Rights Holder's residence. The Company has used and will continue to use
its best efforts to cause the Registration Statement of which this Prospectus is
a part to be declared effective under the laws of various states as may be
required to cause the sale of Units (or the Common Stock and 1996-A Warrants
comprising the Units) upon exercise of Rights to be lawful. However, the Company
is not be required to accept the exercise of the Rights, if, in the opinion of
counsel, the sale of the Units (or the Common Stock and 1996-A Warrants
comprising the Units) upon such exercise would be unlawful. In such cases, the
Rights not accepted for exercise will become worthless after the Expiration
Date.
In the event the Company (i) extends the Expiration Date, (ii) is delayed
in its acceptance for exercise, or (iii) is unable to accept for exercise any
Rights for any reason, in such event, without prejudice to the Company's right
hereunder, the Subscription Agent, at the request of the Company, may
nevertheless retain Rights tendered for exercise together with any cash or
certified or official bank check and any other required documents, subject to
the withdrawal rights of the Rights Holder thereof as set forth herein.
TRANSFER TAXES
Holders of Rights will be required to pay all transfer taxes, if any,
applicable to the exercise of Rights.
MUTILATED, LOST, STOLEN OR DESTROYED RIGHTS CERTIFICATES
Any holder whose certificates evidencing Rights have been mutilated, lost,
stolen or destroyed should contact the Subscription Agent at its address or
telephone number indicated on the back cover page of this Prospectus for further
instructions.
EXPENSES
The Company will pay the Subscription Agent reasonable and customary fees
for its services and will reimburse the Subscription Agent for its reasonable
out-of-pocket expenses in connection therewith. The Company will also reimburse
custodians, nominees and fiduciaries for reasonable out-of pocket expenses
incurred by them in forwarding copies of this Prospectus, the Rights
Certificates and related documents to the beneficial owners of the Common Stock
of the Company and in handling or forwarding tenders on behalf of their
customers. The Company will also pay legal, accounting, printing, listing,
filing and other similar fees and expenses in connection with the securities
offered pursuant to this Prospectus.
EXERCISE BY MANAGEMENT
The executive officers and directors of the Company hold 3,422,642 shares
of Common Stock as of June 24, 1996, and as of the date of this Prospectus, they
have reserved all rights with respect to exercise of the Rights to be
distributed to them pursuant to this offering and have not committed to exercise
all or any portion of the Rights. See "Security Ownership of Certain Beneficial
Owners and Management."
PROHIBITION AGAINST TRADING BY INTERESTED PERSONS
Pursuant to Section 10b of the Exchange Act and Rule 10b-6 thereunder,
subject to certain exceptions, it is unlawful for the Company, any underwriter
and broker-dealer that participates or agrees to participate in the distribution
of the Units (each referred to as a "Distribution Participant"), and an
"affiliated purchaser" (within the meaning of Rule 10b-6(c)(6) under the
Exchange Act), directly or indirectly, either alone or with one or more other
persons, until completion of the distribution of the Units, or its or his
participation in the distribution of the Units, to
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(i) bid for or purchase for any account in which it or he has a beneficial
interest in the Units, Common Stock, the Public Warrants, 1996-A Warrants,
Rights, stock options or other warrants, or any right to purchase any such
securities, or (ii) induce any person to purchase any such security or right.
However, the Company and any other Distribution Participant and affiliated
purchaser, if not engaged in for the purpose of creating actual or apparent
active trading in or raising the price of the Common Stock, Units, 1996-A
Warrants or Rights, are not prohibited from effecting certain transactions in
the Company's securities, including (i) unsolicited privately negotiated block
purchases not effected through a broker-dealer and (ii) the exercise of any
rights (Public Warrants, options, warrants, etc.) to acquire the securities
directly from the Company.
For purposes of the foregoing, "affiliated purchaser" includes (i) any
person, directly or indirectly, acting in concert with a Distribution
Participant in connection with the acquisition or distribution of the Units,
Common Stock, 1996-A Warrants, or the Public Warrants, stock options, other
warrants or any other right to purchase the Units, Common Stock or 1996-A
Warrants, (ii) an affiliate who, directly or indirectly, controls the purchases
of the Units, Common Stock, and 1996-A Warrants by a Distribution Participant,
whose purchases are controlled by a Distribution Participant, or whose purchases
under common control with those of a Distribution Participant, (iii) an
affiliate that is a broker-dealer, subject to a limited exception, or (iv) an
affiliate (other than a broker-dealer) that regularly purchases securities,
through a broker-dealer or otherwise, for its own account, for the account of
others, or recommends or exercises investment discretion with respect to the
purchase or sale of securities, other than an affiliate that is a separate and
distinct organizational entity from, with no officers (or persons performing
similar functions) or employees (other than clerical, ministerial, or support
personnel) in common with, the Distribution Participant, and the affiliate and
the Distribution Participant have separate employee compensation arrangements
and the affiliate's bids for, purchases of, and inducements to purchase the
securities are made in the ordinary course of its business.
SUBSCRIPTION AGENT
The Company has retained U.S. Stock Transfer Corp. (the "Subscription
Agent") to act as Subscription Agent in connection with the Rights Offering.
The Subscription Agent will act as agent for the tendering Rights Holders of the
Rights for the purposes of receiving from the Company the Common Stock and 1996-
A Warrants comprising the Units, and transmitting such securities to the Rights
Holders. All deliveries sent or presented to the Subscription Agent relating to
the Rights Offering and exercise of the Rights should be directed to its address
or telephone number set forth on the back cover of this Prospectus.
INFORMATION REQUESTS
All questions and requests for assistance concerning the method of
exercising the Rights and subscribing for Units or for additional copies of this
Prospectus should be directed to the Company at address or telephone number set
forth on the back cover of this Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION. The following summary is a general discussion of the federal
income tax consequences to the Rights Holders and the Company of the issuance
and distribution of the Rights to the shareholders of the Company and exercise
of the Rights. The legal conclusions expressed in the summary are the opinion
of Dunn Swan & Cunningham, A Professional Corporation, tax counsel to the
Company ("Counsel"). The summary is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations thereunder, rulings and
other pronouncements, and reported decisions as of the date of this Prospectus,
all of which are subject to change. Furthermore, the following discussion is
limited to the material federal income tax aspects of the issuance and
distribution of the Rights to the shareholders and the exercise thereof by the
Rights Holders who hold the Rights as "capital assets" (generally, property held
for investment as compared to property held for sale to customers as inventory)
within the meaning of Section 1221 of the Code. The summary does not discuss
all aspects of federal income taxation that may be relevant to a Rights Holder
exercising the Rights in light of such Rights Holder's personal investment
circumstances or to certain types of person subject to special treatment under
the federal income tax laws (for example, trusts, life insurance companies, tax-
exempt organizations, financial institutions, or S corporations) and does not
discuss any aspects of applicable state, local or foreign tax laws.
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ISSUANCE OF THE RIGHTS TO SHAREHOLDERS. The issuance and distribution of
the Rights as a dividend to the shareholders will not result in any gain or loss
to the shareholders.
TAX BASIS OF RIGHT. A shareholder will not recognize any gain or loss upon
the exercise of a Right. The adjusted tax basis of such Right in the hands of
the shareholder will be determined by allocating the shareholder's tax basis of
his share of Common Stock with respect to which the Right was distributed (the
"Share") between the Share and the Right, in proportion to their relative fair
market values on the date of distribution. If, however, the fair market value
of the Right distributed to the shareholder on the date of distribution is less
than 15 percent of the fair market value of the Share, the tax basis of the
Right will be deemed to be zero unless the shareholder affirmatively elects, by
attaching an election statement to his federal income tax return for the year in
which he receives the Right, to compute the tax basis of the Right in accordance
with the method described above. Once made, such an election is irrevocable. A
Right will not be treated as having any tax basis if it expires without exercise
and, therefore, the shareholder will not recognize a loss upon expiration of the
Right.
EXERCISE OF RIGHT AND SALE OF UNITS. No gain or loss will be recognized by
a shareholder upon purchase of an Unit pursuant to exercise of a Right. The tax
basis of a Unit purchased pursuant to exercise of a Right will be equal to the
sum of (i) the tax basis of the Right exercised and (ii) the Exercise Price paid
for the Unit. The Rights Holder's tax basis in the Unit must be further
allocated between the shares of Common and the 1996-A Warrant comprising the
Unit in proportion to their respective fair market values (trading values) at
the time of issuance. The amount allocated to each component of the Unit will
constitute the tax basis of that component. The holding period of the a Unit
and the component shares of Common Stock and 1996-A Warrant will commence on the
date of exercise. Upon the subsequent sale of the share of Common Stock or
1996-A Warrant (other than pursuant to redemption by the Company), the
shareholder will generally recognize capital gain or loss in an amount equal to
the difference between the proceeds of the sale and the shareholder's tax basis
of such share or 1996-A Warrant. Such gain or loss will be long-term capital
gain or loss if the shareholder's holding period for such share or 1996-A
Warrant is more than one year on the date of sale. If such share of Common
Stock or 1996-A Warrant is redeemed by the Company, the shareholder will
recognize capital gain or loss (determined as described above) if, for federal
income tax purposes, the redemption (i) results in a "complete termination" of
the shareholder's Common Stock ownership in the Company, (ii) is "substantially
disproportionate" with respect to the shareholder, or (iii) is "not essentially
equivalent to a dividend." If none of these tests is satisfied, the redemption
proceeds could be taxed to the shareholder as an ordinary income cash dividend,
in whole or in part, depending on the extent of the Company's current and
accumulated earnings and profits.
TAX CONSEQUENCE TO THE COMPANY. No gain or loss will be recognized by the
Company upon issuance of the Rights, the receipt of cash for Units pursuant to
exercise of the Rights, or the expiration of the Rights without exercise.
Based upon calculations performed by the Company, Counsel is of the opinion
that the exercise of the Rights will not adversely affect the Company's ability
to preserve and utilize its net operation loss carryforwards for federal income
tax purposes. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Income Taxes."
BUSINESS
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 94 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
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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 1.9, 8.2 and 30 percent for the three months ended
September 30, 1996, and the year ended December 31, 1995 and 1994, respectively,
and 2.8 and 9.3 percent for the nine months ended September 30, 1996 and 1995,
respectively. The percentage of total revenue contributed from the Company's
nutritional supplement program was 96.7, 89.9 and 69.3 for the nine months ended
September 30, 1996, and the year ended December 31, 1995 and 1994, respectively.
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. of Naperville, Illinois. The
pre-paid legal services are provided by Pre-Paid Legal Services, Inc. of Ada
Oklahoma.
Individuals purchase memberships in the Company's Infinity Plan. They
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 manufactured by J&K Pharmaceutical
Laboratories. The Company and its affiliates have no other relationships with
Consumer Benefit Services, Inc., J&K Pharmaceutical Laboratories , 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, Inc. was elected to the Company's Board of Directors on August 25,
1995.
OTHER PRODUCTS AND SERVICES. As of the date of this Prospectus the Company
has not determined the 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.
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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 nine months ended September 30, 1996,
and the year ended December 31, 1995 and 1994, the Company paid commissions to
2,059, 1,863 and 1,871 individuals in the aggregate amount of $1,915,367,
$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 September 30, 1996, the Company had 9,214, "active" sales
associates compared to 7,617 and 6,447 "active" sales associates at December 31,
1995 and September 30, 1995, respectively. 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 services provided to its multi-level marketing sales
force, 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 tracking
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. During the nine months ended September 30, 1996, and the years ended
December 31, 1995 and 1994, the Company received one-time distributor and
associate fees totaling $398,767, $261,043 and $222,880, respectively. The
Company did not begin charging a monthly $4.00 administrative fee until the
second quarter of 1995. During the nine months ended September 30, 1996 and the
year ended December 31, 1995, the Company received administrative fees totaling
$12,754 and $15,018, respectively.
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
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"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, 1994, the Company had
marketing materials and product inventories of $29,215 and $18,656,
respectively. At December 31, 1995, the Company had marketing materials and
product inventories of $46,440 and $52,181, respectively. At September 30,
1996, the Company had marketing materials and product inventories of $132,492
and $173,312, 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 the date of this Prospectus, the consumer benefit services offered
and distributed by the Company are provided by Consumer Benefit Services, Inc.
("CBS") and Pre-Paid Legal Services, Inc. The Company has non-exclusive
contractual 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
these costs on a monthly
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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 manufactured by J&K Pharmaceutical
Laboratories. 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 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
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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 50
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 September 30, 1996, the Company had 17 full-time, of whom three were
executive officers, seven were engaged in administrative activities, two were
engaged in marketing activities, three were engaged in customer service
activities, and two were 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.
PROPERTIES
The Company maintains its executive office in 6,303 square feet at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293. The
office premises are occupied pursuant to a long-term lease which terminates on
May 31, 1998, and the monthly rental payment is $4,432. The Company considers
such space to be adequate for its current needs. In the event the Company is
required to relocate its office upon termination of the existing lease, the
Company believes other office space is available under favorable leasing terms
in the Oklahoma City area.
LITIGATION
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 the date of this Prospectus, 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. As of the date of this Prospectus, the Pool holds 178,069
shares of Common Stock for and 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 delivered to such participant for the purpose of effecting such sale.
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
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Prospectus, the investigation is in the discovery stage, legal counsel cannot
express an opinion regarding the ultimate outcome of the investigation.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
executive officer and director of the Company. Directors are generally elected
at the annual shareholders' meeting and hold office until the annual share
holders' meeting three years after election or until their successors are
elected and qualified. Executive officers are elected by the Board of Directors
and serve at its discretion. 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 Harland C. Stonecipher expires in 1999. Messrs. Hail, Wilson and Baresel
devote their full-time to business of the Company. See "--Board of Directors."
NAME AGE POSITION WITH THE COMPANY
- --------------------------- --- ---------------------------------------
John W. Hail(1)(2)......... 65 Chairman of the Board, Chief Executive
Officer, and Director
Curtis H. Wilson, Sr.(3)... 69 Vice-Chairman of the Board and Director
Roger P. Baresel(1)(2)..... 40 President, Chief Financial Officer,
Secretary and Director
R. Terren Dunlap(3)........ 50 Director
Harland C. Stonecipher(4).. 56 Director
- --------------------------
(1) Member of the Stock Option Committee. See "--Stock Option Plan," below.
(2) Term as a Director expires in 1998.
(3) Term as a Director expires in 1997.
(4) Term as a Director expires in 1999.
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., a public company engaged in the selling of legal
services contracts, and during this period, Mr. Hail also served as Chairman of
the Board of directors of TVC Marketing, Inc., the exclusive marketing agent of
Pre-Paid Legal Services, Inc.
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 of TVC Marketing, Inc., the exclusive marketing agent
of Pre-Paid Legal Services, Inc. From March 1983 to January 1984, Mr. Wilson
was a sales associate of TVC Marketing, Inc. Mr. Wilson retired in April 1982
after having been employed for 26 years as a salesman, Vice President and
ultimately President of V.J. McGanahan, Inc., a television and appliance
wholesale distributor in Dayton, Ohio.
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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 a Director since June 1, 1995. He served as
Vice President-International Development form June 1995 through March 1996. 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 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.
COMPENSATION OF EXECUTIVE OFFICERS
Executive Officers of the Company. 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
Compensation(4)
-------------------
ANNUAL COMPENSATION Award of Options
------------------------------------- -------------------
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) OTHER(3) Number of Shares
- ----------------------------- ---- --------- -------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
John W. Hail.............. 1995 $ -- $ $20,283 375,000(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
$53,281, respectively. See "Certain 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 years.
(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) Adjusted to give effect to the one-to-eight reverse stock split on
October 29, 1996. During 1995, Mr. Hail transferred by gift 225,000 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.
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<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
------------------------------------------------------------- -----------------------------
PERCENT OF TOTAL
NUMBER OPTIONS GRANTED EXERCISE OR
OF OPTIONS TO EMPLOYEES IN BASE PRICE
NAME GRANTED 1995 PER SHARE EXPIRATION DATE FIVE PERCENT TEN PERCENT
- --------------------------- ---------- --------------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail............... 375,000(2) 50.3% $2.00(2) February $375,000 $1,500,000
----- 23, 2005
- ------------------------
</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 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.
(2) Adjusted to give effect to the one-to-eight reverse stock split on
October 29, 1996.
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.
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised In-the-Money
as of December 31, 1995 as of December 31, 1995(1)
----------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John W. Hail.... 150,000(2) -- $636,000 $ --
- -------------
</TABLE>
(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 $6.24 after giving effect to the one to eight reverse stock
split. Value is calculated on the basis of the remainder of $6.24, minus
the exercise price multiplied by the number of shares of Common Stock
underlying the options.
(2) During 1995, Mr. Hail transferred by gift 225,000 stock options. The
value of these options as of December 31, 1995, were $954,000.
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 1999, 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
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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 total
number of shares of Common Stock authorized and reserved for issuance under the
Plan is 1,125,000. As of the date of this Prospectus, 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 85 percent of 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.
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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 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.
CERTAIN TRANSACTIONS
Set forth below is a description of transactions entered into between the
Company and certain of its officers, directors and shareholders during the last
two years. Certain of these transactions will continue in effect during and
following completion of this offering and may result in conflicts of interest
between the Company and such individuals. Although these persons have fiduciary
duties to the Company and its shareholders, there can be no assurance that
conflicts of interest will always be resolved in favor of the Company.
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 $22,000, $87,684 and
$66,026 during the nine months ended September 30, 1996, and 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. During the nine months ended September 30, 1996, JHA
made repayments of $3,040. At September 30, 1996, JHA was indebted to the
Company in the amount of $70,923. Effective June 30, 1996, the Company adopted
a policy to not make any further advances to JHA, and JHA executed a promissory
note payable to the Company in the principal amount of $73,964 bearing interest
at eight percent per annum and payable in 60 installments of $1,499 per month.
At September 30, 1996, and December 31, 1995, the balance due on a short-
term loan from the Company's Chief Executive Officer and major shareholder was
$17,658 and $81,929, respectively. 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 the nine months
ended September 30, 1996, the Company did not
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receive any advances under the loan, while during 1995, the Company received
aggregate advances of $31,963 under the loan. During the nine months ended
September 30, 1996 and the year ended December 31, 1995, the Company made
principal payments of $64,271 and $127,615, respectively, 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, and as of the date of
this Prospectus the Company is making weekly principal and interest payments of
$1,500.
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.
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 nine
months ended September 30, 1996, and the years ended December 31, 1995 and 1994,
the Company received commissions from PPL on these sales totaling $7,063,
$16,415 and $71,713, respectively.
During the nine months ended September 30, 1996 and during the years ended
December 31, 1995 and 1994, the Company paid Curtis H. Wilson, Sr., a Director
of the Company, sales commissions of $32,064, $51,669, and $26,791,
respectively. During the nine months ended September 30, 1996 and 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 $7,547, $10,662, and $10,398, respectively. During the nine
months ended September 30, 1996 and during 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
$791, $12,433, and $10,000, respectively. In addition, during the nine months
ended September 30, 1996 and 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 $254 and $672, respectively.
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 125,000 and 43,750 shares of Common Stock for $2.00 and $3.60
per share, respectively. During 1995, Mr. Baresel transferred by gift 156,250
of such stock options to third parties, including 87,500 to his wife, Judith A.
Baresel, and 12,500 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 10,000 shares of Common
Stock for $2.16 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 375,000 shares of Common Stock for $2.00 per share. During 1995,
Mr. Hail transferred by gift 225,000 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 125,000 shares
of Common Stock for $3.60 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 former
executive officer of the Company, five-year stock options exercisable for the
purchase of 37,500 shares of Common Stock for $2.16 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.
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During 1995, the Company granted United Financial Advisory Services, Inc.
five-year stock options exercisable for the purchase of 125,000 shares of Common
Stock for $3.60 per share and 125,000 shares of Common Stock for $4.96 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 49,125 shares of Common Stock for $2.00 per
share and two-year stock options exercisable for the purchase of 6,945 shares of
Common Stock for $2.16 per share. Furthermore, during 1994, Mr. Nance was
granted five-year stock options exercisable for the purchase of 5,358 shares of
Common Stock for $2.80 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.
During 1995, Gene Burson, a director and shareholder of Miracle Mountain
International, Inc. ("MMI"), advanced $56,253 to MMI pursuant to a demand note
bearing nine percent interest. During 1995, MMI did not make any principal or
interest payments on this note. In accordance with the terms of the Stock
Purchase Agreement pursuant to which the Company acquired MMI, Mr. Burson
contributed the note to MMI as additional capitalization of MMI. See "The
Company--Background--MMI Acquisition."
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 the date of this Prospectus, the Board of Directors is
comprised of the five members of which two are independent directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of the Common Stock as of October 28, 1996, and the beneficial
ownership of the Common Stock, as adjusted to give effect to this offering (the
"Rights Offering"), assuming exercise of the Rights in full and the issuance of
2,148,191 shares of Common Stock, and the Warrant Modification Offering,
assuming exercise of the Public Warrants in full and the issuance of 1,050,470
shares of Common Stock, of (i) each person who is known to the Company to be the
beneficial owner of more than five percent thereof, (ii) each director and
executive officer of the Company, and (iii) all executive officers and directors
as a group, together with their percentage holdings of the outstanding shares,
and, as adjusted, after giving effect to completion of the Rights Offering and
the Warrant Modification Offering. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated, and
there are no family relationships between the executive officers and directors
of the Company. For purposes of the following table, the number of shares and
percent of ownership of outstanding Common Stock that the named person
beneficially owned includes shares of Common Stock that such person has the
right to acquire within 60 days of October 28, 1996, pursuant to exercise of the
Public Warrants, options and other warrants, as well as any other rights to
acquire, and are deemed to be outstanding, but are not deemed to be outstanding
for the purposes of computing the number of shares beneficially owned and
percent of outstanding Common Stock of any other named person.
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<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING BENEFICIALLY
OWNED SHARES AFTER GIVING EFFECT TO
------------------------------------
WARRANT
PERCENT OF SHARES MODIFICATION
OUTSTANDING BENEFICIALLY OFFER(2)
SHARES BENEFICIALLY OWNED AFTER WARRANT AND
NAME AND ADDRESS OF BENEFICIALLY OWNED DISTRIBUTION MODIFICATION RIGHTS RIGHTS
BENEFICIAL OWNER OWNED SHARES OF RIGHTS(1) OFFER(2) OFFERING(3) OFFERING(3)
- ------------------- ------------ ------------ ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail(4)(5)........................ 412,659 17.99% 675,318 12.34% 15.22% 12.31%
Bruce Greene(6)........................... 331,500 13.40% 331.500 10.38% 7.18% 6.21%
Curtis H. Wilson, Sr.(4)(7)............... 272,603 11.39% 295,206 7.92% 6.51% 5.28%
United Financial Advisory Services(8)..... 250,000 10.45% 250,000 7.26% 5.51% 4.47%
William A. LaReese(9)..................... 216,541 9.48% 291,832 6.78% 6.59% 5.47%
Robert and Retha Nance(10)................ 193,094 8.76% 324,760 5.93% 7.47% 6.02%
Roger P. Baresel(4)(11)................... 161,250 7.08% 187,500 4.84% 4.24% 3.43%
Pre-Paid Legal Services, Inc.(12)......... 56,415 2.63% 112,830 1.77% 2.63% 2.11%
Harland C. Stonecipher(12)................ 56,415 2.63% 112,830 1.77% 2.63% 2.11%
R. Terren Dunlap(4)(13)................... 37,500 1.72% 37,500 1.16% .87% .70%
Executive Officers and
Directors as a group
(five persons)(5)(7)(11)(12)(13)(14)... 940,427 34.63% 1,308,354 29.45% 30.52% 24.52%
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</TABLE>
(1) Assumes the distribution of 2,148,191 Rights to the shareholders of the
Company.
(2) Assumes the exercise of the Public Warrants in full and the issuance
pursuant thereto of 1,050,470 shares of Common Stock comprising part the
Units. See "Warrant Modification Offer."
(3) Assumes exercise of the Rights in full and issuance pursuant thereto of
2,148,191 shares of Common Stock comprising in part the Rights Offering
Units pursuant to the Rights Offering. See "Description of Securities--
Common Stock--Rights Offering."
(4) A Director and an executive officer of the Company, with a business
address of 2601 Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma
73112.
(5) The shares and percentage include (i) 262,659 shares of outstanding
Common Stock held by Mr. Hail, (ii) 150,000 shares of Common Stock which
are subject to currently exercisable stock options granted in 1995 to and
held by Mr. Hail, and, after distribution of the Rights in connection with
the Rights Offering, (iii) 262,659 shares of Common Stock issuable upon
exercise of the Rights. As of the date of this Prospectus, Mr. Hail has
reserved all rights with respect to the Rights to be distributed pursuant
to the Rights Offering and has not committed to exercise all or any portion
of the Rights.
(6) Mr. Greene's business address is 1465 Greenbrier Drive Green Oaks,
Illinois 60048. The shares consist of and percentages are based on 331,500
shares of Common Stock which are subject to currently exercisable Public
Warrants held by Mr. Greene. As of the date of this Prospectus, Mr. Greene
has reserved all rights with respect to the Public Warrants and has not
committed to exercise all or any portion of the Public Warrants.
(7) The shares and percentage include (i) 17,065 shares of outstanding
Common Stock held by Mr. Wilson, (ii) 250,000 shares of Common Stock which
are subject to currently exercisable stock options granted to and held by
Mr. Wilson (125,000 of which were granted in 1995), and (iii) 5,538 shares
of outstanding Common Stock held by Ruth Wilson, wife of Mr. Wilson and
with respect to which Mr. Wilson disclaims any beneficial interest, and,
after distribution of the Rights in connection with the Rights Offering
and, after distribution of the Rights in connection with the Rights
Offering, (iv) 17,065 shares of Common Stock issuable upon exercise of the
Rights by Mr. Wilson, and (v) 5,538 shares of Common Stock issuable upon
exercise of the Rights by Mrs. Wilson. As of the date of this Prospectus,
Mr. and Mrs. Wilson have reserved all rights with respect to the Rights to
be distributed pursuant to the Rights Offering and has not committed to
exercise all or any portion of the Rights.
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<PAGE>
(8) The business address of United Financial Advisors, Inc. is 1601
Northwest Expressway, Suite 2101, Oklahoma City, Oklahoma 73118. The shares
consist of and the percentage is based upon 250,000 shares of Common Stock
which are subject to currently exercisable warrants.
(9) Mr. LaReese's business address is 2239 Northwest 30th Street, Oklahoma
City, Oklahoma 73112. The shares and percentage include (i) 75,291 shares
of outstanding Common Stock held by Mr. LaReese, (ii) 141,250 shares of
Common Stock that are subject to currently exercisable Public Warrants,
and, after distribution of the Rights in connection with the Rights
Offering, (iii) 75,291 shares of Common Stock issuable upon exercise of the
Rights. As of the date of this Prospectus, Mr. LaReese has reserved all
rights with respect to the Public Warrants and the Rights to be distributed
pursuant to the Rights Offering and has not committed to exercise all or
any portion of the Public Warrants or Rights.
(10) 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 (i) 75 shares of outstanding Common Stock held by Mr. Nance, (ii)
37,750 shares of outstanding Common Stock owned by Mrs. Nance, (iii) 93,841
shares of outstanding Common Stock owned jointly by Mr. and Mrs. Nance,
(iv) 61,428 shares of Common Stock which are subject to currently
exercisable stock options granted to and held by Mr. Nance, and, after
distribution of the Rights in connection with the Rights Offering, (v)
131,666 shares of Common Stock issuable upon exercise of the Rights. As of
the date of this Prospectus, Mr. and Mrs. Nance have reserved all rights
with respect to the Rights to be distributed pursuant to the Rights
Offering and have not committed to the exercise of all or any portion of
the Rights.
(11) The shares and percentages include (i) 12,500 shares of outstanding
Common Stock jointly held by Mr. Baresel and his wife, Judith A. Baresel,
(ii) 35,000 shares of Common Stock which are subject to currently
exercisable stock options granted to and held by Mr. Baresel, of which
12,500, 10,000 and 12,500 options were granted in 1992, 1994 and 1995,
respectively, (iii) 13,750 shares of outstanding Common Stock held by Mrs.
Baresel, (iv) 87,500 shares of Common Stock which are subject to currently
exercisable stock options held by Mrs. Baresel, (v) 12,500 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, and, after
distribution of the Rights in connection with the Rights Offering, (vi)
26,250 shares of Common Stock issuable upon exercise of the Rights. As of
the date of this Prospectus, Mr. and Mrs. Baresel have reserved all rights
with respect to the Rights to be distributed pursuant to the Rights
Offering and have not committed to exercise all or any portion of the
Rights.
(12) Mr. Stonecipher is a Director of the Company with a business address of
321 East Main Street, Ada, Oklahoma 74820 and Chairman of the Board and
Chief Executive Officer of Pre-Paid Legal Services, Inc. The shares and
percentages include (i) 56,415 shares of outstanding Common Stock held by
Pre-Paid Legal Services, Inc. and, after distribution of the Rights in
connection with the Rights Offering, (ii) 56,415 shares of Common Stock
issuable upon exercise of the Rights. As of the date of this Prospectus,
Pre-Paid Legal Services, Inc. has reserved all rights with respect to the
Rights to be distributed pursuant to the Rights Offering and has not
committed to exercise all or any portion of the Rights.
(13) The shares and percentages include 37,500 shares of outstanding Common
Stock which are subject to a currently exercisable stock options granted in
1995.
(14) The shares and percentage include (i) 367,927 shares of outstanding
Common Stock, (ii) 572,500 shares of Common Stock which are subject to
currently exercisable stock options and, after distribution of the Rights
in connection with the Rights Offering, (ii) 367,927 shares of Common Stock
issuable upon exercise of the Rights.
DESCRIPTION OF SECURITIES
Pursuant to its Certificate of Incorporation, the Company is currently
authorized to issue up to 495,000,000 shares of Common Stock, $.0001 par value
("Common Stock"), and 5,000,000 shares of Preferred Stock, $.0001 par value
("Preferred Stock"). As of the date of this Prospectus, the outstanding capital
stock of the Company consisted of 2,148,191 shares of Common Stock. Pursuant to
the Rights Offering, the Company will issue 2,148,191 Rights for
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the purchase of 2,148,191 shares of Common Stock and 1996-A Warrants comprising
the Units. Concurrently with this offering, pursuant to the Warrant Modification
Offering, the Company is offering pursuant to a separate prospectus 1,050,470
Warrant Modification Units, each consisting of one share of Common Stock and one
1996-A Warrant. See "--Public Warrants--Warrant Modification Offering," below.
The share of Common Stock and the 1996-A Warrant comprising each Unit and each
Warrant Modification Unit will be immediately detachable and separately
tradeable upon issuance and the 1996-A Warrants will be exercisable 90 days
after the date of this Prospectus.
After giving effect to (i) the issuance of the Rights and assuming the
exercise of the Rights in full and the issuance of 2,148,191 Units (2,148,191
shares of Common Stock and 2,148,191 1996-A Warrants) pursuant thereto and (ii)
the offering pursuant to the Warrant Modification Offering and assuming the
exercise of the Public Warrants in full and the issuance of 1,050,470 Warrant
Modification Units (1,050,470 shares of Common Stock and 1,050,470 1996-A
Warrants) pursuant thereto, the issued and outstanding capital stock of the
Company will consist of 5,346,852 shares of Common Stock without giving effect
to exercise of the 1996-A Warrants. Furthermore, after giving effect to (i)
this offering and the Warrant Modification Offering and assuming the exercise of
the Public Warrants in full and the issuance of 1,050,470 Units (1,050,470
shares of Common Stock and 1,050,470 1996-A Warrants), (ii) the distribution of
the Rights and assuming the exercise of the Rights in full and the issuance of
2,148,191 Rights Offering Units (2,148,191 shares of Common Stock and 2,148,191
1996-A Warrants) pursuant thereto and (iii) exercise of the 1996-A Warrants in
full, the issued and outstanding capital stock of the Company will consist of
8,545,513 shares of Common Stock. See "Rights Offering" and "--Public Warrants--
Warrant Modification Offer" and "--Common Stock," "--1996-A Warrants," below.
The following description of certain matters relating to the capital stock,
the Public Warrants and the 1996-A Warrants is a summary and is qualified in its
entirety by the provisions of the Company's Certificate of Incorporation,
Bylaws, the Warrant Agreements between the Company and U.S. Stock Transfer Corp.
(the "Warrant Agent"), as amended, related to the Public Warrants and the 1996-
A Warrants, and the Rights Agreement between the Company and U.S. Stock Transfer
Corp. (the "Subscription Agent"), all of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
COMMON STOCK
Pursuant to its Certificate of Incorporation, the Company is authorized to
issue up to 495,000,000 shares of Common Stock. The holders of outstanding
shares of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of assets
legally available therefor, subject to the payment of preferential dividends
with respect to any Preferred Stock that may be outstanding. In the event of
liquidation, dissolution and winding-up of the Company, the holders of
outstanding Common Stock are entitled to share ratably in all assets available
for distribution to the Common Stock shareholders after payment of all
liabilities of the Company, subject to the prior distribution rights of the
holders of any Preferred Stock that may be outstanding at that time. Holders of
outstanding Common Stock are entitled to one vote per share on matters submitted
to a vote by the Common Stock shareholders of the Company. The Common Stock has
no preemptive rights and no subscription, redemption or conversion privileges.
The Common Stock does not have cumulative voting rights, which means that
holders of a majority of shares voting for the election of directors can elect
all members of the Board of Directors sub ject to election. In general, a
majority vote of shares represented at a meeting of Common Stock shareholders at
which a quorum (a majority of the outstanding shares of Common Stock) is present
is sufficient for all actions that require the vote or concurrence of
shareholders, subject to and possibly in connection with the voting rights of
the holders of any Preferred Stock that from time to time may be outstanding and
entitled to vote with the holders of the Common Stock. Upon issuance of the
Common Stock as a component of the Units pursuant to the Warrant Modification
Offering, all of the outstanding shares of Common Stock will be fully paid and
nonassessable.
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PUBLIC WARRANTS
As of the date of this Prospectus, there are 524,610 Class A Common Stock
Purchase Warrants (the "Class A Warrants) and 525,860 Class B Common Stock
Purchase Warrants (the "Class B Warrants") issued and outstanding. The terms and
conditions of the Class A Warrants and the Class B Warrants (collectively, the
"Public Warrants") are set forth in the Warrant Agreement between the Company
and the Warrant Agent, dated January 26, 1989, as amended providing for
extension of the respective periods during which the Public Warrants may be
exercised. Pursuant to amendment of the Warrant Agreement, the period of
exercise of the Class Warrants and the Class B Warrants was extended to July 26,
1996, and July 26, 1997, respectively. The Public Warrants are evidenced by
warrant certificates in registered form.
Each Public Warrant entitles the holder to purchase one share of Common
Stock. The number and kind of securities or other property for which the Public
Warrants are exercisable are subject to adjustments in certain events, such as
mergers, reorganizations or stock splits, to prevent dilution. Since issuance
of the Public Warrants and without giving effect to the Warrant Modification
Offering, there has not been any events resulting in adjustment in the number
and kind of securities or other property required to be delivered by the Company
upon exercise of the Public Warrants. The Class A Warrants and Class B Warrants
are exercisable on or before July 26, 1996 and 1997, respectively, for the
purchase of one share of Common Stock for $6.00 and $8.00 per share (the
"Warrant Exercise Prices"), before giving effect to the Warrant Modification
Offering. The Company has exercised its right to redeem (the "Warrant
Redemption") the Public Warrants, by notice at 5:00 p.m., Central Standard Time,
on , 1996, subject to extension by the Company (the "Redemption
Date"), for $.0008 per warrant (the "Redemption Price").
WARRANT MODIFICATION OFFERING. Pursuant to agreement with the Warrant
Agent, the Company has unilaterally offered to the holders of the Public
Warrants to modify the terms of the Public Warrants until their redemption by
the Company (the "Warrant Modification Offering"). Pursuant to the Warrant
Modification Offering, the Company has reduced the Warrant Exercise Price of the
Class B Warrants to $6.00 from the $8.00 exercise price during the period
commencing on the date of this Prospectus until the Redemption Date (the
"Special Exercise Period"). In addition, the Company will issue as soon as
practicable after expiration of the Redemption Date, one Warrant Modification
Unit (one share of Common Stock and one 1996-A Warrant) for each Class A Warrant
and Class B Warrant effectively exercised, and not withdrawn, on or prior to the
Redemption Date, subject to certain conditions as set forth herein. The
Company's obligation to consummate the Warrant Modification Offering is not
subject to the exercise of any minimum number of Public Warrants. Following
expiration of the Redemption Date, the unexercised Public Warrants will expire
and cease to be issued and outstanding, and the registered holders of the
unexercised Public Warrants on the Redemption Date will be entitled to receive
the $.0008 Redemption Price per Public Warrant.
1996-A WARRANTS
The Board of Directors of the Company has authorized the issuance and sale
of 3,198,661 1996-A Warrants to be issued as components of the Units and
Warrant Modification Units (one 1996-A Warrant per Unit and Warrant Modification
Unit) to be offered to the Rights Holders pursuant to the Rights Offering and
Warrant Holders pursuant to the Warrant Modification Offering. See "Rights
Offering" and "--Public Warrants--Warrant Modification Offer," above. The 1996-
A Warrants will be issued subject to the terms and conditions of the Warrant
Agreement between the Company and the Warrant Agent.
Each 1996-A Warrant entitles the holder to purchase one share of Common
Stock at any time 90 days after the date of this Prospectus and on or before
November 30, 1998 for an exercise price of $12.00. The number and kind of
securities or other property for which the 1995-A Warrants are exercisable are
subject to adjustments in certain events, such as mergers, reorganizations or
stock splits, to prevent dilution. At any time, upon 30 days' written notice,
the Company may redeem in whole and not in part, unexercised 1996-A Warrants for
$.0001 per Warrant, provided the Common Stock has traded in excess of the
Warrant Exercise Price, as adjusted, for five consecutive trading days. If any
1996-A Warrants called for redemption are not exercised by such time, the 1996-A
Warrants will cease to be
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<PAGE>
exercisable and the holders thereof will be entitled only to receive the
redemption price. All 1996-A Warrants not exercised or redeemed will expire on
November 30, 1998. Holders of 1996-A Warrants will not, as such, have any of the
rights of shareholders of the Company.
In certain cases, the sale of securities by the Company upon exercise of
1996-A Warrants could violate the securities laws of the United States, certain
states thereof or other jurisdictions. The Company has agreed to use its best
efforts to cause a registration statement with respect to such securities under
the 1933 Act to continue to be effective during the term of the 1996-A Warrants
and to take such other actions under the laws of various states as may be
required to cause the sale of securities upon exercise of 1996-A Warrants to be
lawful. However, the Company will not be required to honor the exercise of 1996-
A Warrants if, in the opinion of counsel, the sale of securities upon such
exercise would be unlawful. In certain cases, the Company may, but is not
required to, purchase 1996-A Warrants submitted for exercise for a cash price
equal to the difference between the market price of the securities obtainable
upon such exercise and the exercise price of such 1996-A Warrants.
PREFERRED STOCK
Pursuant to its Certificate of Incorporation, the Company has an authorized
class of Preferred Stock of 5,000,000 million shares, $.0001 par value. The
Preferred Stock may be issued from time to time in one or more series, and the
Board of Directors of the Company, without further approval of its shareholders,
is authorized to fix the relative rights, preferences, privileges and
restrictions applicable to each series of Preferred Stock. Management of the
Company believes that having such a class of Preferred Stock provides the
Company with greater flexibility in financing, acquisitions and other corporate
activities. While there are no current plans, commitments or understandings,
written or oral, to issue any shares of Preferred Stock, in the event of any
issuance, the holders of Common Stock will not have any preemptive or similar
rights to acquire any of such Preferred Stock.
The Board of Directors has the authority to issue shares of Preferred Stock
and to determine its rights and preferences to eliminate delays associated with
a shareholder vote on specific issuances. The issuance of Preferred Stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company.
OTHER OPTIONS AND WARRANTS
As of October 28, 1996, the Company has granted stock options and issued
warrants to purchase 1,540,177 shares of Common Stock during various periods,
which expire February 1997 through July 2005, at exercise prices of $1.60 to
$6.48 per share. The average exercise price of the stock options is $2.48, and
the exercise prices of the stock options and warrants were equal to the fair
market value of the Common Stock on the date of the grant of each stock option
and warrant. In addition, the Board of Directors is authorized to issue options
and other stock purchase rights pursuant to the Advantage Marketing Systems,
Inc. 1995 Stock Option Plan. As of the date of this Prospectus, options under
such Stock Option Plan have not been granted. See "Management--Stock Option
Plan."
During 1995, the Company issued options to certain officers and directors
in return for services rendered as a means of retaining their services to the
Company. In lieu of payments of salaries and consulting fees, the Company has
historically used options to attract, retain and compensate consultants,
officers and directors. The Company also believes that linking the compensation
of its officers and directors to increases in the value of its Common Stock
achieves improved performance.
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of the Company and the Oklahoma
General Corporation Act include a number of provisions which may have the effect
of encouraging persons considering unsolicited tender offers
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or other unilateral takeover proposals to negotiate with the Board of Directors
rather than pursue non-negotiated takeover attempts. The Company believes that
the benefits of these provisions outweigh the potential disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals might result in an improvement of their terms. The description below
related to provisions of the Certificate of Incorporation and the Bylaws of the
Company is intended as a summary only and is qualified in its entirety by
reference to the Certificate of Incorporation and the Bylaws of the Company,
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
Preferred Stock. The Certificate of Incorporation authorizes the issuance
of the Preferred Stock in classes, and the Board of Directors to set and
determine the voting rights, redemption rights, conversion rights and other
rights relating to such class of Preferred Stock, and to issue such stock in
either private or public transactions. In some circumstances, the Preferred
Stock could be issued and have the effect of preventing a merger, tender offer
or other takeover attempt which the Company's Board of Directors opposes.
Classified Board of Directors. The Bylaws of the Company provide that the
Board of Directors shall be comprised of three classes of directors, each class
constituting approximately one-third of the total number of directors with each
class serving staggered three-year terms. The classification of the directors
make it more difficult for shareholders to change the composition of the Board
of Directors. The Company believes, however, that the longer time required to
elect a majority of a classified board of directors will help ensure continuity
and stability of the Company's management and policies.
The classification provisions may also have the effect of discouraging a
third party from accumulating large blocks of Common Stock or attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. Accordingly, shareholders of the Company
could be deprived of certain opportunities to sell their shares of Common Stock
at a higher market price than might otherwise be the case.
Oklahoma Anti-Takeover Statutes. Following completion of this offering and
the Warrant Modification Offering, the Company may become subject to Section
1090.3 and Sections 1145 through 1155 of the Oklahoma General Corporation Act
(the "OGCA").
Subject to certain exceptions, Section 1090.3 of the OGCA prohibits a
publicly-held Oklahoma corporation from engaging in a "business combination"
with an "interested shareholder" for a period of three years after the date of
the transaction in which such person became an interested shareholder, unless
the interested shareholder attained such status with approval of the board of
directors or the business combination is approved in a prescribed manner, or
certain other conditions are satisfied. A "business combination" includes
mergers, asset sales, and other transactions resulting in a financial benefit to
the interested shareholder. Subject to certain exceptions, an "interested
shareholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15 percent or more of the corporation's voting
stock.
In general, Sections 1145 through 1155 of the OGCA provide that issued and
outstanding shares ("interested shares") of voting stock acquired (within the
meaning of a "control share acquisition") become nonvoting stock for a period of
three years following such control share acquisition, unless a majority of the
holders of non-interested shares approve a resolution reinstating the interested
shares with the same voting rights that such shares had before such interested
shares became control shares. Any person ("acquiring person") who proposes to
make a control share acquisition may, at the person's election, and any
acquiring person who has made a control share acquisition is required to deliver
an acquiring person statement to the corporation disclosing certain prescribed
information regarding the acquisition. The corporation is required to present
to the next annual meeting of the shareholders the reinstatement of voting
rights with respect to the control shares that resulted in the control share
acquisition, unless the acquiring person requests a special meeting of
shareholders for such purpose and undertakes to pay the costs and expenses of
such special meeting. In the event voting rights of control shares acquired in
a control share acquisition are reinstated in full and the acquiring person has
acquired control shares with a majority or more of all voting power, all
shareholders
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<PAGE>
of the corporation have dissenters' rights entitling them to receive the fair
value of their shares which will not be less than the highest price paid per
share by the acquiring person in the control share acquisition.
A "control share acquisition" includes the acquisition by any person
(including persons acting as a group) of ownership of, or the power to direct
the exercise of voting power with respect to, control shares (generally issued
and outstanding shares having more than 20 percent of all voting power in the
election of directors of a publicly held corporation), subject to certain
exceptions including (i) an acquisition pursuant to an agreement of merger,
consolidation, or share acquisition to which the corporation is a party and is
effected in compliance with certain Sections of the OGCA, (ii) an acquisition by
a person of additional shares within the range of voting power for which such
person has received approval pursuant to a resolution by the majority of the
holders of non-interested shares, (iii) an increase in voting power resulting
from any action taken by the corporation, provided the person whose voting power
is thereby affected is not an affiliate of the corporation, (iv) an acquisition
pursuant to proxy solicitation under and in accordance with the Securities
Exchange Act of 1934, as amended, or the laws of Oklahoma, and (v) an
acquisition from any person whose previous acquisition of shares did not
constitute a control share acquisition, provided the acquisition does not result
in the acquiring person holding voting power within a higher range of voting
power than that of the person from whom the control shares were acquired. The
issuance of the shares of Common Stock comprising in part the Units in
connection with this offering and issuance of shares of Common Stock in
connection with the exercise of the 1996-A Warrants will not constitute "control
shares" within the meaning of Section 1146 of the OGCA because the resulting
increase, if any, in voting power of a Rights Holder as a result of exercise of
the Rights will result from the actions taken by the Company in the making of
the Warrant Modification Offer. Therefore, the receipt of such shares by the
holders of Rights or by the holders of the 1996-A Warrants will not constitute a
share acquisition within the meaning of Sections 1145 through 1155 of the OGCA.
Furthermore, the voting rights provisions of the Sections 1145 through 1155 of
the OGCA were declared unconstitutional and unenforceable in 1987. In 1991,
Sections 1145 through 1155 of the OGCA were amended; however, the
constitutionality and enforceability of the voting rights provisions of such
Sections of the OGCA, as amended, have not been determined as of the date of
this Prospectus.
The anti-takeover provisions of the OGCA may have the effect of
discouraging a third party from acquiring large blocks of Common Stock within a
short period or attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its shareholders. Accordingly,
shareholders of the Company could be deprived of certain opportunities to sell
their shares of Common Stock at a higher market price than might otherwise be
the case.
TRANSFER AGENT AND WARRANT AGENT
U.S. Stock Transfer Corp. is the registrar and transfer agent for the
Common Stock and the Warrant Agent for the Public Warrants and the 1996-A
Warrants, whose address is 1745 Gardena Avenue, Suite 200, Glendale, California
91204-2991. In addition, U.S. Stock Transfer Corp. is serving as Subscription
Agent with respect to the exercise of the Rights and the purchase of Units
pursuant to this offering.
SHARES ELIGIBLE FOR FUTURE SALE
Upon issuance and distribution of the Rights and assuming and giving effect
to (i) exercise of the Rights in full and upon issuance of 2,148,191 Units
pursuant thereto and (ii) exercise of the Public Warrants in full pursuant to
the Warrant Modification Offering and the issuance of 1,050,470 Warrant
Modification Units pursuant thereto, the Company will have outstanding 5,346,852
shares of Common Stock. The Company has reserved 3,198,661 shares of Common
Stock for issuance upon exercise of the 1996-A Warrants and exercise of
1,540,177 shares of Common Stock for exercise of outstanding stock options and
certain other warrants, and 1,125,000 shares of Common Stock have been reserved
for issuance under the Stock Option Plan. Additionally, the Company will have
483,789,310 shares of Common Stock available for issuance at such times and upon
such terms as may be approved by the Company's Board of Directors. No
prediction can be made as to the effect, if any, that future sales or the
availability of shares for sale
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will have on the market price of the Common Stock prevailing from time to time.
Also see "Risk Factors --Absence of Prior Public Market for Units and 1996-A
Warrants; Possible Volatility of Stock Price." Nevertheless, sales of
substantial amounts of Common Stock in the public market could adversely affect
the prevailing market price of the Common Stock and could impair the Company's
ability to raise capital through sales of its equity securities.
The Units sold pursuant to the Rights Offering and the Units (and the
component one share of Common Stock and one 1996-A Warrant of the Units) sold in
pursuant to the Warrant Modification Offering, will be immediately eligible for
resale in the public market without restriction or further registration under
the 1933 Act, except for Units, Common Stock, and 1996-A Warrants purchased by
an "affiliate" (as that term is defined under the 1933 Act) of the Company,
which will be subject to the resale limitations of Rule 144 promulgated under
the 1933 Act. In addition, as of October 28, 1996, there were 627,834 shares of
Common Stock (the "Restricted Shares") outstanding which have not been
registered under the 1933 Act (of which 367,927 were held by the executive
officers, directors and affiliates of the Company), but may be sold without
registration pursuant to Rule 144 promulgated under the 1933 Act, subject to the
limitations thereunder described below.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least two years is entitled to sell within any three-
month period a number of shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock or (ii) an amount equal
to the average weekly reported volume of trading in such shares during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Commission. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company. Restricted Shares properly sold in reliance on
Rule 144 are thereafter freely tradable without restrictions or registration
under the 1933 Act, unless thereafter held by an affiliate of the Company. In
addition, affiliates of the Company must comply with the restrictions and
requirements of Rule 144, other than the two-year holding period requirement, in
order to sell shares of Common Stock which are not Restricted Shares (such as
shares of Common Stock acquired by affiliates of the Company pursuant to
exercise of the Public Warrants). As defined in Rule 144, an "affiliate" of an
issuer is a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with
such issuer.
Furthermore, if three years have elapsed since the later of the date of any
acquisition of Restricted Shares from the Company or from any affiliate of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
pursuant to Rule 144(k) without regard to volume limitations, manner of sale
restrictions, or public information or notice requirements. The Securities and
Exchange Commission has recently proposed an amendment to Rule 144 which would
reduce the three-year holding period to two years. The Commission is currently
awaiting comments on proposed amendment. It is anticipated that the proposed
amendment will be adopted, although there can be no assurance that the proposed
amendment will be adopted as proposed or that additional conditions may not be
imposed to permit the sale by non-affiliates after such two year holding period
pursuant to Rule 144.
Pursuant to Rule 144A promulgated under the 1933 Act, under certain
circumstances qualified institutional buyers, as defined in the rule, are
permitted to more easily acquire and sell "restricted securities." The Company
is unable to predict the effect that Rule 144A has or will have on the
prevailing market price of the Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby are be
passed upon for the Company by its counsel, Dunn Swan & Cunningham, A
Professional Corporation.
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EXPERTS
The financial statements of Advantage Marketing Systems, Inc. (formerly
AMS, Inc.) as of December 31, 1995 and 1994, and for each of the two years in
the period ended December 31, 1995, and for Miracle Mountain International, Inc.
as of December 31, 1995, and the year then ended included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 (No. 33-80629)
(herein, together with all amendments thereto, the "Registration Statement"), of
which this Prospectus constitutes a part, under the Securities Act of 1933, as
amended (the "1933 Act"), with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., with respect to the securities offered by this
Prospectus. As permitted by the rules and regulations of the Commission, this
Prospectus, filed as part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and in the exhibits
thereto. The statements contained in this Prospectus as to the contents of any
contract or other document referenced herein are not necessarily complete, and
in each instance, if the contract or document was filed as an exhibit, reference
is hereby made to the copy of the contract or other document filed as an exhibit
to the Registration Statement and each such statement is qualified in all
respects by such reference. The Registration Statement (including the exhibits
thereto) may be inspected without charge at the office of the Commission,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549-1004, and at the
regional offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of the Registration Statement and the exhibits and
schedules thereto may be obtained from the Commission at such offices, upon
payment of prescribed rates. In addition, registration statements and certain
other filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system are publicly available through the
Commission's site on the World Wide Web on the Internet, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR. The
Company will provide without charge to each person who receives this Prospectus,
upon written or oral request, a copy of any information incorporated by
reference in this Prospectus (excluding exhibits to information incorporated by
reference unless such exhibits are themselves specifically incorporated by
reference). Such requests should be directed to Advantage Marketing Systems,
Inc. at 2601 Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-
7293, telephone: (405) 842-0131.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") as a "small business issuer"
as defined under Regulation S-B promulgated under the 1933 Act. In accordance
with the 1934 Act, the Company files reports and other information with the
Commission (File No. 33-25701), and such reports and other information can be
inspected and copied at, and copies of such materials can be obtained at
prescribed rates from, the Public Reference Section of the Commission in
Washington, D.C.
The Company distributes to its shareholders annual reports containing
financial statements audited by its independent public accountants and, upon
request, quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information. Such requests should
be directed to Advantage Marketing Systems, Inc. at 2601 Northwest Expressway,
Suite 1210W, Oklahoma City, Oklahoma 73112-7293, telephone: (405) 842-0131.
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INDEX TO FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
PAGE
----
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited Pro Forma Consolidated Statement of Operations
for the YearEnded December 31, 1995 28
Unaudited Pro Forma Consolidated Statement of Operations
for the Nine Months Ended September 30, 1996 29
Notes to Unaudited Pro Forma Consolidated Financial
Statements 30
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 (Unaudited) F-2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited) F-3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited) F-4
Notes to Consolidated Financial Statements for the Nine Months
Ended September 30, 1996 and 1995 (Unaudited) F-5
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-7
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-8
Consolidated Statements of Operations for Years Ended
December 31, 1995 and 1994 F-9
Consolidated Statements of Stockholders' Deficiency for Years
Ended December 31, 1995 and 1994 F-10
Consolidated Statements of Cash Flows for Years Ended
December 31, 1995 and 1994 F-11
Notes to Consolidated Financial Statements for Years Ended
December 31, 1995 and 1994 F-12
MIRACLE MOUNTAIN INTERNATIONAL, INC. AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report F-19
Balance Sheet as of December 31, 1995 F-20
Statement of Operations for the Year Ended December 31, 1995 F-21
Statement of Stockholders' Deficiency for the Year Ended
December 31, 1995 F-22
Statement of Cash Flows for the Year Ended December 31, 1995 F-23
Notes to Financial Statements for the Year Ended December 31, 1995 F-24
MIRACLE MOUNTAIN INTERNATIONAL, INC. UNAUDITED FINANCIAL STATEMENTS:
Balance Sheets as of May 31, 1996 and December 31, 1995 (Unaudited) F-26
Statements of Operations for the Five Months Ended
May 31, 1996 and 1995 (Unaudited) F-27
Statements of Cash Flows for the Five Months Ended
May 31, 1996 and 1995 (Unaudited) F-28
Notes to Financial Statements F-29
F-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ 117,965 $ 112,087
Receivables - net of allowance of $25,804 in 1996 and $27,434 in 1995..... 12,774 18,299
Receivable from affiliate................................................. -- 51,963
Inventory................................................................. 305,804 98,621
Prepaid expenses.......................................................... 18,257 2,371
----------- -----------
Total current assets.................................................. 454,800 283,341
----------- -----------
COMMISSION ADVANCES TO RELATED
PARTIES -- NONCURRENT...................................................... 29,481 65
RECEIVABLE FROM AFFILIATE..................................................... 70,923 --
RECEIVABLES -- NONCURRENT..................................................... 18,742 22,620
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $326,002 in 1996 and $280,606 in 1995..................... 176,932 159,797
GOODWILL...................................................................... 113,488 --
COVENANT NOT TO COMPETE....................................................... 55,556 --
DEFERRED TAXES................................................................ 438,349 --
OTHER ASSETS.................................................................. 156,662 67,173
----------- -----------
TOTAL ASSETS.................................................................. $ 1,514,933 $ 532,996
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 206,634 $ 91,949
Accrued expenses.......................................................... 276,379 151,654
Accrued promotion expense................................................. 56,862 99,424
Notes payable:
Stockholder........................................................... 17,658 81,929
Other................................................................. 9,401 8,440
Current obligations under capital lease................................... 25,032 20,679
----------- -----------
Total current liabilities......................................... 591,966 454,075
LONG-TERM LIABILITIES:
Notes payable - other..................................................... 23,880 28,500
Capital lease............................................................. 61,812 75,649
----------- ----------
Total long-term liabilities....................................... 85,692 104,149
----------- -----------
TOTAL LIABILITIES............................................................. 677,658 558,224
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - $.0001 par value; authorized 5,000,000 shares;
none issued........................................................... -- --
Common stock - $.0001 par value; authorized 495,000,000 shares;
2,143,191 and 2,123,191 shares issued and outstanding, respectively... 214 212
Paid-in capital........................................................... 1,981,380 1,859,882
Accumulated deficit....................................................... (1,144,319) (1,885,322)
----------- -----------
Total stockholders' equity (deficiency)............................... 837,275 (25,228)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 1,514,933 $ 532,996
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
REVENUE:
Sale of programs............... $4,186,404 $3,155,934
Sale of promotional material... 234,735 88,893
Other.......................... 37,471 17,797
---------- ----------
Total...................... 4,458,610 3,262,624
---------- ----------
EXPENSES:
Cost of programs............... 968,635 906,935
Cost of promotional material... 142,610 69,395
Selling........................ 2,235,879 1,495,084
Interest expense............... 19,422 20,335
General and administrative..... 789,410 593,273
---------- ----------
Total...................... 4,155,956 3,085,022
---------- ----------
INCOME BEFORE TAXES................ 302,654 177,602
TAX BENEFIT........................ 438,349 --
---------- ----------
NET INCOME......................... $ 741,003 $ 177,602
========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES (thousands)....... 3,176 2,121
========== ==========
NET INCOME PER COMMON SHARE........ $.23 $.08
========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.................................................... $ 741,003 $ 177,602
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization............................. 53,955 29,149
Changes in assets and liabilities
which provided (used) cash:
Inventory............................................. (207,183) (11,000)
Receivables, advances and prepaids.................... (35,899) 1,204
Deferred taxes........................................ (438,349) --
Other assets.......................................... -- (18,082)
Checks outstanding.................................... -- (46,663)
Accounts payable and accrued expenses................. 196,848 106,861
--------- ---------
Net cash provided (used) by operating activities.......... 310,375 239,071
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................ (62,531) (4,072)
Advances to affiliate......................................... (22,000) --
Repayment of advances to affiliate............................ 3,040 --
Purchase of Miracle Mountain International, Inc............... (56,103) --
Purchase of other assets...................................... (89,489) --
--------- ---------
Net cash used by investing activities..................... (227,083) (4,072)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from stockholders....................................... -- 46,244
Payment on notes payable...................................... (3,659) (2,088)
Payment on capital leases..................................... (9,484) (9,050)
Payment on notes payable -- stockholders...................... (64,271) (111,150)
--------- ---------
Net cash used by financing activities..................... (77,414) (76,044)
--------- ---------
NET INCREASE IN CASH.......................................... 5,878 158,955
BEGINNING CASH BALANCE........................................ 112,087 --
--------- ---------
ENDING CASH BALANCE........................................... $ 117,965 $ 158,955
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Reclassify interest payable to notes payable -- stockholders.. $ -- $ 51,806
========= =========
Property and equipment acquired by capital lease.............. $ -- $ 91,263
========= =========
Fair value of capital stock issued to purchase
Miracle Mountain International, Inc....................... $ 120,000 $ --
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The accompanying financial statements and related
notes should be read in conjunction with the audited financial statements of
the Company, and notes thereto, for the fiscal year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the amounts
that will be reported for the fiscal year ending December 31, 1996. See Note
5 regarding the reverse stock split.
2. MIRACLE MOUNTAIN INTERNATIONAL, INC.
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a
Colorado corporation ("MMI"), and MMI became a wholly-owned subsidiary of
the Company (the "MMI Acquisition"). MMI is a multi-level marketer of
various third-party manufactured nutritional supplement products. Pursuant
to the Purchase Agreement and in connection with the MMI Acquisition, the
Company issued and delivered to the shareholders of MMI 20,000 shares of
Common Stock. In addition, the Company agreed to issue and deliver an
additional 5,000 shares to the shareholders of MMI on or before December 17,
1996, pending determination of certain liabilities.
The excess of the purchase price of $176,103, which includes $56,103 of
transaction costs, over the negative $3,059 fair market value of the assets
of MMI, net of liabilities, has been allocated $119,162 to goodwill and
$60,000 to the covenant not to compete. Goodwill and the covenant not to
compete will be amortized over a 7 and 4.5 year period, respectively. The
fair market value of the assets of MMI, net of liabilities, declined from
$16,690 to negative $3,059 between March 31, 1996 and May 31, 1996.
3. INCOME TAXES
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax
benefits of its deferred tax assets. Based upon the historical trend of
increasing earnings, management has concluded that it is more likely than
not that a tax benefit will be realized from its deferred tax assets and has
therefore eliminated the previously recorded valuation allowance for its
deferred tax assets.
The Company's deferred tax assets consist primarily of net operating loss
carryforwards for income tax purposes at September 30, 1996, totaling
approximately $1,369,841, which will begin to expire in 2003. Elimination of
the valuation allowance results in a deferred tax asset at September 30,
1996, of $438,349 and a corresponding tax benefit for the quarter ended
September 30, 1996.
4. RECEIVABLE FROM AFFILIATE
The Company made advances to the John Hail Agency, Inc. ("JHA"), a company
of which the Company's Chief Executive Officer and major shareholder is the
sole director and shareholder, of $22,000 and $87,684 during the nine months
ended September 30, 1996, and the year ended December 31, 1995,
respectively. During the nine months ended September 30, 1996, JHA made
repayments of $3,040. JHA made repayments
F-5
<PAGE>
of these advances of $67,401 during the year ended December 31, 1995.
Furthermore, effective June 30, 1996, the Company adopted a policy to not
make any further advances to JHA, and Jha executed a promissory note payable
to the Company in the principal amount of $73,964, bearing interest at eight
percent per annum and payable in 60 installments of $1,499 per month.
5. SUBSEQUENT EVENTS
On October 29, 1996, the Board of Directors of the Company approved a one-
for-eight reverse split of the Company's issued and outstanding common
stock, options and warrants, effective as of 5:00 p.m. New York City time on
October 29, 1996. In addition, the number of the Company's issued and
outstanding options and warrants have been reduced by a factor of eight and
their exercise price per share has been increased by a factor of eight
pursuant to this action.
The one-for-eight reverse split is reflected in the accompanying financial
statements on a retroactive basis. The Company's previously reported number
of shares of common stock issued and outstanding at September 30, 1996 and
December 31, 1995, of 17,145,524 and 16,985,524 has been adjusted to
2,143,191 and 2,123,191, respectively. Previously reported weighted average
number of outstanding shares of common stock for the nine months ended
September 30, 1995, of 16,966,000 has been adjusted to 2,121,000. Previously
reported earnings per share for the nine months ended September 30, 1995, of
$.01 has been restated to $.08.
F-6
<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 the years then ended. 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 the years then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE
LLP
Oklahoma City, Oklahoma
March 29, 1996, except as to Note 11,
for which the date is October 29, 1996
F-7
<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 2,123,191 and 2,120,691 shares, respectively (see Note 11)... 212 212
Paid-in capital............................................................ 1,859,882 1,847,382
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-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1995 1994
----------- -----------
<S> <C> <C>
REVENUES:
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..................................... 2,662,681 2,119,356
Net income per common share.................................................... $.09 $.04
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<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>
(Note 11)
BALANCE,
JANUARY 1, 1994................ 2,105,598 $211 $1,823,236 $(2,215,036) $(391,589)
Conversion of payables
into stock..................... 1,343 - 2,147 - 2,147
Issuance of capital stock
for services received.......... 13,750 1 21,999 - 22,000
Net income for the year ended
December 31, 1994.............. - - - 80,006 80,006
----------------- ------ ---------- ----------- ---------
BALANCE,
DECEMBER 31, 1994.............. 2,120,691 212 1,847,382 (2,135,030) (287,436)
Warrants exercised.................. 1,250 - 7,500 - 7,500
Issuance of capital stock for cash.. 1,250 - 5,000 - 5,000
Net income for the year ended
December 31, 1995.............. - - - 249,708 249,708
----------------- ------ ---------- ----------- ---------
BALANCE,
DECEMBER 31, 1995.............. 2,123,191 $212 $1,859,882 $(1,885,322) $ (25,228)
================= ====== ========== =========== =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<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-11
<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 by the weighted average number of shares outstanding during the period
after giving effect to the reverse stock split discussed in Note 11.
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
539,500. Warrants have not been considered as their effect is anti-dilutive.
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, in management's opinion, it is
more likely than not that some portion of the deferred tax asset will not be
realized.
F-12
<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-13
<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
See related information concerning the October 29, 1996, reverse stock split
in Note 11. All shares and per share information has been restated
retroactively to give effect to the stock split.
COMMON STOCK - During 1994, $2,147 of accounts payable were settled by the
Company through the issuance of 1,343 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 7,500 shares of its common stock to a
consultant for services rendered and 6,250 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 $2.00 per share to $6.48 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 34,108 shares of the Company's
common stock at exercise prices ranging from $2.16 per share to $2.80 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..... 350,358 $1.60 - 2.16 316,250 $ 1.60
Options granted
during the year:....... 706,624 2.00 - -
44,445 2.16 28,750 2.16
- - 5,358 2.80
302,500 3.60 - -
125,000 4.96 - -
11,250 6.48 - -
--------- -------
1,189,819 34,108
--------- -------
Options outstanding
at end of year........ 1,540,177 $1.60 - 6.48 350,358 $1.60 - 2.80
========= =======
</TABLE>
F-14
<PAGE>
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, distribution of common
stock rights. See discussion at Proposed Redemption and Offerings below.
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
DECEMBER 31, 1995: OUTSTANDING PRICE EXERCISE PERIOD
-------------- ---------- -------------------
<S> <C> <C> <C>
Class A Warrants at beginning of year........ 525,860 $6.00 4/26/89 - 7/26/96
Class A Warrants exercised during the year... (1,250) $6.00
-------
Class A Warrants at end of year.............. 524,610
=======
Class B Warrants............................. 525,860 $8.00 4/26/89 - 7/26/97
=======
</TABLE>
During 1995, Class A and B warrants exercise periods were extended by one
year to 1996 and 1997, respectively, by Board of Director approval.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DECEMBER 31, 1994:
Class A Warrants............................ 525,860 $6.00 4/26/89 - 7/26/95
=======
Class B Warrants............................ 525,860 $8.00 4/26/89 - 7/26/96
=======
</TABLE>
During 1994, Class A and B warrants exercise periods were extended by one
year to 1995 and 1996, respectively, by Board of Director approval.
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 $.0008 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
temporarily 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
November 30, 1998, to purchase one share of common stock at $12.00 per
share. The proposed redemption 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.
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.
F-15
<PAGE>
6. STOCK OPTION PLAN
See related information concerning the October 29, 1996, reverse stock split
in Note 11. All shares and per share information has been restated
retroactively to give effect to the stock split.
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options 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 1,125,000 shares of the common stock, $.0001 par
value, of the Company. The Plan limits participation to employees,
independent contractors, and consultants. Nonemployee directors 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.
F-16
<PAGE>
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.
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%
========= =========
Deferred tax liabilities and assets at December 31, 1995 and
1994 are comprised of the following:
DECEMBER 31,
-----------
1995 1994
--------- ---------
Deferred tax liabilities:
Commissions advanced..................... $ - $ (4,500)
--------- ---------
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.
11. SUBSEQUENT EVENTS
On October 29, 1996, the Board of Directors of the Company approved a one-for-
eight reverse split of the Company's outstanding common stock, options and
warrants, effective as of 5:00 p.m. New York City time on October 29, 1996. In
addition, the number of the Company's outstanding options and warrants have been
reduced by a factor of eight and their exercise price per share has been
increased by a factor of eight pursuant to this action.
This one-for-eight reverse split is reflected in the accompanying financial
statements on a retroactive basis. The Company's previously reported number of
shares of common stock issued and outstanding at December 31, 1995 and 1994, of
16,985,524 and 16,965,524 has been adjusted to 2,123,191 and 2,120,691,
respectively. Previously
F-17
<PAGE>
reported weighted average number of outstanding shares of common stock for the
years ended December 31, 1995 and 1994, of 21,301,441 and 16,954,848 have been
adjusted to 2,662,681 and 2,119,356, respectively. Previously reported earnings
per share for the years ended December 31, 1995 and 1994 of $.01 and NIL have
been adjusted to $.09 and $.04, respectively.
* * * * * *
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Miracle Mountain International, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Miracle Mountain
International, Inc. (the "Company") as of December 31, 1995 and the related
statements of operations, stockholders' deficiency and cash flows for the year
then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Miracle Mountain International, Inc. at
December 31, 1995 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
June 21, 1996
F-19
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1995
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S>....................................................... <C>
Cash.................................................... $ 3,334
Inventory............................................... 2,186
---------
Total current assets............................ 5,520
PROPERTY AND EQUIPMENT, net............................... 39,898
OTHER ASSETS.............................................. 725
---------
TOTAL..................................................... $ 46,143
=========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable........................................ 1,558
Accrued commissions..................................... 16,477
Accrued payroll taxes................................... 2,346
Interest payable........................................ 1,318
Notes payable to related parties........................ 62,418
---------
Total current liabilities....................... 84,117
STOCKHOLDERS' DEFICIENCY:
Common stock - no par value; authorized 1,000,000 shares;
issued and outstanding 200,000 shares................. 92,655
Accumulated deficit..................................... (130,629)
---------
Total stockholders' deficiency.................. (37,974)
---------
TOTAL..................................................... $ 46,143
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-20
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
TOTAL REVENUE........................ $ 277,366
---------
COSTS AND EXPENSES:
Programs........................... 103,217
Selling............................ 145,650
General and administrative......... 157,725
Interest expense................... 1,403
---------
Total expenses............. 407,995
---------
NET LOSS............................. $(130,629)
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-21
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
SHARES STOCK DEFICIT DEFICIENCY
------- ------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995..... - $ - $ - $ -
Capital contributions........ 200,000 92,655 - 92,655
Net loss for the year ended
December 31, 1995.......... - - (130,629) (130,629)
------- ------- ----------- -------------
BALANCE, DECEMBER 31, 1995... 200,000 $92,655 $(130,629) $ (37,974)
======= ======= =========== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-22
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C>
Net loss......................................................... $(130,629)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization................................ 1,926
Changes in assets and liabilities which provided (used) cash:
Inventory.................................................. (2,186)
Other assets............................................... (725)
Accounts payable........................................... 1,558
Accrued expenses........................................... 18,823
Interest payable........................................... 1,318
---------
Net cash used in operating activities.................... (109,915)
---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment.............................. (41,824)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from capital contributions.............................. 92,655
Proceeds from notes payable...................................... 65,253
Payment on notes payable......................................... (2,835)
---------
Net cash provided by financing activities................ 155,073
---------
NET INCREASE IN CASH............................................... 3,334
BEGINNING CASH BALANCE............................................. -
---------
ENDING CASH BALANCE................................................ $ 3,334
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................... $ 85
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-23
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company is engaged in marketing nutritional
supplements through a multi-level sales organization of independent sales
associates developed by the Company. During the first three months of
operations, the Company primarily paid start-up expenses relating to
organization and recruitment of sales associates. The Company did not have
significant sales until April of 1995.
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 - Revenue is recognized when goods are shipped.
INVENTORY - Inventory consists of consumer product inventory. 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.
Property and equipment are depreciated over five years using a straight-line
basis.
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 .
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Office furniture, fixtures, and equipment...... $41,824
Accumulated depreciation and amortization...... (1,926)
Total property, net............................ $39,898
=======
</TABLE>
3. NOTES PAYABLE TO STOCKHOLDERS
The Company has a note payable to a stockholder and director in the amount
of $56,253 as of December 31, 1995. This note is due on demand and bears
interest at 9.0%. No principal or interest payments were made on the note
during the year ended December 31, 1995.
The Company is also making note payments to a bank on behalf of a
stockholder and director in exchange for an advance of $9,000. The principal
balance of the note at December 31, 1995 is $6,165. Payments of principal
and interest totaling $2,835 and $85, respectively, were made during the
year. No written agreement exists between the parties.
F-24
<PAGE>
4. LEASE AGREEMENTS
The Company leases office space under a cancelable operating lease. The
Company can cancel the lease with 30 days written notice. The lease terms
provide for monthly payments of $825.
Additionally, the Company leases office equipment under separate operating
leases. The leases are cancelable at any time by the Company. The lease
terms provide for combined monthly payments of $441.
Rental expense under operating leases for the year ended December 31, 1995
was $16,535.
5. RELATED PARTIES
Certain stockholders and directors receive commissions on revenue of the
Company. Such commissions are recognized as compensation to the stockholders
and directors and are included in selling expense. Total commissions paid to
stockholders and directors during 1995 totaled approximately $27,000.
6. INCOME TAXES
The Company experienced a net loss for the year ended December 31, 1995 and
consequently paid no income tax.
The Company has a net operating loss carryforward at December 31, 1995
totaling approximately $130,000 which is available to reduce Federal income
tax in future periods and will expire in 2010. 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 carryforward and has,
therefore, provided a valuation allowance of approximately $44,000 to fully
reserve the net deferred tax asset.
7. SUBSEQUENT EVENTS
On June 20, 1996, the Company's stockholders exchanged 100% of their
outstanding stock in the Company for a total of 200,000 shares of common
stock of Advantage Marketing Systems, Inc. ("AMS"). As part of the
agreement, AMS withheld 40,000 shares which will be delivered 120 days after
closing, provided that liabilities of the Company, which will be assumed by
AMS, do not exceed $19,000. Upon delivery, the shares withheld will be
reduced by one share for every $.88 of liabilities in excess of $19,000.
Also, the agreement provides that certain officers, directors and
stockholders will not compete with AMS for a limited time.
* * * * * *
F-25
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
BALANCE SHEETS, MAY 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
MAY 31, DECEMBER 31,
1996 1995
--------- -----------
ASSETS
CURRENT ASSETS:
Cash............................................ $ - $ 3,334
Inventory....................................... 3,320 2,186
-------- ---------
Total current assets........................ 3,320 5,520
-------- ---------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $5,411 in 1996 and 1,926 in 1995... 36,413 39,898
OTHER ASSETS........................................ 725 725
-------- ---------
TOTAL ASSETS........................................ $ 40,458 $ 46,143
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Bank overdrafts................................. $ 11,067 $ -
Accounts payable................................ 8,646 1,558
Accrued expenses................................ - -
Accrued commissions............................. 22,623 16,477
Accrued payroll taxes........................... 2,025 2.346
Interest payable................................ 2,340 1,318
Notes payable to related parties................ 62,418 62,418
-------- ---------
Total current liabilities............... 109,119 84,117
-------- ---------
STOCKHOLDERS' DEFICIENCY:
Common stock - no par value; authorized 1,000,000 shares;
issued and outstanding 200,000 shares....... 92,655 92,655
Accumulated deficit............................. (161,316) (130,629)
--------- ---------
Total stockholders' deficiency.............. (68,661) (37,974)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 40,458 $ 46,143
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-26
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE FIVE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
FOR THE FIVE MONTHS ENDED
MAY 31,
-------------------------
1996 1995
-------- ---------
REVENUE.......................... $205,112 $ 64,839
EXPENSES:
Products..................... 54,743 9,274
Selling...................... 129,758 21,343
General and administrative... 49,188 29,272
Interest expense............. 2,110 197
-------- ---------
Total.................... 235,799 60,086
-------- ---------
NET INCOME (LOSS)................ $(30,687) $ 4,753
======== =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-27
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
MAY 31, MAY 31,
1996 1995
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $(30,687) $ 4,753
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization........................ 3,485 545
Changes in assets and liabilities which
provided (used) cash:
Inventory........................................ (1,134) (19,440)
Commissions advances............................. - (13,257)
Other assets..................................... - (725)
Checks outstanding............................... 11,067 -
Interest payable................................. 1,022 332
Accounts payable and accrued expense............. 12,913 2,007
-------- --------
Net cash used by operating activities................ (3,334) (25,785)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment....................... - (3,022)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.............................. - 7,000
Payment on note payable.................................. - -
Proceeds from capital contributions...................... - 32,655
-------- --------
Net cash provided by financing activities............ - 39,655
-------- --------
NET INCREASE (DECREASE) IN CASH.......................... (3,334) 10,848
BEGINNING CASH BALANCE................................... 3,334 -
-------- --------
ENDING CASH BALANCE...................................... $ $ 10,848
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Property and equipment acquired by capital lease......... $ 6,700 $ 42,815
======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-28
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The accompanying financial statements and related
notes should be read in conjunction with the audited financial statements of
the Company, and notes thereto, for the fiscal year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the amounts
that will be reported for the fiscal year ended December 31, 1996.
2. ACCOUNTING POLICIES ADOPTED
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-
Based Compensation. SFAS 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. No options or warrants were issued during the first
quarter of 1996.
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to such
assets. Management does not believe this pronouncement will have a material
effect on the Company's financial statements.
3. SUBSEQUENT EVENTS
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company was acquired by Advantage
Marketing Systems, Inc., an Oklahoma corporation ("AMS"), and became a
wholly-owned subsidiary of AMS. All liabilities of the Company, other than
commissions payable to associates, were assumed by certain of the Company's
former shareholders, and certain officers, directors and stockholders were
required to sign agreements not to compete with AMS.
F-29
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
<S> <C>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN- 2,148,191 UNITS
TATIONS MUST NOT BE RELIED UPON AS HAVING BEEN (EACH CONSISTING OF ONE
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UN- SHARE OF COMMON STOCK AND
DERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN ONE 1996-A WARRANT)
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, BY
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR ISSUABLE UPON EXERCISE
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON OF RIGHTS
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO
DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE ADVANTAGE MARKETING
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE SYSTEMS, INC.
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
------------------------ PROSPECTUS
------------------------
THE SUBSCRIPTION AGENT FOR THE RIGHTS OFFERING IS:
Holders of Rights who require information about
U.S. STOCK TRANSFER CORP. procedures for exercise of the Rights should contact the
1745 GARDENA AVENUE, SUITE 200 Subscription Agent.
GLENDALE, CALIFORNIA 91204-2991
TELEPHONE: (818) 502-1404 Any requests for information in general or with respect
to this offering or additional copies of this Prospectus
may be made by calling or by writing the Company at:
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
ATTENTION: CORPORATE SECRETARY
TELEPHONE: (405) 842-0131
------------------------ ----------------------
, 1996
UNTIL , 1996, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
=====================================================================================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1031 of the Oklahoma General Corporation Act permits (and the
Registrant's Certificate of Incorporation and Bylaws, which are incorporated by
reference herein, authorize) indemnification of directors and officers of the
Registrant and officers and directors of another corporation, partnership, joint
venture, trust or other enterprise who serve at the request of the Registrant,
against expenses, including attorneys fees, judgments, fines and amount paid in
settlement actually and reasonably incurred by such person in connection with
any action, suit or proceeding in which such person is a party by reason of such
person being or having been a director or officer of the Registrant or at the
request of the Registrant, if he conducted himself in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The Registrant may not
indemnify an officer or a director with respect to any claim, issue or matter as
to which such officer or director shall have been adjudged to be liable to the
Registrant, unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper. To the extent that an officer or director is successful on
the merits or otherwise in defense on the merits or otherwise in defense of any
action, suit or proceeding with respect to which such person is entitled to
indemnification, or in defense of any claim, issue or matter therein, such
person is entitled to be indemnified against expenses, including attorney's
fees, actually and reasonably incurred by him in connection therewith.
The circumstances under which indemnification is granted with an action
brought on behalf of the Registrant are generally the same as those set forth
above; however, expenses incurred by an officer or a director in defending a
civil or criminal action, suit or proceeding may be paid by the Corporation in
advance of final disposition upon receipt of an undertaking by or on behalf of
such officer or director to repay such amount if it is ultimately determined
that such officer or director is not entitled to indemnification by the
Registrant.
These provisions may be sufficiently broad to indemnify such persons for
liabilities arising under the Securities Act of 1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
S.E.C. Registration Fees........................................... $ 20,446.34
N.A.S.D. Filing Fees............................................... -
*State Securities Laws (Blue Sky) Legal Fees....................... 10,000.00
*State Securities Laws Filing Fees................................. 20,000.00
*Printing and Engraving............................................ 22,000.00
*Legal Fees........................................................ 89,000.00
*Accounting Fees and Expenses...................................... 20,000.00
*Transfer and Warrant Agent's Fees and Costs of Certificates....... 8,000.00
*Miscellaneous..................................................... 5,000.00
------------
Total............................................................ $ 199,446.34
============
</TABLE>
________________________________________
*Estimated
II-I
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has sold and issued the securities described below within
the past three years which were not registered under the Act.
<TABLE>
<CAPTION>
DATE OF PURCHASE NUMBER
PURCHASE OR PRICE PER OF SHARES
NAME ISSUANCE SHARE PURCHASED NET PROCEEDS CONSIDERATION
- ------------------ ---------- --------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
R. Baresel........ 12-29-94 .20 60,000 $ 12,000 Services
C. Blackwood...... 12-30-94 .20 25,000 5,000 Services
P. Pierro......... 12-30-94 .20 25,000 5,000 Services
A/P Conversion.... 12-30-94 .20 10,737 2,147
M. Cooper......... 12-31-93 .10 100,000 10,000 Services
C. Wilson......... 12-31-93 .10 120,000 12,000 Services
F. Morgan......... 12-31-93 .10 120,000 12,000 Services
J. Baresel........ 12-31-93 .10 100,000 10,000 Services
M. Strauss........ 12-21-93 .25 8,000 2,000
R. Nance.......... 12-13-93 .10 300,000 30,000 Cash
Refunds........... 11-15-93 .10 373,919 37,392
J. Baresel........ 10-04-93 .10 50,000 5,000 Services
S. Moser.......... 10-04-93 .10 20,000 2,000 Services
R. Boyd........... 07-28-93 .25 120,000 30,000 Cash
B. Wineinger...... 07-16-93 .20 50,000 10,000 Cash
G. Landon......... 06-04-93 .25 120,000 30,000 Cash
G. Landon......... 05-07-93 .25 80,000 20,000 Cash
D. Thorley........ 05-07-93 .25 40,000 10,000 Cash
M. Kendall........ 04-01-93 .25 80,000 20,000 Cash
E. Baldwin........ 04-01-93 .25 40,000 10,000 Cash
R. Tepoel......... 03-02-93 .20 12,500 2,500 Cash
R. Nelson......... 01-19-93 .20 50,000 10,000 Cash
D. Huff........... 09-30-92 .10 25,000 2,500 Services
R/P Conversion.... 09-30-92 .10 1,295,130 129,513
N/P Conversion.... 09-30-92 .10 451,912 45,192
R. Nance.......... 09-30-92 .10 750,000 75,000 Cash
C. Wilson......... 07-01-92 .10 120,000 10,000 Services
</TABLE>
- --------------------------------------------
(1) No underwriting discounts or commissions were paid with respect to such
sales.
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996, the Company acquired all of the issued and outstanding capital stock of
Miracle Mountain International, Inc., a Colorado corporation. On June 20, 1996,
the Company issued 160,000 shares of its Common Stock and agreed to issue an
additional 40,000 shares of its Common Stock on or before October 18, 1996, to
the shareholders of Miracle Mountain International, Inc. pursuant to Rule 506 of
Regulation D.
The Company relied on Rule 147 and Sections 3 and 4(2) of the Securities
Act of 1933 for exemption from the registration requirements of such Act. Each
investor was furnished with information concerning the formation and operations
of the Registrant, and each had the opportunity to verify the information
supplied. Additionally, Registrant obtained a signed representation from each
of the foregoing persons in connection with the purchase of the Common Stock of
his or her intent to acquire such Common Stock for the purpose of investment
only, and not with a view toward the subsequent distribution thereof; each of
the certificates representing the Common Stock of the Registrant has been
stamped with a legend restricting transfer of the securities represented
thereby, and the Registrant
II-II
<PAGE>
has issued stop transfer instructions to U.S. Stock Transfer Inc., the Transfer
Agent for the Common Stock of the Company, concerning all certificates
representing the Common Stock issued in the above-described transactions.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO.
-----------
2.1 Agreement and Plan of Merger between Registrant and AMS, 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 The Registrant's Certificate of Incorporation.*
3.2 The Registrant's Bylaws.*
4.1 Certificate of Common Stock of the Registrant.*
4.2 Class A Common Stock Purchase Warrant Certificate.*
4.3 Class B Common Stock Purchase Warrant Certificate.*
4.4 Warrant Agreement between Registrant and U.S. Stock Transfer Inc.*
4.5 1996-A Warrant Certificate.
4.6 Warrant Agreement between Registrant and U.S. Stock Transfer Inc.
4.7 Letter dated June 8, 1990, addressed to U.S. Stock Transfer, Inc.
extending the expiration dates of Registrant's Class A Common Stock
Purchase Warrants and Class B Common Stock Purchase Warrants.*
4.8 Letter dated October 22, 1990, addressed to U.S. Stock Transfer,
Inc. extending the expiration dates of Registrant's Class A Common
Stock Purchase Warrants and Class B Common Stock Purchase Warrants.*
4.9 Letter dated July 15, 1991, addressed to U.S. Stock Transfer,
Inc. extending the expiration dates of Registrant's Class A Common
Stock Purchase Warrants and Class B Common Stock Purchase Warrants.*
4.10 Letter dated July 10, 1993, addressed to U.S. Stock Transfer,
Inc. extending the expiration dates of Registrant's Class A Common
Stock Purchase Warrants and Class B Common Stock Purchase Warrants.*
4.11 Letter dated June 14, 1994, addressed to U.S. Stock Transfer,
Inc. extending the expiration dates of Registrant's Class A Common
Stock Purchase Warrants and Class B Common Stock Purchase Warrants.*
4.12 Letter dated June 14, 1995, addressed to U.S. Stock Transfer,
Inc. extending the expiration dates of Registrant's Class A Common
Stock Purchase Warrants and Class B Common Stock Purchase Warrants.*
II-III
<PAGE>
4.13 Stock Purchase Agreement having an effective date of May 31,
1996, between the Registrant, Miracle Mountain International, Inc.,
Richard Seaton, Gene Burson, Kaye Jennings, Daryl Burson, James
Rogers.*
4.14 Stock Rights Agreement between Registrant and U.S. Stock
Transfer Inc.
4.15 Non-Transferrable Stock Rights Certificate.
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation, counsel
to Registrant, regarding legality of the securities covered by this
Registration Statement.
5.2 Opinion of Dunn Swan & Cunningham, A Professional Corporation, counsel
to Registrant, regarding certain federal income tax consequences.
10.1 Advantage Marketing Systems, Inc. 1995 Stock Option Plan.*
10.2 Agreement between Registrant and Consumer Benefit Services, Inc.*
10.3 Agreement between Registrant and Advanced Products, Inc.*
10.4 Agreement between Registrant and J&K Pharmaceutical Laboratories.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel.
24.1 Power of Attorney of John Hail.*
24.2 Power of Attorney of Curtis H. Wilson, Sr.*
24.3 Power of Attorney of Roger P. Baresel.*
24.4 Power of Attorney of R. Terren Dunlap.*
24.5 Power of Attorney of Harland C. Stonecipher.*
______________________________________________________
*Previously furnished.
ITEM 28. UNDERTAKINGS
(a) RULE 415 OFFERING.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
in the registration statement; and
II-IV
<PAGE>
(iii) To include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) Will supplement the prospectus, after the end of the subscription
period, to include the results of the subscription offer, the transactions
by underwriters during the subscription period, the amount of unsubscribed
securities that the underwriters will purchase and the terms of any later
reoffering.
(5) If the underwriters make any public offering of the securities on
terms different from those on the cover page of the prospectus, file a
post-effective amendment to state the terms of such offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(f) RULE 430A.
The Registrant hereby undertakes that it will (i) for determining any
liability under the Securities Act, treat the information omitted from the
form of prospectus filed as a part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act
as a part of this Registration Statement as of the time the Commission
declared it effective, and (ii) for determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in
the registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
II-V
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
hereby certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned
in the City of Oklahoma City, State of Oklahoma, on the 8th day of
November, 1996.
ADVANTAGE MARKETING SYSTEMS, INC.
(Registrant)
By: /S/JOHN W. HAIL
-------------------------------------
John W. Hail, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/S/JOHN W. HAIL Chairman of the Board, Chief November 8, 1996
- ------------------------ Executive Officer and Director
John W. Hail
CURTIS H. WILSON, SR.* Vice-Chairman of the Board November 8, 1996
- ------------------------ and Director
Curtis H. Wilson, Sr.
/S/ROGER P. BARESEL President, Chief Financial November 8, 1996
- ------------------------ Officer and Director
Roger P. Baresel
R. TERREN DUNLAP* Vice President-International November 8, 1996
- ------------------------ Division and Director
R. Terren Dunlap
HARLAND C. STONECIPHER* Director November 8, 1996
- ------------------------
Harland C. Stonecipher
By: /S/JOHN W. HAIL November 8, 1996
- ------------------------------
John W. Hail, Attorney-in-Fact
II-VI
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
2.1 Agreement and Plan of Merger between Registrant and
AMS, 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 The Registrant's Certificate of Incorporation.*
3.2 The Registrant's Bylaws.*
4.1 Certificate of Common Stock of the Registrant.*
4.2 Class A Common Stock Purchase Warrant Certificate.*
4.3 Class B Common Stock Purchase Warrant Certificate.*
4.4 Warrant Agreement between Registrant and U.S. Stock
Transfer Inc.*
4.5 1996-A Warrant Certificate.
4.6 Warrant Agreement between Registrant and U.S. Stock
Transfer Inc.
4.7 Letter dated June 8, 1990, addressed to U.S. Stock
Transfer, Inc. extending the expiration dates of
Registrant's Class A Common Stock Purchase Warrants
and Class B Common Stock Purchase Warrants.*
4.8 Letter dated October 22, 1990, addressed to U.S.
Stock Transfer,Inc. extending the expiration dates
of Registrant's Class A Common Stock Purchase Warrants
and Class B Common Stock Purchase Warrants.*
4.9 Letter dated July 15, 1991, addressed to U.S. Stock
Transfer, Inc. extending the expiration dates of
Registrant's Class A Common Stock Purchase Warrants
and Class B Common Stock Purchase Warrants.*
4.10 Letter dated July 10, 1993, addressed to U.S. Stock
Transfer, Inc. extending the expiration dates of
Registrant's Class A Common Stock Purchase Warrants
and Class B Common Stock Purchase Warrants.*
4.11 Letter dated June 14, 1994, addressed to U.S. Stock
Transfer, Inc. extending the expiration dates of
Registrant's Class A Common Stock Purchase Warrants
and Class B Common Stock Purchase Warrants.*
4.12 Letter dated June 14, 1995, addressed to U.S. Stock
Transfer, Inc. extending the expiration dates of
Registrant's Class A Common Stock Purchase Warrants
and Class B Common Stock Purchase Warrants.*
4.13 Stock Purchase Agreement having an effective date
of May 31, 1996, between the Registrant, Miracle
Mountain International, Inc., Richard Seaton, Gene
Burson, Kaye Jennings, Daryl Burson, James Rogers.*
4.14 Stock Rights Agreement between Registrant and U.S.
Stock Transfer Inc.
4.15 Non-Transferrable Stock Rights Certificate.
<PAGE>
5.1 Opinion of Dunn Swan & Cunningham, A Professional
Corporation, counsel to Registrant, regarding legality
of the securities covered by this Registration Statement.
5.2 Opinion of Dunn Swan & Cunningham, A Professional
Corporation, counsel to Registrant, regarding certain
federal income tax consequences.
10.1 Advantage Marketing Systems, Inc. 1995 Stock Option
Plan.*
10.2 Agreement between Registrant and Consumer Benefit
Services, Inc.*
10.3 Agreement between Registrant and Advanced Products, Inc.*
10.4 Agreement between Registrant and J&K Pharmaceutical
Laboratories.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel.
24.1 Power of Attorney of John Hail.*
24.2 Power of Attorney of Curtis H. Wilson, Sr.*
24.3 Power of Attorney of Roger P. Baresel.*
24.4 Power of Attorney of R. Terren Dunlap.*
24.5 Power of Attorney of Harland C. Stonecipher.*
______________________________________________________
*Previously furnished.
2
<PAGE>
EXHIBIT 4.5
VOID (UNLESS EXTENDED) AFTER 5:00 P.M. CENTRAL STANDARD TIME
ON OCTOBER 30, 1998
ADVANTAGE MARKETING SYSTEMS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF OKLAHOMA
1996-A WARRANTS
WARRANTS
----------------
| |
----------------
CUSIP
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
or registered assigns, is the registered holder of the number of 1996-A
Warrants (the "Warrants") set forth above. Each Warrant entitles the holder
thereof to purchase from Advantage Marketing Systems, Inc., a corporation
incorporated under the laws of the State of Oklahoma (the "Company"), subject to
the terms and conditions set forth hereinafter and in the Warrant Agreement
hereinafter referred to, one fully paid and nonassessable share of Common Stock,
$.0001 par value, of the Company (the "Common Stock") upon presentation and
surrender of this Warrant Certificate with the instructions for the registration
and delivery of Common Stock filed in, at any time after , 1997, and
prior to 5:00 p.m. Central Standard time time ("close of business"), on October
31, 1998, at the stock transfer office in Glendale, California, of U.S. Stock
Transfer Corp., Warrant Agent of the Company ("Warrant Agent") or of its
successor warrant agent or, if there be no successor warrant agent, at the
corporate offices of the Company, and upon payment of $12.00 per share (the
"Purchase Price") and any applicable taxes paid either in cash, or by certified
or official bank check, payable in lawful money of the United States of America
to the order of the Company. Each Warrant entitles the holder initially to
purchase one share of Common Stock at the Purchase Price. The number and kind
of securities or other property for which the Warrants are exercisable are
subject to further adjustment in certain events, such as mergers, splits, stock
dividends, recapitalization and the like. At any time, upon not less than 30
days' notice (the "Notice Period"), the Company may at its option redeem all
unexercised Warrants for $.0001 per Warrant at any time after expiration of the
Notice Period before the Expiration Date. In the event the Company exercises
its right to redeem the Warrants, the Warrants will be exercisable until close
of business on the business day immediately preceding the date fixed for
redemption in such notice. All Warrants not theretofore exercised or redeemed
will expire on October 31, 1998.
This Warrant Certificate is subject to all of the terms, provisions and
conditions of the Warrant Agreement, dated as of , 1996 (the
"Warrant Agreement"), between the Company and the Warrant Agent, to all of which
terms, provisions and conditions the registered holder of this Warrant
Certificate consents by acceptance hereof. The Warrant Agreement is
incorporated herein by reference and made a part hereof, and reference is made
to the Warrant Agreement for a full description of the rights, limitations of
rights, obligations, duties and immunities of the Warrant Agent, the Company and
the holders of this Warrant Certificates. Copies of the Warrant Agreement are
available for inspection at the stock transfer office of the Warrant Agent or
may be obtained upon written request addressed to the Warrant Agent at its stock
transfer office at 1745 Gardena Avenue, Suite 200, Glendale, California 91204-
2991.
<PAGE>
The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of the Warrants, Common
Stock or other Securities, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.
In certain cases, the sale of securities by the Company upon exercise
of the Warrants would violate the securities laws of the United States, certain
states thereof or other jurisdictions. The Company has agreed to use its best
efforts to cause a registration statement to be effective during the term of the
Warrants with respect to such sales under the Securities Act of 1933, and to
take such action under the laws of various states as may be required to cause
the sale of securities upon exercise to be lawful. However, the Company will
not be required to honor the exercise of Warrants if, in the opinion of the
Board of Directors, upon advice of counsel, the sale of securities upon such
exercise would be unlawful in certain cases, the Company may, but is not
required to, purchase Warrants submitted for exercise for a cash price equal to
the difference between the market price of the securities obtainable upon such
exercise and the exercise price of such Warrants.
This Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the absence
of any successor warrant agent, at the corporate offices of the Company, may be
exchanged for another Warrant Certificate or Certificates evidencing in the
aggregate the same number of Warrants as the Warrant Certificate or Certificates
so surrendered. If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon surrender
hereof another Warrant Certificate or Certificates evidencing the number of
Warrants not so exercised.
No holder of this Warrant Certificate, as such, shall be entitled to
vote, receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatever, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder of this Warrant
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof or give or withhold consent to any corporate
action (whether upon any recapitalization, issuance of stock, reclassification
of stock, change of par value or change of stock to no par value, consolidation,
merger, conveyance or otherwise) or to receive notice of meetings or other
actions affecting stockholders (except as provided in the Warrant Agreement) or
to receive dividends or subscription rights or otherwise until the Warrants
evidenced by this Warrant Certificate shall have been exercised and the Common
Stock purchasable upon the exercise thereof shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books of the Company's Common stock or
other class of stock purchasable upon the exercise of the Warrants evidenced by
this Warrant Certificate are closed for any purpose, the Company shall not be
required to make delivery of certificates for shares purchasable upon such
transfer until the date of the reopening of said transfer books.
Every holder of this Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent, and every other holder of a
Warrant Certificate that (i) this Warrant Certificate is transferable on the
registry books of the Warrant Agent only upon the terms and conditions set forth
in the Warrant Agreement, and (ii) the Company and the Warrant Agent may deem
and treat the person in whose name this Warrant Certificate is registered as the
absolute owner hereof (notwithstanding any notation of ownership or other
writing thereon made by anyone other than the Company or the Warrant Agent) for
all purposes whatever, and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.
The Company shall not be required to issue or deliver any certificate
for shares of Common Stock or other securities upon the exercise of Warrants
evidenced by this Warrant Certificate until any tax which may be payable in
respect thereof by the holder of this Warrant Certificate pursuant to the
Warrant Agreement shall have been paid, such tax being payable by the holder of
this Warrant Certificate at the time of surrender.
2
<PAGE>
This Warrant Certificate shall not be valid or obligatory for any purposes
until it shall have been countersigned by the Warrant Agent.
Dated:
ADVANTAGE MARKETING SYSTEMS, INC.
/S/ John W. Hail
Chairman and Chief Executive Officer
/S/ Roger P. Baresel
Secretary
Countersigned:
U.S. STOCK TRANSFER CORP.
1745 Gardena Avenue, Suite 200
Glendale, California 91024-2991
By:
Warrant Agent Authorized Signature
3
<PAGE>
SUBSCRIPTION
(TO BE EXECUTED BY THE WARRANT HOLDER IF HE DESIRES TO EXERCISE
THE WARRANT IN WHOLE OR IN PART)
To: ADVANTAGE MARKETING SYSTEMS, INC.
The undersigned (_________________________________________________________)
Please insert Social Security or other number of Subscriber
hereby irrevocably elects to exercise the right of purchase represented
by the within Warrant Certificate for, and to purchase thereunder,
_______________ shares of Common Stock provided for therein and tenders payment
herewith to the order of ADVANTAGE MARKETING SYSTEMS, INC. in the amount of
$________________. The undersigned requests that certificates for such shares
of Common Stock be issued as follows:
Name: _______________________________________________________________________
Address: ____________________________________________________________________
Deliver to: _________________________________________________________________
Address: ____________________________________________________________________
and if said number of shares of Common Stock shall not be all the shares
of Common Stock purchasable hereunder, that a new Warrant Certificate for the
balance remaining of shares of Common Stock purchasable under the within Warrant
Certificate be registered in the name of, and delivered to the undersigned at
the address stated below:
Address: ____________________________________________________________________
Dated: ____________________, 199__ Signature
_____________________________________
(Signature must conform in all respects
to the name of Warrant Holder as
specified in the case of this Warrant
Certificate in every particular,
without alteration, enlargement or any
change whatever.)
ASSIGNMENT
(TO BE SIGNED ONLY UPON ASSIGNMENT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
______________________________________________________________________________
______________________________________________________________________________
Warrants evidenced by the within Warrant Certificate, and appoints
______________________________________________________________________________
Attorney to transfer said Warrant Certificate and Warrants on the books of
Advantage Marketing Systems, Inc. with the full power of substitution in the
premises.
Dated: ____________________, 199__
In the presence of:
__________________________________
Signature Guaranteed: _____________________________________
(Signature must conform in all respects
to the name of Warrant Holder as
specified on the face of this Warrant
Certificate in every particular,
without alteration, enlargement or any
change whatsoever, and the signature
must be guaranteed in the usual manner)
4
<PAGE>
EXHIBIT 4.6
WARRANT AGREEMENT
BETWEEN
ADVANTAGE MARKETING SYSTEMS, INC.
AND
U.S. STOCK TRANSFER CORP.
DATED AS OF , 1996
THIS WARRANT AGREEMENT, dated as of , 1996, is between Advantage
Marketing Systems, Inc., an Oklahoma corporation (the "Company"), and U.S. Stock
Transfer Corp. (the "Warrant Agent").
WHEREAS, the Company, at or about the time that it is entering into this
Agreement, proposes to (i) offer, issue and sell to the holders of Class A
Common Stock Purchase Warrants and Class B Common Stock Purchase Warrants (the
"Public Warrants") pursuant to modification of the terms of the Public Warrants
(the "Warrant Modification Offering") up to 1,050,470 units (each referred to
herein as the "Unit" and collectively as the "Units"), each consisting of one
share of Common Stock, $.0001 par value (the "Common Stock") and one 1996-A
Warrant (each referred to herein as the "Warrant," or collectively as the
"Warrants") and (i) offer, issue and distribute to the Company's shareholders
non-transferable rights (the "Rights") entitling the holders of the Rights to
purchase 2,148,191 Units (the "Rights Offering"). The Warrant Modification
Offering and the Rights Offering are collectively referred to herein as the
"Offering." In connection with the Offering, the Company proposes to offer,
issue and sell 3,198,661 Warrants, each Warrant represents the right to purchase
one share of Common Stock for $12.00 per share, upon the terms and conditions
and subject to adjustment in certain circumstances (the "Purchase Price"), all
as set forth in this Agreement;
WHEREAS, the Company desires to retain the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Warrants to be issued under this Agreement (the "Warrant Certificates") and the
exercise of the Warrants; and
WHEREAS, the Company desires to enter into this Agreement to set forth the
terms and conditions of the Warrants and the rights of the holders thereof and
to set forth the respective rights and obligations of the Company and the
Warrant Agent.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT. The Company appoints the Warrant
Agent to act as agent for the Company in accordance with the instructions in
this Agreement, and the Warrant Agent accepts such appointment.
SECTION 2. DATE, DENOMINATION AND EXECUTION OF WARRANT CERTIFICATES. The
Warrant Certificates (and the Subscription Form and the Form of Assignment to be
printed on the reverse thereof) shall be in registered form only and shall be
substantially of the tenor and purport recited in Exhibit A hereto, and may have
such letters, numbers or other marks of identification or designation and such
legends, summaries or endorsements printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any law, or with any
rule or regulation made
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pursuant thereto, or with any rule or regulation of any stock exchange on which
the Common Stock or Warrants may be listed, or to conform to usage. Each Warrant
Certificate shall entitle the registered holder thereof, subject to the
provisions of this Agreement and of the Warrant Certificate, to purchase after
, 1996 and on or before the close of business on November 30,
1998 (the "Expiration Date"), one fully paid and non-assessable share of Common
Stock for each Warrant evidenced by such Warrant Certificate, at a price per
share described in Section 6 hereof (the "Purchase Price"). At any time on or
before expiration of the Expiration Date, the previously established Expiration
Date may be extended without limitation and as many times as the Company shall
determine in its sole and absolute discretion. In the event the Expiration Date
is extended, the Company shall promptly provide written notice to the holders of
the Warrants of the extended Expiration Date. Each Warrant Certificate issued as
a part of the Offering shall be dated the date of the Final Prospectus which
forms a part of the Registration Statement on Form SB-2 pursuant to which the
Units, shares of Common Stock and Warrants are registered under the Securities
Act of 1933, as amended; each other Warrant Certificate shall be dated the date
on which the Warrant Agent receives valid issuance instructions from the Company
or, if such instructions specify another date, such other date.
For purposes of this Agreement, the term "close of business" on any given date
shall mean 5:00 p.m., Central Standard time, on such date; provided, however,
that if such date is not a business day, it shall mean 5:00 p.m., Central
Standard time, on the next succeeding business day. For purposes of this
Agreement, the term "business day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in New York City, New York, are
authorized or obligated by law to be closed.
Each Warrant Certificate shall be executed on behalf of the Company by its
Chairman of the Board, its Chief Executive Officer, its President or a Vice
President, either manually or by facsimile signature printed thereon, and shall
be attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. Each Warrant Certificate shall be manually
countersigned by the Warrant Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
Warrant Certificate shall cease to be such officer of the Company before
countersignature by the Warrant Agent and issue and delivery thereof by the
Company, such Warrant Certificate, nevertheless, may be countersigned by the
Warrant Agent, issued and delivered with the same force and effect as though the
person who signed such Warrant Certificate had not ceased to be such officer of
the Company.
SECTION 3. SUBSEQUENT ISSUE OF WARRANT CERTIFICATES. Subsequent to their
original issuance, no Warrant Certificates shall be reissued except (i) Warrant
Certificates issued upon transfer thereof in accordance with Section 4 hereof,
(ii) Warrant Certificates issued upon any combination, split-up, or exchange of
Warrant Certificates pursuant to Section 4 hereof, (iii) Warrant Certificates
issued in replacement of mutilated, destroyed, lost or stolen Warrant
Certificates pursuant to Section 5 hereof, (iv) Warrant Certificates issued upon
the partial exercise of Warrant Certificates pursuant to Section 7 hereof, and
(v) Warrant Certificates issued pursuant to Section 22 hereof to reflect any
adjustment or change in the Purchase Price or the number or kind of shares
purchasable thereunder. The Warrant Agent is hereby irrevocably authorized to
countersign and deliver, in accordance with the provisions of Sections 4, 5, 7
and 22, the new Warrant Certificates required for purposes thereof, and the
Company, whenever required by the Warrant Agent, will supply the Warrant Agent
with Warrant Certificates duly executed on behalf of the Company for such
purposes.
SECTION 4. TRANSFERS AND EXCHANGES OF WARRANT CERTIFICATES. The Warrant Agent
shall keep or cause to be kept books for registration of ownership and transfer
of the Warrant Certificates issued in accordance with this Agreement. Such
registers shall show the names and addresses of the respective holders of the
Warrant Certificates and the number of Warrants evidenced by each such Warrant
Certificate.
The Warrant Agent shall, from time to time, register the transfer of
any outstanding Warrants upon the books to be maintained by the Warrant Agent
for that purpose, upon surrender of the Warrant Certificate evidencing such
Warrants, with the Form of Assignment duly filled in and executed, to the
Warrant Agent at its stock transfer office in Glendale, California, at any time
on or before the Expiration Date, and upon payment to the Warrant
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Agent for the account of the Company of an amount equal to any applicable
transfer tax. Payment of the amount of such tax may be made in cash, or by
certified or official bank check, payable in lawful money of the United States
of America to the order of the Company.
Upon receipt of a Warrant Certificate, with the Form of Assignment
duly filled in and executed, accompanied by payment of an amount equal to any
applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered
Warrant Certificate and countersign and deliver to the transferee a new Warrant
Certificate for the number of full Warrants transferred to such transferee;
provided, however, that in case the registered holder of any Warrant Certificate
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shall elect to transfer fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent in addition shall promptly countersign and
deliver to such registered holder a new Warrant Certificate or Certificates for
the number of full Warrants not so transferred.
Any Warrant Certificate or Certificates may be exchanged at the option
of the holder thereof for another Warrant Certificate or Certificates of
different denominations, of like tenor and representing in the aggregate the
same number of Warrants, upon surrender of such Warrant Certificate or
Certificates, with the Form of Assignment duly filled in and executed, to the
Warrant Agent, at any time or from time to time after the close of business on
the date hereof and prior to the close of business on the Expiration Date. The
Warrant Agent shall promptly cancel the surrendered Warrant Certificate and
deliver the new Warrant Certificate pursuant to the provisions of this Section.
SECTION 5. MUTILATED, DESTROYED, LOST OR STOLEN WARRANT CERTIFICATES. Upon
receipt by the Company and the Warrant Agent of evidence reasonably satisfactory
to them of the loss, theft, destruction or mutilation of any Warrant
Certificate, and in the case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to them of all
reasonable expenses incidental thereto, and in the case of mutilation, upon
surrender and cancellation of the Warrant Certificate, the Warrant Agent shall
countersign and deliver a new Warrant Certificate of like tenor for the same
number of Warrants.
SECTION 6. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE. The number
and kind of securities or other property purchasable upon exercise of a Warrant
shall be subject to adjustment from time to time upon the occurrence, after the
date hereof, of the following events:
6.1 In case the Company shall, other than in connection with the
Offering, (i) pay a dividend in, or make a distribution of, shares of Common
Stock or of capital stock convertible into Common Stock on its outstanding
Common Stock ("Stock Dividend"), (ii) subdivide its outstanding shares of Common
Stock into a greater number of such shares ("Forward Split") or (iii) combine
its outstanding shares of Common Stock into a smaller number of such shares
("Reverse Split"), the total number of shares of Common Stock and the number of
shares of capital stock convertible into Common Stock purchasable upon the
exercise of each Warrant outstanding immediately prior thereto shall be adjusted
so that the holder of any Warrant Certificate thereafter surrendered for
exercise shall be entitled to receive at the same aggregate Purchase Price the
number of shares of Common Stock and the number of shares of capital stock
convertible into Common Stock which such holder would have owned or have been
entitled to receive immediately following the happening of any of the events
described above had such Warrant been exercised in full immediately prior to the
happening of such event. Any adjustment made pursuant to this Subsection shall,
in the case of a Stock Dividend, become effective as of the record date therefor
and, in the case of a Forward Split or Reverse Split, be made as of the
effective date thereof. If, as a result of an adjustment made pursuant to this
Subsection, the holder of any Warrant thereafter surrendered for exercise shall
become-entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive and shall be evidenced by a Board resolution filed with the Warrant
Agent) shall determine the allocation of the adjusted Purchase Price between or
among shares of such classes of capital stock.
6.2 In the event of any adjustment of the total number of shares of
Common Stock purchasable upon the exercise of Warrants pursuant to Subsection
6.1, the Purchase Price of each such Warrant shall remain
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unchanged, but the number of shares of capital stock obtainable on exercise of
each such Warrant shall be adjusted as provided in Subsection 6.1.
6.3 In the event of a capital reorganization or a reclassification of
the Common Stock (except as provided in Subsection 6.1 or Subsection 6.5), any
holder of Warrants, upon exercise thereof, shall be entitled to receive, in lieu
of the Common Stock to which he would have become entitled upon exercise
immediately prior to such reorganization or reclassification, the shares (of any
class or classes) or other securities or property of the Company (or cash) that
he would have been entitled to receive at the same aggregate Purchase Price upon
such reorganization or reclassification if the Warrants held had been exercised
immediately prior thereto; and in any such case, appropriate provision (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and shall be evidenced by a Board resolution filed with the
Warrant Agent) shall be made for the application of this Section 6 with respect
to the rights and interests thereafter of the holders of Warrants (including,
but not limited to, the allocation of the Purchase Price between or among shares
of classes of capital stock), to the end that this Section 6 (including the
adjustments of the number of shares of Common Stock or other securities
purchasable) shall thereafter be reflected, as nearly as reasonably practicable,
in all subsequent exercises of the Warrants for any shares or securities or
other property (or cash) thereafter deliverable upon the exercise of the
Warrants.
6.4 Whenever the number of shares of Common Stock or other securities
purchasable upon exercise of a Warrant is adjusted as provided in this Section
6, the Company will promptly file with the Warrant Agent a certificate signed by
the Chairman of the Board, Chief Executive Officer or the President, or a Vice
President of the Company and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Company setting forth (i) the number
and kind of shares purchasable, as so adjusted, (ii) stating that such
adjustments in the number or kind of shares or other securities conform to the
requirements of this Section 6, and (iii) setting forth a brief statement of the
facts accounting for such adjustments. Such certificates shall be conclusive
evidence of the correctness of such adjustments. Promptly after receipt of such
certificate, the Company, or the Warrant Agent at the Company's request, will
deliver, by first-class, postage prepaid mail, a brief summary thereof (to be
supplied by the Company) to the registered holders of the outstanding Warrant
Certificates; provided, however, that failure to file or to give any notice
-----------------
required under this Subsection, or any defect therein, shall not affect the
legality or validity of any such adjustments under this Section 6; and provided
--------
further, that, where appropriate, such notice may be given in advance and
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included as part of the notice required to be given pursuant to Section 12
hereof.
6.5 In case of any consolidation of the Company with, or merger of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the corporation formed by such consolidation or
merger or the corporation which shall have acquired such assets, as the case may
be, shall execute and deliver to the Warrant Agent a supplemental warrant
agreement providing that the holder of each Warrant then outstanding shall have
the right thereafter (until the expiration of such Warrant) to receive, upon
exercise of such Warrant, solely the kind and amount of shares of stock and
other securities and property (or cash) receivable upon such consolidation,
merger, sale or transfer by a holder of the number of shares of Common Stock of
the Company for which such Warrant might have been exercised immediately prior
to such consolidation, merger, sale or transfer. Such supplemental warrant
agreement shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided in this Section 6. The above
provision of this Subsection 6.5 shall similarly apply to successive
consolidations, mergers, sales or transfers.
The Warrant Agent shall not be under any responsibility to determine
the correctness of any provision contained in any such supplemental warrant
agreement relating to either the kind or amount of shares of stock or securities
or property (or cash) purchasable by holders of Warrant Certificates upon the
exercise of their Warrants after any such consolidation, merger, sale or
transfer or of any adjustment to be made with respect thereto, and (subject to
the provisions of Section 20 hereof) may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants with respect
thereto.
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6.6 Irrespective of any adjustments in the number or kind of shares
issuable upon exercise of Warrants, Warrant Certificates theretofore or
thereafter issued may continue to express the same price and number and kind of
shares as are stated in the similar Warrant Certificates initially issuable
pursuant to this Warrant Agreement.
6.7 The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company or the Executive Committee of
said Board to make any computation required under this Section, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Section 6.
6.8 For the purpose of this Section, the term "Common Stock" shall
mean (i) the class of stock designated as Common Stock in the Certificate of
Incorporation of the Company, as amended, at the date of this Agreement, or (ii)
any other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from no par
value to par value, or from par value to no par value. In the event that at any
time as a result of an adjustment made pursuant to this Section 6, the holder of
any Warrant thereafter surrendered for exercise shall become entitled to receive
any shares of capital stock of the Company other than shares of Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Section, and all other provisions of this
Agreement, with respect to the Common Stock, shall apply on like terms to any
such other shares.
6.9 The Purchase Price may be reduced by the Company at any time,
temporarily or during the remaining period of exercise of the Warrants as
determined in the discretion of the Company, with respect to the Common Stock or
any other securities purchasable upon exercise of the Warrants. In the event
the Purchase Price is reduced in accordance with this Section 6.9, the Company
shall promptly provide written notice to the holders of the Warrants of the
reduced Purchase Price, the period that the Warrants will be exercisable at the
reduced Purchase Price, and the securities purchasable at the reduced Purchase
Price.
SECTION 7. EXERCISE AND REDEMPTION OF WARRANTS. Unless the Warrants have been
redeemed as provided in this Section 7, the registered holder of any Warrant
Certificate may exercise the Warrants evidenced thereby, in whole at any time or
in part from time to time at or prior to the close of business, on the
Expiration Date, subject to the provisions of Section 9, at which time the
Warrant Certificates shall be and become wholly void and of no value. Warrants
may be exercised by their holders or redeemed by the Company as follows:
7.1 Exercise of Warrants shall be accomplished upon surrender of the
Warrant Certificate evidencing such Warrants, with the Subscription Form on the
reverse side thereof duly filled in and executed, to the Warrant Agent at its
stock transfer office in Glendale, California, together with payment to the
Company of the Purchase Price (as of the date of such surrender) of the Warrants
then being exercised and an amount equal to any applicable transfer tax and, if
requested by the Company, any other taxes or governmental charges which the
Company may be required by law to collect in respect of such exercise. Payment
of the Purchase Price and other amounts may be made in cash, or by certified or
official bank check, payable in lawful money of the United States of America to
the order of the Company. No adjustment shall be made for any cash dividends,
whether paid or declared, on any securities issuable upon exercise of a Warrant.
7.2 Upon receipt of a Warrant Certificate, with the Subscription Form
duly filled in and executed, accompanied by payment of the Purchase Price of the
Warrants being exercised (and of an amount equal to any applicable taxes or
government charges as aforesaid), the Warrant Agent shall promptly request from
the Transfer Agent with respect to the securities to be issued and deliver to or
upon the order of the registered holder of such Warrant Certificate, in such
name or names as such registered holder may designate, a certificate or
certificates for the number of full shares of the securities to be purchased,
together with cash made available by the Company pursuant to Section 8 hereof in
respect of any fraction of a share of such securities otherwise issuable upon
such exercise. If the Warrant is then exercisable to purchase property other
than securities, the Warrant Agent shall take appropriate steps
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to cause such property to be delivered to or upon the order of the registered
holder of such Warrant Certificate. In addition, if it is required by law, the
Warrant Agent will deliver to each warrant holder a prospectus which complies
with the provisions of Section 9 of the Securities Act of 1933, as amended, and
the Company agrees to supply the Warrant Agent with sufficient number of
prospectuses for that purpose.
7.3 In case the registered holder of any Warrant Certificate shall
exercise fewer than all of the Warrants evidenced by such Warrant Certificate,
the Warrant Agent shall promptly countersign and deliver to the registered
holder of such Warrant Certificate, or to his duly authorized assigns, a new
Warrant Certificate or Certificates evidencing the number of Warrants that were
not so exercised.
7.4 Each person in whose name any certificate for securities is issued
upon the exercise of Warrants shall for all purposes be deemed to have become
the holder of record of the securities represented thereby as of, and such
certificate shall be dated, the date upon which the Warrant Certificate was duly
surrendered in proper form and payment of the Purchase Price (and of any
applicable taxes or other governmental charges) was made; provided,
--------
however, that if the date of such surrender and payment is a date on
- -------
which the stock transfer books of the Company are closed, such person shall be
deemed to have become the record holder of such shares as of, and the
certificate for such shares shall be dated, the next succeeding business day on
which the stock transfer books of the Company are open (whether before, on or
after the Expiration Date), and the Warrant Agent shall be under no duty to
deliver the certificate for such shares until such date. The Company covenants
and agrees that it shall not cause its stock transfer books to be closed for a
period of more than 20 consecutive business days except upon consolidation,
merger, sale of all or substantially all of its assets, dissolution or
liquidation or as otherwise provided by law.
7.5 The Warrants outstanding at the time of a redemption may be
redeemed at the option of the Company, in its sole and absolute discretion and
in whole but not in part, at any time on not less than 30 days'(the "Notice
Period") written notice to the holders of such Warrants at a price equal to
$.0001 per Warrant (the "Redemption Price"). 'In
the event the Company exercises its right to redeem the Warrants, the Warrants
will be exercisable until the close of business of the business day immediately
preceding the date fixed for redemption in such notice (the "Redemption Date").
On the Redemption Date the holders of record of the Warrants shall be entitled
to payment of the Redemption Price upon surrender of such redeemed Warrants to
the Company at the stock transfer office of the Warrant Agent in Glendale,
California.
7.6 Notice of redemption of Warrants shall be given at least 30 days
prior to the Redemption Date by mailing, by registered or certified mail, return
receipt requested, a copy of such notice to all of the holders of record of
Warrants at their respective addresses appearing on the books or transfer
records of the Company or such other address designated in writing by the holder
of record to the Warrant Agent not less than 40 days prior to the Redemption
Date. The notice of redemption shall specify the Redemption Price to be paid,
the name and address of the Warrant Agent, the intention of the Company to
deposit the Redemption Price with the Warrant Agent on or before the Redemption
Date, and that the right to exercise the Warrants shall terminate at 5:00 p.m.
Central Standard City time on the business day immediately preceding the
Redemption Date.
7.7 From and after the Redemption Date, all rights of the holders of
Warrants (except the right to receive the Redemption Price) shall terminate, but
only if (i) on or prior to the Redemption Date the Company shall have
irrevocably deposited with the Warrant Agent as paying agent a sufficient amount
to pay on the Redemption Date the Redemption Price for all Warrants called for
redemption and (ii) the notice of redemption shall have stated the name and
address of the Warrant Agent and the intention of the Company to deposit such
amount with the Warrant Agent on or before the Redemption Date.
7.8 The Warrant Agent shall pay to the holders of record of redeemed
Warrants all moneys received by the Warrant Agent for the redemption of Warrants
to which the holders of record of such redeemed Warrants who shall have
surrendered their Warrants are entitled.
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7.9 Any amounts deposited with the Warrant Agent that are not required
for redemption of Warrants may be withdrawn by the Company. Any amounts
deposited with the Warrant Agent that shall be unclaimed during the six months
following the Redemption Date may be withdrawn by the Company, and thereafter
the holders of the Warrants called for redemption for which such funds were
deposited shall look solely to the Company for payment. The Company shall be
entitled to the interest, if any, on funds deposited with the Warrant Agent, and
the holders of redeemed Warrants shall have no right to any such interest.
7.10 If the Company fails to make a sufficient deposit with the Warrant Agent
as provided above, the holder of any Warrants called for redemption may at the
option of the holder (i) by notice to the Company declare the notice of
redemption a nullity as to such holder or (ii) proceed against the Company for
the Redemption Price. If the holder brings an action against the Company for the
Redemption Price, the Company will pay reasonable attorneys' fees of the holder.
If the holder fails to bring an action against the Company for the Redemption
Price within 60 days after the Redemption Date, the holder shall be deemed to
have elected to declare the notice of redemption to be a nullity as to such
holder, and such notice shall be without any force or effect as to such holder.
SECTION 8. FRACTIONAL INTERESTS. The Company shall not be required to issue
any Warrant Certificate evidencing a fraction of a Warrant or to issue fractions
of shares of securities on the exercise of the Warrants. If any fraction
(calculated to the nearest one-hundredth) of a Warrant or a share of securities
would, except for the provisions of this Section, be issuable on the exercise of
any Warrant, the Company shall purchase such fraction for an amount in cash
equal to the current value of such fraction computed on the basis of the quoted
closing high bid price on the trading day immediately preceding the day upon
which such Warrant Certificate was surrendered for exercise in accordance with
Section 7 hereof. By accepting a Warrant Certificate, the holder thereof
expressly waives any right to receive a Warrant Certificate evidencing any
fraction of a Warrant or to receive any fractional share of securities upon
exercise of a Warrant.
SECTION 9. RESERVATION OF SECURITIES AND PROPERTY; REGISTRATION OF SECURITIES.
The Company covenants that it will at all times, solely for the purpose of
issuance and delivery upon exercise of the Warrants, reserve and keep available,
free from preemptive and other rights, out of its authorized and unissued shares
of Common Stock, such number of shares of Common Stock as shall then be issuable
and all other securities and property as shall then be deliverable upon the
exercise of all outstanding Warrants. The Company covenants that all securities
which shall be so issuable shall, upon such issue, be duly authorized, validly
issued, fully paid and non-assessable.
The Company covenants that if any securities, required to be reserved
for the purpose of issue upon exercise of the Warrants hereunder, require
registration with or approval of any governmental authority under any federal or
state law before such securities may be issued upon exercise of Warrants, the
Company will in good faith and as expeditiously as possible endeavor to cause
such securities to be duly registered, or approved, as the case may be, and, to
the extent practicable, take all such action in anticipation of and prior to the
exercise of the Warrants, including, without limitation, filing a Registration
Statement on the appropriate form and all post-effective amendments to such
Registration Statement necessary to permit a public offering of the securities
underlying the Warrants at any and all times during the term of the Warrants;
provided, however, that in no event shall such securities be issued, and the
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Company is authorized to refuse to honor the exercise of any Warrant, if such
exercise would result in the opinion of the Company's Board of Directors, upon
advice of counsel, in the violation of any law; and provided further that, in
----------------
the case of a Warrant exercisable solely for securities listed on a securities
exchange or for which there are at least two independent market makers, in lieu
of obtaining such registration or approval, the Company may elect to redeem
Warrants submitted to the Warrant Agent for exercise for a price equal to the
difference between the aggregate low asked price, or closing price, as the case
may be, of the securities for which such Warrant is exercisable on the date of
such submission and the Purchase Price of such Warrants. In the event of such
redemption, the Company will pay to the holder of such Warrants the above-
described redemption price in cash within 10 business days after receipt of
notice from the Warrant Agent that such Warrants have been submitted for
exercise.
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SECTION 10. REDUCTION OF CONVERSION PRICE BELOW PAR VALUE. Before taking any
action that would cause an adjustment pursuant to Section 6 hereof reducing the
portion of the Purchase Price required to purchase one share of capital stock
below the then par value (if any) of a share of such capital stock, the Company
will use its best efforts to take any corporate action which, in the opinion of
its counsel, may be necessary in order that the Company may validly and legally
issue fully paid and non-assessable shares of such capital stock.
SECTION 11. PAYMENT OF TAXES. The Company covenants and agrees that it will
pay when due and payable any and all federal and state documentary stamp and
other original issue taxes which may be payable in respect of the original
issuance of the Warrant Certificates, or any shares of Common Stock or other
securities upon the exercise of Warrants. The Company shall not, however, be
required (i) to pay any tax which may be payable in respect of any transfer
involved in the transfer and delivery of Warrant Certificates or the issuance or
delivery of certificates for Common Stock or other securities in a name other
than that of the registered holder of the Warrant Certificate surrendered for
purchase or (ii) to issue or deliver any certificate for shares of Common Stock
or other securities upon the exercise of any Warrant Certificate until any such
tax shall have been paid, all such tax being payable by the holder of such
Warrant Certificate at the time of surrender.
SECTION 12. NOTICE OF CERTAIN CORPORATE ACTION. In case the Company after the
date hereof shall, other than in connection with the Offering, propose (i) to
offer to the holders of Common Stock rights to subscribe to or purchase any
additional shares of any class of its capital stock, any evidences of its
indebtedness or assets, or any other rights or options or (ii) to effect any
reclassification of Common Stock (other than a reclassification involving merely
the subdivision or combination of outstanding shares of Common Stock) or any
capital reorganization, or any consolidation or merger to which the Company is a
party and for which approval of any shareholders of the Company is required, or
any sale, transfer or other disposition of its property and assets substantially
as an entirety, or the liquidation, voluntary or involuntary dissolution or
winding-up of the Company, then, in each such case, the Company shall file with
the Warrant Agent and the Company (or the Warrant Agent on its behalf) shall
mail (by first-class, postage prepaid mail) to all registered holders of the
Warrant Certificates notice of such proposed action, which notice shall specify
the date on which the books of the Company shall close or a record be taken for
such offer of rights or options, or the date on which such reclassification,
reorganization, consolidation, merger, sale, transfer, other disposition,
liquidation, voluntary or involuntary dissolution or winding-up shall take place
or commence, as the case may be, and which shall also specify any record date
for determination of holders of Common Stock entitled to vote thereon or
participate therein and shall set forth such facts with respect thereto as shall
be reasonably necessary to indicate any adjustments in the number or kind of
shares or other securities purchasable upon exercise of Warrants which will be
required as a result of such action. Such notice shall be filed and mailed in
the case of any action covered by clause (i) above, at least 10 days prior to
the record date for determining holders of the Common Stock for purposes of such
action or, if a record is not to be taken, the date as of which the holders of
shares of Common Stock of record are to be entitled to such offering; and, in
the case of any action covered by clause (ii) above, at least 20 days prior to
the earlier of the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition, liquidation, voluntary
or involuntary dissolution or winding-up is expected to become effective and the
date on which it is expected that holders of shares of Common Stock of record on
such date shall be entitled to exchange their shares for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, sale, transfer, other disposition, liquidation, voluntary or involuntary
dissolution or winding-up.
Failure to give any such notice or any defect therein shall not affect
the legality or validity of any transaction listed in this Section 12.
SECTION 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANT CERTIFICATES, ETC.
Upon the exercise, or conversion of any Warrant, the Warrant Agent shall
promptly deposit the payment into an escrow account established by mutual
agreement of the Company and the Warrant Agent at a federally insured commercial
bank. All funds deposited in the escrow account will be disbursed on a weekly
basis to the Company once they have been determined by the Warrant Agent to be
collected funds. Once the funds are determined to be collected, the Warrant
Agent shall cause the share certificate(s) representing the exercised warrants
to be issued.
8
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The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours at its stock
transfer office. Copies of this Agreement may be obtained upon written request
addressed to the Warrant Agent at its stock transfer office in Glendale,
California.
SECTION 14. WARRANT CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No holder, as
such, of any Warrant Certificate shall be entitled to vote, receive dividends or
be deemed the holder of Common Stock or any other securities of the Company
which may at any time be issuable on the exercise of the Warrants represented
thereby for any purpose whatever, nor shall anything contained herein or in any
Warrant Certificate be construed to confer upon the holder of any Warrant
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice of
meetings or other actions affecting shareholders (except as provided in Section
12 hereof), or to receive dividend or subscription rights, or otherwise, until
such Warrant Certificate shall have been exercised in accordance with the
provisions hereof and the receipt of the Purchase Price and any other amounts
payable upon such exercise by the Warrant Agent.
SECTION 15. RIGHT OF ACTION. All rights of action in respect to this Agreement
are vested in the respective registered holders of the Warrant Certificates; and
any registered holder of any Warrant Certificate, without the consent of the
Warrant Agent or of the holder of any Warrant Certificate, may, on his own
behalf for his own benefit, enforce, and may institute and maintain any suit,
action or preceding against the Company suitable to enforce, or otherwise in
respect of, the holder's right to exercise the Warrants evidenced by such
Warrant Certificate, for the purchase of shares of the Common Stock and any
other securities and property of the Company in the manner provided in the
Warrant Certificate and in this Agreement.
SECTION 16. AGREEMENT OF HOLDERS OF WARRANT CERTIFICATES. Every holder of a
Warrant Certificate, by accepting the same, consents and agrees with the
Company, the Warrant Agent and every other holder of a Warrant Certificate that:
16.1 The Warrant Certificates are transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in this Agreement;
and
16.2 The Company and the Warrant Agent may deem and treat the person in whose
name the Warrant Certificate is registered as the absolute owner of the Warrant
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes whatsoever,
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary.
SECTION 17. CANCELLATION OF WARRANT CERTIFICATES. In the event that the
Company shall purchase or otherwise acquire any Warrant Certificate or
Certificates after the issuance thereof, such Warrant Certificate or
Certificates shall thereupon be delivered to the Warrant Agent and be canceled
by it and retired. The Warrant Agent shall also cancel any Warrant Certificate
delivered to it for exercise, in whole or in part, or delivered to it for
transfer, split-up, combination or exchange. Warrant Certificates so canceled
shall be delivered by the Warrant Agent to the Company from time to time, or
disposed of in accordance with the instructions of the Company.
SECTION 18. CONCERNING THE WARRANT AGENT. The Company agrees to pay to the
Warrant Agent from time to time, on demand of the Warrant Agent, reasonable
compensation for all services rendered by it hereunder and also its reasonable
expenses and other reasonable disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Warrant Agent for, and to
hold it harmless against, any loss, liability or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Warrant Agent,
arising out of or in connection with the acceptance and administration of this
Agreement.
9
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SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT. Any
corporation into which the Warrant Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Warrant Agent shall be a party, or any corporation succeeding the
corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 21 hereof. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, any of the
Warrant Certificates shall have been countersigned but not delivered, any such
successor to the Warrant Agent may adopt the countersignature of the original
Warrant Agent and deliver such Warrant Certificates so countersigned; and in
case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrant Certificates shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrant Certificates so countersigned; and in case at that time
any of the Warrant Certificates shall not have been countersigned, the Warrant
Agent may countersign such Warrant Certificates either in its prior name or in
its changed name; and in such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in this Agreement.
SECTION 20. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrant Certificates,
by their acceptance thereof, shall be bound:
20.1 The Warrant Agent may consult with counsel satisfactory to it
(who may be counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Warrant Agent as to any
action taken, suffered or omitted by it in good faith and in accordance with
such opinion; provided, however that the Warrant Agent shall have
-----------------
exercised reasonable care in the selection of such counsel.
20.2 Whenever in the performance of its duties under this Agreement,
the Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, Chief
Executive Officer or the President or a Vice President or the Secretary of the
Company and delivered to the Warrant Agent; and such certificate shall be full
authorization to the Warrant Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
20.3 The Warrant Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
20.4 The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature on the Warrant Certificates and such
statements or recitals as describe the Warrant Agent or action taken or to be
taken by it) or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.
20.5 The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Warrant Certificate;
10
<PAGE>
nor shall it be responsible for any change in the number of shares of Common
Stock required under the provisions of Section 6 or responsible for the manner,
method or amount of any such change or the ascertaining of the existence of
facts that would require any such adjustment or change; nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock to be issued pursuant
to this Agreement or any Warrant Certificate or as to whether any shares of
Common Stock will, when issued, be validly issued, fully paid and non-
assessable.
20.6 The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or take any other action likely to involve
expense unless the Company or one or more registered holders of Warrants shall
furnish the Warrant Agent with reasonable security and indemnity, as determined
in the sole discretion of the Warrant Agent, for any costs and expenses which
may be incurred. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent, and any recovery of judgment
shall be for the ratable benefit of the registered holders of the Warrants, as
their respective rights or interests may appear.
20.7 The Warrant Agent and any shareholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
20.8 The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, Chief Executive Officer or President or a Vice President
or the Secretary of the Company, and to apply to such officers for advice or
instructions in connection with the Warrant Agent's duties, and it shall not be
liable for any action taken or suffered or omitted by it in good faith in
accordance with instructions of any such officer.
20.9 The Warrant Agent will not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.
20.10 The Warrant Agent will not incur any liability or responsibility
to the Company or to any holder of any Warrant Certificate for any action taken,
or any failure to take action, in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument reasonably
believed by the Warrant Agent to be genuine and to have been signed, sent or
presented by the proper party or parties.
20.11 The Warrant Agent will act hereunder solely as agent of the
Company in a ministerial capacity, and its duties will be determined solely by
the provisions hereof. The Warrant Agent will not be liable for anything which
it may do or refrain from doing in connection with this Agreement except for its
own negligence, bad faith or willful conduct.
SECTION 21. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be
discharged from its duties under this Agreement upon 30 days' prior notice in
writing mailed, by registered or certified mail, to the Company. The Company may
remove the Warrant Agent or any successor warrant agent upon 30 days' prior
notice in writing, mailed to the Warrant Agent or successor warrant agent, as
the case may be, by registered or certified mail. If the Warrant Agent shall
resign or be removed or shall otherwise become incapable of acting, the Company
shall appoint a successor to the Warrant Agent and shall, within 15 days
following such appointment, give notice thereof in writing to each registered
holder of the Warrant Certificates. If the Company shall fail to make such
appointment within a period of 15 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent, then the Company agrees to perform the
duties of the
11
<PAGE>
Warrant Agent hereunder until a successor Warrant Agent is appointed. After
appointment the successor Warrant Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor Warrant Agent any property at the time
held by it pursuant to this Agreement, and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose. Failure to give
any notice provided for in this Section, however, or any defect therein shall
not affect the legality or validity of the resignation or removal of the Warrant
Agent or the appointment of the successor warrant agent, as the case may be.
SECTION 22. ISSUANCE OF NEW WARRANT CERTIFICATES. Notwithstanding any of the
provisions of this Agreement or the Warrant Certificates to the contrary, the
Company may, at its option, issue new Warrant Certificates in such form as may
be approved by its Board of Directors to reflect any adjustment or change in the
number or kind of shares purchasable under the several Warrant Certificates made
in accordance with the provisions of this Agreement.
SECTION 23. NOTICES. Notice or demand pursuant to this Agreement to be given
or made on the Company by the Warrant Agent or by the registered holder of any
Warrant Certificate shall be sufficiently given or made if sent by first class
or registered mail, postage prepaid, addressed (until another address is filed
in writing by the Company with the Warrant Agent) as follows:
Advantage Marketing Systems, Inc.
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112-7293
Attention: President
Subject to the provisions of Section 21, any notice pursuant to this Agreement
to be given or made by the Company or by the holder of any Warrant Certificate
to or on the Warrant Agent shall be sufficiently given or made if sent by first
class or registered mail, postage prepaid, addressed (until another address is
filed in writing by the Warrant Agent with the Company) as follows:
U.S. Stock Transfer Corp.
1745 Gardena Avenue, Suite 200
Glendale, California 91204-2291
Attention: Stock Transfer Department
Any notice or demand authorized to be given or made to the registered
holder of any Warrant Certificate under this Agreement shall be sufficiently
given or made if sent by first class or registered mail, postage prepaid, to the
last address of such holder as it shall appear on the registers maintained by
the Warrant Agent.
SECTION 24. MODIFICATION OF AGREEMENT. The Warrant Agent may, without the
consent or concurrence of the holders of the Warrant Certificates, by
supplemental agreement or otherwise, concur with the Company in making any
changes or corrections in this Agreement that the Warrant Agent shall have been
advised by counsel (who may be counsel for the Company) are necessary or
desirable to cure any ambiguity or to correct any defective or inconsistent
provision or clerical omission or mistake or manifest error herein contained, or
to make any other provisions in regard to matters or questions arising hereunder
and which shall not be inconsistent with the provisions of the Warrant
Certificates and which shall not adversely affect the interests of the holders
of Warrant Certificates. As of the date hereof, this Agreement contains the
entire and only agreement, understanding, representation, condition, warranty or
covenant between the parties hereto with respect to the matters herein,
supersedes any and all other agreements between the parties hereto relating to
such matters, and may be modified or amended only by a written agreement signed
by both parties hereto pursuant to the authority granted by the first sentence
of this Section.
12
<PAGE>
SECTION 25. SUCCESSORS. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Warrant Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
SECTION 26. GOVERNING LAW. This Agreement and each Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Oklahoma and for all purposes shall be construed in accordance with the laws of
such state.
SECTION 27. TERMINATION. This Agreement shall terminate as of the close of
business on the Expiration Date, or such earlier date upon which all Warrants
shall have been exercised or redeemed, except that the Warrant Agent shall
account to the Company pursuant to Section 4 as to all Warrants outstanding and
all cash held by it as of the close of business on the Expiration Date.
SECTION 28. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement or in the
Warrant Certificates shall be construed to give to any person or corporation
other than the Company, the Warrant Agent, and their respective successors and
assigns hereunder and the registered holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent, their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates.
SECTION 29. DESCRIPTIVE HEADINGS. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
SECTION 30. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, all as of the day and year first above written.
ADVANTAGE MARKETING SYSTEMS, INC.
By:
--------------------------------------
Roger P. Baresel, President
U.S. STOCK TRANSFER CORP.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
13
<PAGE>
EXHIBIT 4.14
STOCK RIGHTS AGREEMENT
BETWEEN
ADVANTAGE MARKETING SYSTEMS, INC.
AND
U.S. STOCK TRANSFER CORP.
DATED AS OF , 1996
THIS STOCK RIGHTS AGREEMENT, dated as of , 1996, is between Advantage
Marketing Systems, Inc., an Oklahoma corporation (the "Company"), and U.S. Stock
Transfer Corp. (the "Subscription Agent").
WHEREAS, the Company, at or about the time that it is entering into this
Agreement, proposes to (i) offer, issue and distribute to its shareholders (the
"Rights Offering") up to 2,148,191 non-transferable rights (the "Rights"), each
exercisable to purchase one unit (each referred to herein as the "Unit" and
collectively as the "Units") consisting of one share of Common Stock, $.0001 par
value (the "Common Stock") and one 1996-A Warrant (each referred to herein as
the "Warrant" or collectively as the "Warrants") and (ii) offer, issue and sell
up to an additional 1,050,470 Units to the holders of Class A Common Stock
Purchase Warrants and Class B Common Stock Purchase Warrants pursuant to a
warrant modification offer for $6.00 per Unit (the "Warrant Modification
Offering"). The Rights Offering and the Warrant Modification Offering are
collectively referred to herein as the "Offering." Each Right represents the
right to purchase one Unit for $6.80 per share, upon the terms and conditions
and subject to adjustment in certain circumstances (the "Subscription Price"),
all as set forth in this Agreement;
WHEREAS, the Company desires to retain the Subscription Agent to act on behalf
of the Company, and the Subscription Agent is willing so to act, in connection
with the issuance, exchange and replacement of the certificates evidencing the
Rights to be issued under this Agreement (the "Rights Certificates") and the
exercise of the Rights; and
WHEREAS, the Company desires to enter into this Agreement to set forth the
terms and conditions of the Rights and the rights of the holders thereof and to
set forth the respective rights and obligations of the Company and the
Subscription Agent.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
SECTION 1. APPOINTMENT OF SUBSCRIPTION AGENT. The Company appoints the
Subscription Agent to act as agent for the Company in accordance with the
instructions in this Agreement, and the Subscription Agent accepts such
appointment.
SECTION 2. DATE, DENOMINATION AND EXECUTION OF RIGHTS CERTIFICATES. The Rights
Certificates (and the Subscription Form to be printed on the reverse thereof)
shall be in registered form only and shall be substantially of the tenor and
purport recited in Exhibit A hereto, and may have such letters, numbers or other
marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law, or with any rule or regulation
made pursuant thereto, or with any rule or regulation of any stock exchange on
which the Common Stock or Warrants may be listed, or to conform to usage. Each
Rights Certificate shall entitle the registered holder thereof, subject to the
provisions of this Agreement and of the Rights Certificate, to purchase, on or
before the close of business on , 1996 (the "Expiration Date"),
one fully paid and non-assessable share of Common Stock for each Right evidenced
by such Rights Certificate, at a price per
<PAGE>
share described in Section 6 hereof (the "Subscription Price"). At any time on
or before expiration of the Expiration Date, the previously established
Expiration Date may be extended but not beyond , 1996, without
limitation and as many times as the Company shall determine in its sole and
absolute discretion. In the event the Expiration Date is extended, the Company
shall promptly provide written notice to the holders of the Rights of the
extended Expiration Date. Each Rights Certificate issued as a part of the Rights
Offering shall be dated the date of the Final Prospectus which forms a part of
the Registration Statement on Form SB-2 pursuant to which the Units are
registered under the Securities Act of 1933, as amended; each other Rights
Certificate shall be dated the date on which the Subscription Agent receives
valid issuance instructions from the Company or, if such instructions specify
another date, such other date.
For purposes of this Agreement, the term "close of business" on any given date
shall mean 5:00 p.m., Central Standard time, on such date; provided, however,
that if such date is not a business day, it shall mean 5:00 p.m., Central
Standard time, on the next succeeding business day. For purposes of this
Agreement, the term "business day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in New York City, New York, are
authorized or obligated by law to be closed.
Each Rights Certificate shall be executed on behalf of the Company by its
Chairman of the Board, its Chief Executive Officer, its President or a Vice
President, either manually or by facsimile signature printed thereon, and shall
be attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. Each Rights Certificate shall be manually
countersigned by the Subscription Agent and shall not be valid for any purpose
unless so countersigned. In case any officer of the Company who shall have
signed any Rights Certificate shall cease to be such officer of the Company
before countersignature by the Subscription Agent and issue and delivery thereof
by the Company, such Rights Certificate, nevertheless, may be countersigned by
the Subscription Agent, issued and delivered with the same force and effect as
though the person who signed such Rights Certificate had not ceased to be such
officer of the Company.
SECTION 3. SUBSEQUENT ISSUE OF RIGHTS CERTIFICATES. Subsequent to their
original issuance, no Rights Certificates shall be reissued except (i) Rights
Certificates issued upon transfer thereof in accordance with Section 4 hereof,
(ii) Rights Certificates issued upon any combination, split-up, or exchange of
Rights Certificates pursuant to Section 4 hereof, (iii) Rights Certificates
issued in replacement of mutilated, destroyed, lost or stolen Rights
Certificates pursuant to Section 5 hereof, (iv) Rights Certificates issued upon
the partial exercise of Rights Certificates pursuant to Section 7 hereof, and
(v) Rights Certificates issued pursuant to Section 22 hereof to reflect any
adjustment or change in the Subscription Price or the number or kind of shares
purchasable thereunder. The Subscription Agent is hereby irrevocably authorized
to countersign and deliver, in accordance with the provisions of Sections 4, 5,
7 and 22, the new Rights Certificates required for purposes thereof, and the
Company, whenever required by the Subscription Agent, will supply the
Subscription Agent with Rights Certificates duly executed on behalf of the
Company for such purposes.
SECTION 4. TRANSFERS AND EXCHANGES OF RIGHTS CERTIFICATES. The Subscription
Agent shall keep or cause to be kept books for registration of ownership and
transfer of the Rights Certificates issued in accordance with this Agreement.
Such registers shall show the names and addresses of the respective holders of
the Rights Certificates and the number of Rights evidenced by each such Rights
Certificate. Any Rights Certificate or Certificates shall be non-transferrable,
except by death or other operation of law.
The Subscription Agent shall, from time to time, register the transfer of any
outstanding Rights upon the books to be maintained by the Subscription Agent for
that purpose, upon surrender of the Rights Certificate evidencing such Rights,
with the Form of Assignment duly filled in and executed and accompanied by
evidence of the transfer by operation of law (i.e., court order, etc.), to the
Subscription Agent at its stock transfer office in Glendale, California, at any
time on or before the Expiration Date, and upon payment to the Subscription
Agent for the account of the Company of an amount equal to any applicable
transfer tax. Payment of the amount of such tax may be made
2
<PAGE>
in cash, or by certified or official bank check, payable in lawful money of the
United States of America to the order of the Company.
Upon receipt of a Rights Certificate, with the Form of Assignment duly filled
in and executed, accompanied by payment of an amount equal to any applicable
transfer tax, the Subscription Agent shall promptly cancel the surrendered
Rights Certificate and countersign and deliver to the transferee a new Rights
Certificate for the number of full Rights transferred to such transferee;
provided, however, that in case the registered holder of any Rights Certificate
- -----------------
shall be required by operation of law to transfer fewer than all of the Rights
evidenced by such Rights Certificate, the Subscription Agent in addition shall
promptly countersign and deliver to such registered holder a new Rights
Certificate or Certificates for the number of full Rights not so transferred.
Any Rights Certificate or Certificates may be exchanged at the option
of the holder thereof for another Rights Certificate or Certificates of
different denominations, of like tenor and representing in the aggregate the
same number of Rights, upon surrender of such Rights Certificate or
Certificates, with the Form of Assignment duly filled in and executed, to the
Subscription Agent, at any time or from time to time after the close of business
on the date hereof and prior to the close of business on the Expiration Date.
The Subscription Agent shall promptly cancel the surrendered Rights Certificate
and deliver the new Rights Certificate pursuant to the provisions of this
Section.
SECTION 5. MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. Upon
receipt by the Company and the Subscription Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of any Rights
Certificate, and in the case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to them of all
reasonable expenses incidental thereto, and in the case of mutilation, upon
surrender and cancellation of the Rights Certificate, the Subscription Agent
shall countersign and deliver a new Rights Certificate of like tenor for the
same number of Rights.
SECTION 6. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE. The number
and kind of securities or other property purchasable upon exercise of a Right
shall be subject to adjustment from time to time upon the occurrence, after the
date hereof, of the following events:
6.1 In case the Company shall (i) pay a dividend in, or make a distribution
of, shares of Common Stock or of capital stock convertible into Common Stock on
its outstanding Common Stock ("Stock Dividend"), (ii) subdivide its outstanding
shares of Common Stock into a greater number of such shares ("Forward Split") or
(iii) combine its outstanding shares of Common Stock into a smaller number of
such shares ("Reverse Split"), the total number of shares of Common Stock and
the number of shares of capital stock convertible into Common Stock purchasable
upon the exercise of each Right outstanding immediately prior thereto shall be
adjusted so that the holder of any Rights Certificate thereafter surrendered for
exercise shall be entitled to receive at the same aggregate Subscription Price
the number of shares of Common Stock and the number of shares of capital stock
convertible into Common Stock which such holder would have owned or have been
entitled to receive immediately following the happening of any of the events
described above had such Right been exercised in full immediately prior to the
happening of such event. Any adjustment made pursuant to this Subsection shall,
in the case of a Stock Dividend, become effective as of the record date therefor
and, in the case of a Forward Split or Reverse Split, be made as of the
effective date thereof. If, as a result of an adjustment made pursuant to this
Subsection, the holder of any Right thereafter surrendered for exercise shall
become-entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive and shall be evidenced by a Board resolution filed with the
Subscription Agent) shall determine the allocation of the adjusted Subscription
Price between or among shares of such classes of capital stock.
6.2 In the event of any adjustment of the total number of shares of Common
Stock purchasable upon the exercise of Rights pursuant to Subsection 6.1, the
Subscription Price of each such Right shall remain unchanged, but the number of
shares of capital stock obtainable on exercise of each such Right shall be
adjusted as provided in Subsection 6.1.
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6.3 In the event of a capital reorganization or a reclassification of the
Common Stock (except as provided in Subsection 6.1 or Subsection 6.5), any
holder of Rights, upon exercise thereof, shall be entitled to receive, in lieu
of the Common Stock to which he would have become entitled upon exercise
immediately prior to such reorganization or reclassification, the shares (of any
class or classes) or other securities or property of the Company (or cash) that
he would have been entitled to receive at the same aggregate Subscription Price
upon such reorganization or reclassification if the Rights held had been
exercised immediately prior thereto; and in any such case, appropriate provision
(as determined by the Board of Directors of the Company, whose determination
shall be conclusive and shall be evidenced by a Board resolution filed with the
Subscription Agent) shall be made for the application of this Section 6 with
respect to the rights and interests thereafter of the holders of Rights
(including, but not limited to, the allocation of the Subscription Price between
or among shares of classes of capital stock), to the end that this Section 6
(including the adjustments of the number of shares of Common Stock or other
securities purchasable) shall thereafter be reflected, as nearly as reasonably
practicable, in all subsequent exercises of the Rights for any shares or
securities or other property (or cash) thereafter deliverable upon the exercise
of the Rights.
6.4 Whenever the number of Units or other securities purchasable upon
exercise of a Right is adjusted as provided in this Section 6, the Company will
promptly file with the Subscription Agent a certificate signed by the Chairman
of the Board, Chief Executive Officer or the President, or a Vice President of
the Company and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary of the Company setting forth (i) the number and kind of
shares purchasable, as so adjusted, (ii) stating that such adjustments in the
number or kind of shares or other securities conform to the requirements of this
Section 6, and (iii) setting forth a brief statement of the facts accounting for
such adjustments. Such certificates shall be conclusive evidence of the
correctness of such adjustments. Promptly after receipt of such certificate,
the Company, or the Subscription Agent at the Company's request, will deliver,
by first-class, postage prepaid mail, a brief summary thereof (to be supplied by
the Company) to the registered holders of the outstanding Rights Certificates;
provided, however, that failure to file or to give any notice required under
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this Subsection, or any defect therein, shall not affect the legality or
validity of any such adjustments under this Section 6; and provided further,
----------------
that, where appropriate, such notice may be given in advance and included as
part of the notice required to be given pursuant to Section 12 hereof.
6.5 In case of any consolidation of the Company with, or merger of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the corporation formed by such consolidation or
merger or the corporation which shall have acquired such assets, as the case may
be, shall execute and deliver to the Subscription Agent a supplemental rights
agreement providing that the holder of each Right then outstanding shall have
the right thereafter (until the expiration of such Right) to receive, upon
exercise of such Right, solely the kind and amount of shares of stock and other
securities and property (or cash) receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock of the
Company for which such Right might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental rights agreement
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Section 6. The above provision
of this Subsection 6.5 shall similarly apply to successive consolidations,
mergers, sales or transfers.
The Subscription Agent shall not be under any responsibility to determine the
correctness of any provision contained in any such supplemental rights agreement
relating to either the kind or amount of shares of stock or securities or
property (or cash) purchasable by holders of Rights Certificates upon the
exercise of their Rights after any such consolidation, merger, sale or transfer
or of any adjustment to be made with respect thereto, and (subject to the
provisions of Section 20 hereof) may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants with respect
thereto.
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6.6 Irrespective of any adjustments in the number or kind of shares
issuable upon exercise of Rights, Rights Certificates theretofore or thereafter
issued may continue to express the same price and number and kind of shares as
are stated in the similar Rights Certificates initially issuable pursuant to
this Right Agreement.
6.7 The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company or the Executive Committee of
said Board to make any computation required under this Section, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Section 6.
6.8 For the purpose of this Section, the term "Common Stock" shall
mean (i) the class of stock designated as Common Stock in the Certificate of
Incorporation of the Company, as amended, at the date of this Agreement, or (ii)
any other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from no par
value to par value, or from par value to no par value. In the event that at any
time as a result of an adjustment made pursuant to this Section 6, the holder of
any Right thereafter surrendered for exercise shall become entitled to receive
any shares of capital stock of the Company other than shares of Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in this Section, and all other provisions of this Agreement,
with respect to the Common Stock, shall apply on like terms to any such other
shares.
6.9 The Subscription Price may be reduced by the Company at any time,
temporarily or during the remaining period of exercise of the Rights as
determined in the discretion of the Company, with respect to the Units or any
other securities purchasable upon exercise of the Rights. In the event the
Subscription Price is reduced in accordance with this Section 6.9, the Company
shall promptly provide written notice to the holders of the Rights of the
reduced Subscription Price, the period that the Rights will be exercisable at
the reduced Subscription Price, and the securities purchasable at the reduced
Subscription Price.
SECTION 7. EXERCISE OF RIGHTS. The registered holder of any Rights Certificate
may exercise the Rights evidenced thereby, in whole at any time or in part from
time to time at or prior to the close of business, on the Expiration Date,
subject to the provisions of Section 9, at which time the Rights Certificates
shall be and become wholly void and of no value. Rights may be exercised by
their holders or redeemed by the Company as follows:
7.1 Exercise of Rights shall be accomplished upon surrender of the
Rights Certificate evidencing such Rights, with the Subscription Form on the
reverse side thereof duly filled in and executed, to the Subscription Agent at
its stock transfer office in Glendale, California, together with payment to the
Company of the Subscription Price (as of the date of such surrender) of the
Rights then being exercised and an amount equal to any applicable transfer tax
and, if requested by the Company, any other taxes or governmental charges which
the Company may be required by law to collect in respect of such exercise.
Payment of the Subscription Price and other amounts may be made in cash, or by
certified or official bank check, payable in lawful money of the United States
of America to the order of the Company. No adjustment shall be made for any
cash dividends, whether paid or declared, on any securities issuable upon
exercise of a Right.
7.2 Upon receipt of a Rights Certificate, with the Subscription Form
duly filled in and executed, accompanied by payment of the Subscription Price of
the Rights being exercised (and of an amount equal to any applicable taxes or
government charges as aforesaid), the Subscription Agent shall promptly request
from the Transfer Agent with respect to the securities to be issued and deliver
to or upon the order of the registered holder of such Rights Certificate, in
such name or names as such registered holder may designate, a certificate or
certificates for the number of full shares of the securities to be purchased,
together with cash made available by the Company pursuant to Section 8 hereof in
respect of any fraction of a share of such securities otherwise issuable upon
such exercise. If the Right is then exercisable to purchase property other than
securities, the Subscription Agent shall take appropriate steps to cause such
property to be delivered to or upon the order of the registered holder of such
Rights Certificate. In addition, if
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it is required by law, the Subscription Agent will deliver to each rights holder
a prospectus which complies with the provisions of Section 9 of the Securities
Act of 1933, as amended, and the Company agrees to supply the Subscription Agent
with sufficient number of prospectuses for that purpose.
7.3 In case the registered holder of any Rights Certificate shall
exercise fewer than all of the Rights evidenced by such Rights Certificate, the
Subscription Agent shall promptly countersign and deliver to the registered
holder of such Rights Certificate, or to his duly authorized assigns, a new
Rights Certificate or Certificates evidencing the number of Rights that were not
so exercised.
7.4 Each person in whose name any certificate for securities is issued
upon the exercise of Rights shall for all purposes be deemed to have become the
holder of record of the securities represented thereby as of, and such
certificate shall be dated, the date upon which the Rights Certificate was duly
surrendered in proper form and payment of the Subscription Price (and of any
applicable taxes or other governmental charges) was made; provided, however,
-----------------
that if the date of such surrender and payment is a date on which the stock
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares as of, and the certificate for such
shares shall be dated, the next succeeding business day on which the stock
transfer books of the Company are open (whether before, on or after the
Expiration Date), and the Subscription Agent shall be under no duty to deliver
the certificate for such shares until such date. The Company covenants and
agrees that it shall not cause its stock transfer books to be closed for a
period of more than 20 consecutive business days except upon consolidation,
merger, sale of all or substantially all of its assets, dissolution or
liquidation or as otherwise provided by law.
SECTION 8. FRACTIONAL INTERESTS. The Company shall not be required to issue
any Rights Certificate evidencing a fraction of a Right or to issue fractions of
shares of securities on the exercise of the Rights. If any fraction of a Right
would, except for the provisions of this Section, be issuable, the fractional
Right shall be deemed canceled and shall not be exercisable.
SECTION 9. RESERVATION OF SECURITIES AND PROPERTY; REGISTRATION OF SECURITIES.
The Company covenants that it will at all times, solely for the purpose of
issuance and delivery upon exercise of the Rights, reserve and keep available,
free from preemptive and other rights, out of its authorized and unissued shares
of Common Stock, Warrants, such number of shares of Common Stock as shall then
be issuable and all other securities and property as shall then be deliverable
upon the exercise of all outstanding Rights and the Warrants comprising in part
the Units. The Company covenants that all securities which shall be so issuable
shall, upon such issue, be duly authorized, validly issued, fully paid and non-
assessable.
The Company covenants that if any securities, required to be reserved for the
purpose of issue upon exercise of the Rights hereunder, require registration
with or approval of any governmental authority under any federal or state law
before such securities may be issued upon exercise of Rights, the Company will
in good faith and as expeditiously as possible endeavor to cause such securities
to be duly registered, or approved, as the case may be, and, to the extent
practicable, take all such action in anticipation of and prior to the exercise
of the Rights, including, without limitation, filing a Registration Statement on
the appropriate form and all post-effective amendments to such Registration
Statement necessary to permit a public offering of the securities underlying the
Rights at any and all times during the term of the Rights; provided, however,
-----------------
that in no event shall such securities be issued, and the Company is authorized
to refuse to honor the exercise of any Right, if such exercise would result in
the opinion of the Company's Board of Directors, upon advice of counsel, in the
violation of any law; and provided further that, in the case of a Right
----------------
exercisable solely for securities listed on a securities exchange or for which
there are at least two independent market makers, in lieu of obtaining such
registration or approval, the Company may elect to redeem Rights submitted to
the Subscription Agent for exercise for a price equal to the difference between
the aggregate low asked price, or closing price, as the case may be, of the
securities for which such Right is exercisable on the date of such submission
and the Subscription Price of such Rights.
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SECTION 10. REDUCTION OF CONVERSION PRICE BELOW PAR VALUE. Before taking any
action that would cause an adjustment pursuant to Section 6 hereof reducing the
portion of the Subscription Price required to purchase one share of capital
stock below the then par value (if any) of a share of such capital stock, the
Company will use its best efforts to take any corporate action which, in the
opinion of its counsel, may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such capital stock.
SECTION 11. PAYMENT OF TAXES. The Company covenants and agrees that it will
pay when due and payable any and all federal and state documentary stamp and
other original issue taxes which may be payable in respect of the original
issuance of the Rights Certificates, or Units (or any shares of Common Stock,
Warrants or other securities) upon the exercise of Rights. The Company shall
not, however, be required (i) to pay any tax which may be payable in respect of
any transfer involved in the transfer and delivery of Rights Certificates or the
issuance or delivery of certificates for Common Stock, Warrants, or other
securities in a name other than that of the registered holder of the Rights
Certificate surrendered for purchase or (ii) to issue or deliver any certificate
for shares of Common Stock or other securities upon the exercise of any Rights
Certificate until any such tax shall have been paid, all such tax being payable
by the holder of such Rights Certificate at the time of surrender.
SECTION 12. NOTICE OF CERTAIN CORPORATE ACTION. In case the Company after the
date hereof shall propose other than in connection with the Offering (i) to
offer to the holders of Common Stock rights to subscribe to or purchase any
additional shares of any class of its capital stock, any evidences of its
indebtedness or assets, or any other rights or options or (ii) to effect any
reclassification of Common Stock (other than a reclassification involving merely
the subdivision or combination of outstanding shares of Common Stock) or any
capital reorganization, or any consolidation or merger to which the Company is a
party and for which approval of any shareholders of the Company is required, or
any sale, transfer or other disposition of its property and assets substantially
as an entirety, or the liquidation, voluntary or involuntary dissolution or
winding-up of the Company, then, in each such case, the Company shall file with
the Subscription Agent and the Company (or the Subscription Agent on its behalf)
shall mail (by first-class, postage prepaid mail) to all registered holders of
the Rights Certificates notice of such proposed action, which notice shall
specify the date on which the books of the Company shall close or a record be
taken for such offer of rights or options, or the date on which such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution or winding-up
shall take place or commence, as the case may be, and which shall also specify
any record date for determination of holders of Common Stock entitled to vote
thereon or participate therein and shall set forth such facts with respect
thereto as shall be reasonably necessary to indicate any adjustments in the
number or kind of shares or other securities purchasable upon exercise of Rights
which will be required as a result of such action. Such notice shall be filed
and mailed in the case of any action covered by clause (i) above, at least 10
days prior to the record date for determining holders of the Common Stock for
purposes of such action or, if a record is not to be taken, the date as of which
the holders of shares of Common Stock of record are to be entitled to such
offering; and, in the case of any action covered by clause (ii) above, at least
20 days prior to the earlier of the date on which such reclassification,
reorganization, consolidation, merger, sale, transfer, other disposition,
liquidation, voluntary or involuntary dissolution or winding-up is expected to
become effective and the date on which it is expected that holders of shares of
Common Stock of record on such date shall be entitled to exchange their shares
for securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, sale, transfer, other disposition,
liquidation, voluntary or involuntary dissolution or winding-up.
Failure to give any such notice or any defect therein shall not affect
the legality or validity of any transaction listed in this Section 12.
SECTION 13. DISPOSITION OF PROCEEDS ON EXERCISE OF RIGHTS CERTIFICATES, ETC.
Upon the exercise, or conversion of any Right, the Subscription Agent shall
promptly deposit the payment into an escrow account established by mutual
agreement of the Company and the Subscription Agent at a federally insured
commercial bank. All funds deposited in the escrow account will be disbursed on
a weekly basis to the Company once they have been determined by the Subscription
Agent to be collected funds. Once the funds are determined to be collected, the
Subscription Agent shall cause the share certificate(s) representing the
exercised Rights to be issued.
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The Subscription Agent shall keep copies of this Agreement available
for inspection by holders of Rights during normal business hours at its stock
transfer office. Copies of this Agreement may be obtained upon written request
addressed to the Subscription Agent at its stock transfer office in Glendale,
California.
SECTION 14. RIGHTS CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No holder, as
such, of any Rights Certificate shall be entitled to vote, receive dividends or
be deemed the holder of Common Stock or any other securities of the Company
which may at any time be issuable on the exercise of the Rights represented
thereby for any purpose whatever, nor shall anything contained herein or in any
Rights Certificate be construed to confer upon the holder of any Rights
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice of
meetings or other actions affecting shareholders (except as provided in Section
12 hereof), or to receive dividend or subscription rights, or otherwise, until
such Rights Certificate shall have been exercised in accordance with the
provisions hereof and the receipt of the Subscription Price and any other
amounts payable upon such exercise by the Subscription Agent.
SECTION 15. RIGHT OF ACTION. All rights of action in respect to this Agreement
are vested in the respective registered holders of the Rights Certificates; and
any registered holder of any Rights Certificate, without the consent of the
Subscription Agent or of the holder of any Rights Certificate, may, on his own
behalf for his own benefit, enforce, and may institute and maintain any suit,
action or preceding against the Company suitable to enforce, or otherwise in
respect of, the holder's right to exercise the Rights evidenced by such Rights
Certificate, for the purchase of shares of the Common Stock and any other
securities and property of the Company in the manner provided in the Rights
Certificate and in this Agreement.
SECTION 16. AGREEMENT OF HOLDERS OF RIGHTS CERTIFICATES. Every holder of a
Rights Certificate, by accepting the same, consents and agrees with the Company,
the Subscription Agent and every other holder of a Rights Certificate that:
16.1 The Rights Certificates are transferable on the registry books of
the Subscription Agent only upon the terms and conditions set forth in this
Agreement; and
16.2 The Company and the Subscription Agent may deem and treat the
person in whose name the Rights Certificate is registered as the absolute owner
of the Right (notwithstanding any notation of ownership or other writing thereon
made by anyone other than the Company or the Subscription Agent) for all
purposes whatsoever, and neither the Company nor the Subscription Agent shall be
affected by any notice to the contrary.
SECTION 17. CANCELLATION OF RIGHTS CERTIFICATES. In the event that the Company
shall purchase or otherwise acquire any Rights Certificate or Certificates after
the issuance thereof, such Rights Certificate or Certificates shall thereupon be
delivered to the Subscription Agent and be canceled by it and retired. The
Subscription Agent shall also cancel any Rights Certificate delivered to it for
exercise, in whole or in part, or delivered to it for transfer, split-up,
combination or exchange. Rights Certificates so canceled shall be delivered by
the Subscription Agent to the Company from time to time, or disposed of in
accordance with the instructions of the Company.
SECTION 18. CONCERNING THE SUBSCRIPTION AGENT. The Company agrees to pay to
the Subscription Agent from time to time, on demand of the Subscription Agent,
reasonable compensation for all services rendered by it hereunder and also its
reasonable expenses and other reasonable disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Subscription
Agent for, and to hold it harmless against, any loss, liability or expense,
incurred without negligence, bad faith or willful misconduct on the part of the
Subscription Agent, arising out of or in connection with the acceptance and
administration of this Agreement.
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SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF SUBSCRIPTION AGENT.
Any corporation into which the Subscription Agent may be merged or with which it
may be consolidated, or any corporation resulting from any merger or
consolidation to which the Subscription Agent shall be a party, or any
corporation succeeding the corporate trust business of the Subscription Agent,
shall be the successor to the Subscription Agent hereunder without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, provided that such corporation would be eligible for appointment as a
successor Subscription Agent under the provisions of Section 21 hereof. In case
at the time such successor to the Subscription Agent shall succeed to the agency
created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor to the Subscription Agent
may adopt the countersignature of the original Subscription Agent and deliver
such Rights Certificates so countersigned; and in case at that time any of the
Rights Certificates shall not have been countersigned, any successor to the
Subscription Agent may countersign such Rights Certificates either in the name
of the predecessor Subscription Agent or in the name of the successor
Subscription Agent; and in all such cases such Rights Certificates shall have
the full force provided in the Rights Certificates and in this Agreement.
In case at any time the name of the Subscription Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Subscription Agent may adopt the countersignature under
its prior name and deliver Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates shall not have been countersigned, the
Subscription Agent may countersign such Rights Certificates either in its prior
name or in its changed name; and in such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
SECTION 20. DUTIES OF SUBSCRIPTION AGENT. The Subscription Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions, by all of which the Company and the holders of Rights
Certificates, by their acceptance thereof, shall be bound:
20.1 The Subscription Agent may consult with counsel satisfactory to
it (who may be counsel for the Company), and the opinion of such counsel shall
be full and complete authorization and protection to the Subscription Agent as
to any action taken, suffered or omitted by it in good faith and in accordance
with such opinion; provided, however that the Subscription Agent shall have
-----------------
exercised reasonable care in the selection of such counsel.
20.2 Whenever in the performance of its duties under this Agreement,
the Subscription Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, Chief
Executive Officer or the President or a Vice President or the Secretary of the
Company and delivered to the Subscription Agent; and such certificate shall be
full authorization to the Subscription Agent for any action taken or suffered in
good faith by it under the provisions of this Agreement in reliance upon such
certificate.
20.3 The Subscription Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
20.4 The Subscription Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates (except its countersignature on the Rights Certificates and
such statements or recitals as describe the Subscription Agent or action taken
or to be taken by it) or be required to verify the same, but all such statements
and recitals are and shall be deemed to have been made by the Company only.
20.5 The Subscription Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Subscription Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights
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Certificate; nor shall it be responsible for any change in the number of shares
of Common Stock required under the provisions of Section 6 or responsible for
the manner, method or amount of any such change or the ascertaining of the
existence of facts that would require any such adjustment or change; nor shall
it by any act hereunder be deemed to make any representation or warranty as to
the authorization or reservation of any shares of Common Stock to be issued
pursuant to this Agreement or any Rights Certificate or as to whether any shares
of Common Stock will, when issued, be validly issued, fully paid and
nonassessable.
20.6 The Subscription Agent shall be under no obligation to institute
any action, suit or legal proceeding or take any other action likely to involve
expense unless the Company or one or more registered holders of Rights shall
furnish the Subscription Agent with reasonable security and indemnity, as
determined in the sole discretion of the Subscription Agent, for any costs and
expenses which may be incurred. All rights of action under this Agreement or
under any of the Rights may be enforced by the Subscription Agent without the
possession of any of the Rights or the production thereof at any trial or other
proceeding relative thereto, and any such action, suit or proceeding instituted
by the Subscription Agent shall be brought in its name as Subscription Agent,
and any recovery of judgment shall be for the ratable benefit of the registered
holders of the Rights, as their respective rights or interests may appear.
20.7 The Subscription Agent and any shareholder, director, officer or
employee of the Subscription Agent may buy, sell or deal in any of the
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to or
otherwise act as fully and freely as though it were not Subscription Agent under
this Agreement. Nothing herein shall preclude the Subscription Agent from
acting in any other capacity for the Company or for any other legal entity.
20.8 The Subscription Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, Chief Executive Officer or President or a Vice
President or the Secretary of the Company, and to apply to such officers for
advice or instructions in connection with the Subscription Agent's duties, and
it shall not be liable for any action taken or suffered or omitted by it in good
faith in accordance with instructions of any such officer.
20.9 The Subscription Agent will not be responsible for any failure of
the Company to comply with any of the covenants contained in this Agreement or
in the Rights Certificates to be complied with by the Company.
20.10 The Subscription Agent will not incur any liability or responsibility to
the Company or to any holder of any Rights Certificate for any action taken, or
any failure to take action, in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument reasonably
believed by the Subscription Agent to be genuine and to have been signed, sent
or presented by the proper party or parties.
20.11 The Subscription Agent will act hereunder solely as agent of the
Company in a ministerial capacity, and its duties will be determined solely by
the provisions hereof. The Subscription Agent will not be liable for anything
which it may do or refrain from doing in connection with this Agreement except
for its own negligence, bad faith or willful conduct.
SECTION 21. CHANGE OF SUBSCRIPTION AGENT. The Subscription Agent may resign
and be discharged from its duties under this Agreement upon 30 days' prior
notice in writing mailed, by registered or certified mail, to the Company. The
Company may remove the Subscription Agent or any successor Subscription Agent
upon 30 days' prior notice in writing, mailed to the Subscription Agent or
successor Subscription Agent, as the case may be, by registered or certified
mail. If the Subscription Agent shall resign or be removed or shall otherwise
become incapable of acting, the Company shall appoint a successor to the
Subscription Agent and shall, within 15 days following such appointment, give
notice thereof in writing to each registered holder of the Rights Certificates.
If the Company shall fail to make such appointment within a period of 15 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Subscription
Agent, then the Company agrees to perform the duties of the Subscription Agent
hereunder until a successor Subscription
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Agent is appointed. After appointment the successor Subscription Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Subscription Agent without further act or deed; but the
former Subscription Agent shall deliver and transfer to the successor
Subscription Agent any property at the time held by it pursuant to this
Agreement, and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose. Failure to give any notice provided for in this
Section, however, or any defect therein shall not affect the legality or
validity of the resignation or removal of the Subscription Agent or the
appointment of the successor Subscription Agent, as the case may be.
SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the
provisions of this Agreement or the Rights Certificates to the contrary, the
Company may, at its option, issue new Rights Certificates in such form as may be
approved by its Board of Directors to reflect any adjustment or change in the
number or kind of shares purchasable under the several Rights Certificates made
in accordance with the provisions of this Agreement.
SECTION 23. NOTICES. Notice or demand pursuant to this Agreement to be given
or made on the Company by the Subscription Agent or by the registered holder of
any Rights Certificate shall be sufficiently given or made if sent by first
class or registered mail, postage prepaid, addressed (until another address is
filed in writing by the Company with the Subscription Agent) as follows:
Advantage Marketing Systems, Inc.
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112-7293
Attention: President
Subject to the provisions of Section 21, any notice pursuant to this Agreement
to be given or made by the Company or by the holder of any Rights Certificate to
or on the Subscription Agent shall be sufficiently given or made if sent by
first class or registered mail, postage prepaid, addressed (until another
address is filed in writing by the Subscription Agent with the Company) as
follows:
U.S. Stock Transfer Corp.
1745 Gardena Avenue, Suite 200
Glendale, California 91204-2291
Attention: Stock Transfer Department
Any notice or demand authorized to be given or made to the registered holder of
any Rights Certificate under this Agreement shall be sufficiently given or made
if sent by first class or registered mail, postage prepaid, to the last address
of such holder as it shall appear on the registers maintained by the
Subscription Agent.
SECTION 24. MODIFICATION OF AGREEMENT. The Subscription Agent may, without
the consent or concurrence of the holders of the Rights Certificates, by
supplemental agreement or otherwise, concur with the Company in making any
changes or corrections in this Agreement that the Subscription Agent shall have
been advised by counsel (who may be counsel for the Company) are necessary or
desirable to cure any ambiguity or to correct any defective or inconsistent
provision or clerical omission or mistake or manifest error herein contained, or
to make any other provisions in regard to matters or questions arising hereunder
and which shall not be inconsistent with the provisions of the Rights
Certificates and which shall not adversely affect the interests of the holders
of Rights Certificates. As of the date hereof, this Agreement contains the
entire and only agreement, understanding, representation, condition, warranty or
covenant between the parties hereto with respect to the matters herein,
supersedes any and all other agreements between the parties hereto relating to
such matters, and may be modified or amended only by a written agreement signed
by both parties hereto pursuant to the authority granted by the first sentence
of this Section.
11
<PAGE>
SECTION 25. SUCCESSORS. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Subscription Agent shall bind and
inure to the benefit of their respective successors and assigns hereunder.
SECTION 26. GOVERNING LAW. This Agreement and each Rights Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Oklahoma and for all purposes shall be construed in accordance with the laws of
such state.
SECTION 27. TERMINATION. This Agreement shall terminate as of the close of
business on the Expiration Date, or such earlier date upon which all Rights
shall have been exercised or redeemed, except that the Subscription Agent shall
account to the Company pursuant to Section 4 as to all Rights outstanding and
all cash held by it as of the close of business on the Expiration Date.
SECTION 28. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement or in the
Rights Certificates shall be construed to give to any person or corporation
other than the Company, the Subscription Agent, and their respective successors
and assigns hereunder and the registered holders of the Rights Certificates any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Subscription Agent, their respective successors and assigns hereunder and the
registered holders of the Rights Certificates.
SECTION 29. DESCRIPTIVE HEADINGS. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
SECTION 30. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, all as of the day and year first above written.
ADVANTAGE MARKETING SYSTEMS, INC.
By:
--------------------------------------
Roger P. Baresel, President
U.S. STOCK TRANSFER CORP.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
12
<PAGE>
EXHIBIT 4.15
VOID (UNLESS EXTENDED) AFTER 5:00 P.M. CENTRAL STANDARD TIME
ON , 199
ADVANTAGE MARKETING SYSTEMS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF OKLAHOMA
NON-TRANSFERABLE STOCK RIGHTS
RIGHTS
----------------
| |
----------------
CUSIP
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
or registered assigns, is the registered holder of the number of non-
transferrable rights (the "Rights") set forth above. Each Right entitles the
holder thereof to purchase from Advantage Marketing Systems, Inc., a corporation
incorporated under the laws of the State of Oklahoma (the "Company"), subject to
the terms and conditions set forth hereinafter and in the Stock Rights Agreement
hereinafter referred to, one fully paid and non-assessable unit (comprised of
one share of Common Stock, $.0001 par value, of the Company (the "Common Stock")
and one 1996-A Warrant exercisable for the purchase of one share of Common
Stock) (the "Unit" or "Units") upon presentation and surrender of this Rights
Certificate with the instructions for the registration and delivery of the Units
filed in, at any time prior to 5:00 p.m. Central Standard time ("close of
business"), on , 199 , unless extended by the Company but not
beyond , 199 , at the stock transfer office in Glendale,
California, of U.S. Stock Transfer Corp., Subscription Agent of the Company
("Subscription Agent") or of its successor subscription agent or, if there be no
successor warrant agent, at the corporate offices of the Company, and upon
payment of $6.80 per Unit (the "Purchase Price") and any applicable taxes paid
either in cash, or by certified or official bank check, payable in lawful money
of the United States of America to the order of the Company. Each Right
entitles the holder initially to purchase one Unit at the Purchase Price. The
number and kind of securities or other property for which the Rights are
exercisable are subject to further adjustment in certain events, such as
mergers, splits, stock dividends, recapitalization and the like. All Rights not
theretofore exercised or redeemed will expire on , 199 , unless
extended.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Stock Rights Agreement, dated as of , 1996
(the "Rights Agreement"), between the Company and the Subscription Agent, to all
of which terms, provisions and conditions the registered holder of this Rights
Certificate consents by acceptance hereof. The Subscription Agreement is
incorporated herein by reference and made a part hereof, and reference is made
to the Subscription Agreement for a full description of the rights, limitations
of rights, obligations, duties and immunities of the Subscription Agent, the
Company and the holders of this Rights Certificates. Copies of the Stock Rights
Agreement are available for inspection at the stock transfer office of the
Subscription Agent or may be obtained upon written request addressed to the
Subscription Agent at its stock transfer office at 1745 Gardena Avenue, Suite
200, Glendale, California 91204-2991.
In certain cases, the sale of securities by the Company upon exercise
of the Rights would violate the securities laws of certain states thereof or
other jurisdictions. The Company has agreed to use its best efforts to take
such action under the laws of various states as may be required to cause the
sale of securities upon exercise to be lawful. However, the Company will not be
required to honor the exercise of the Rights if, in the opinion of the Board of
Directors, upon advice of counsel, the sale of securities upon such exercise
would be unlawful in certain cases.
<PAGE>
If the Rights evidenced by this Rights Certificate shall be exercised
in part, the holder hereof shall be entitled to receive upon surrender hereof
another Rights Certificate evidencing the number of Rights not so exercised.
No holder of this Rights Certificate, as such, shall be entitled to vote,
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatever, nor shall anything contained in the Stock
Rights Agreement or herein be construed to confer upon the holder of this Rights
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof or give or withhold consent to any corporate
action (whether upon any recapitalization, issuance of stock, reclassification
of stock, change of par value or change of stock to no par value, consolidation,
merger, conveyance or otherwise) or to receive notice of meetings or other
actions affecting shareholders (except as provided in the Stock Rights
Agreement) or to receive dividends or subscription rights or otherwise until the
Rights evidenced by this Rights Certificate shall have been exercised and the
Common Stock purchasable upon the exercise thereof shall have become deliverable
as provided in the Stock Rights Agreement.
If this Rights Certificate shall be surrendered for exercise within any period
during which the transfer books of the Company's Common stock or other class of
stock purchasable upon the exercise of the Rights evidenced by this Rights
Certificate are closed for any purpose, the Company shall not be required to
make delivery of certificates for shares of Common Stock and Warrants comprising
the Units purchasable upon such transfer until the date of the reopening of said
transfer books.
Every holder of this Rights Certificate by accepting the same consents and
agrees with the Company and the Subscription Agent that the Company and the
Subscription Agent may deem and treat the person in whose name this Subscription
Certificate is registered as the absolute owner hereof (notwithstanding any
notation of ownership or other writing thereon made by anyone other than the
Company or the Subscription Agent) for all purposes whatever, and neither the
Company nor the Subscription Agent shall be affected by any notice to the
contrary.
The Company shall not be required to issue or deliver any certificate for
shares of Common Stock, Warrants or other securities upon the exercise of Rights
evidenced by this Rights Certificate until any tax which may be payable in
respect thereof by the holder of this Rights Certificate pursuant to the
Subscription Agreement shall have been paid, such tax being payable by the
holder of this Rights Certificate at the time of surrender.
This Rights Certificate shall not be valid or obligatory for any purposes
until it shall have been countersigned by the Subscription Agent.
Dated: , 199
ADVANTAGE MARKETING SYSTEMS, INC.
/S/ John W. Hail
Chairman and Chief Executive Officer
/S/ Roger P. Baresel
Secretary
Countersigned:
U.S. STOCK TRANSFER CORP.
1745 Gardena Avenue, Suite 200
Glendale, California 91024-2991
By:
Warrant Agent Authorized Signature
2
<PAGE>
SUBSCRIPTION FORM
(TO BE EXECUTED BY THE RIGHTS HOLDER IF HE DESIRES TO EXERCISE THE
RIGHTS IN WHOLE OR IN PART)
To: ADVANTAGE MARKETING SYSTEMS, INC.
The undersigned (___________________________________________________________)
Please insert Social Security or other number of Subscriber
hereby irrevocably elects to exercise the right of purchase represented by the
within Non-Transferable Stock Rights Certificate for, and to purchase
thereunder, _______________ Units provided for therein and tenders payment
herewith to the order of ADVANTAGE MARKETING SYSTEMS, INC. in the amount of
$________________. The undersigned requests that certificates for the shares of
Common Stock and 1996-A Warrants comprising the Units be issued as follows:
Name: _______________________________________________________________________
Address: ____________________________________________________________________
Deliver to: _________________________________________________________________
Address: ____________________________________________________________________
and if said number of Units shall not be all the Units purchasable hereunder,
that a new Certificate for the balance remaining of Units purchasable under the
within Certificate be registered in the name of, and delivered to the
undersigned at the address stated below:
Address: ____________________________________________________________________
Dated: ____________________, 199__
Signature
_____________________________________
(Signature must conform in all respects
to the name of Rights Holder as
specified in the case of this
Certificate in every particular,
without alteration, enlargement or any
change whatever.)
3
<PAGE>
EXHIBIT 5.1
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
2800 OKLAHOMA TOWER 405.235.8318
210 PARK AVENUE TELECOPY 405.235.9605
OKLAHOMA CITY, OKLAHOMA 73102-5604
November 8, 1996
Board of Directors
Advantage Marketing Systems, Inc.
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112
Gentlemen:
Reference is made to the Registration Statement on Form SB-2 (the
"Registration Statement") filed by Advantage Marketing Systems, Inc. (the
"Company") with the United States Securities and Exchange Commission (the
"Commission") with respect to the proposed initial issuance by the Company of
(i) 1,050,470 units, each consisting of one share of common stock, $.0001 par
value (the "Common Stock"), and one 1996-A Warrant (the "Units"), pursuant to
exercise of certain outstanding Class A Common Stock Purchase Warrants and Class
B Common Stock Purchase Warrants (the "Public Warrants"), and (ii) 2,148,191
Units pursuant to exercise of certain rights (the "Rights") to be distributed to
the shareholders of the Company providing for the option to purchase the Units.
Based upon the Registration Statement (including the Prospectuses
contained therein and the exhibits thereto), certificate of the Secretary of
State of the State of Oklahoma, and the financial statements of the Company, we
are of the opinion that:
1. The Company is duly organized and existing under the laws of the State
of Oklahoma;
2. All of the issued and outstanding shares of the Common Stock of the
Company have been legally issued, are fully paid and are not liable to
further call or assessment;
3. In the event of exercise of the Public Warrants by the holders thereof
to purchase up to 1,050,470 Units comprised of 1,050,470 shares of
Common Stock and 1,050,470 1996-A Warrants from the Company in
accordance with the terms of the Public Warrants, (i) such number of
shares of Common Stock with respect to which such holders exercise the
Public Warrants, when issued to such holders against payment of the
exercise price of the Public Warrants and pursuant to the Registration
Statement as declared effective by the Commission on or prior to the
date of issuance, will be legally issued and fully paid, and will not be
liable to further call or assessment, and (ii) such number of 1996-A
Warrants with respect to which such holders exercise the Public
Warrants, when issued to such holders against payment of the exercise
price of the Public Warrants and pursuant to the Registration Statement
as declared effective by the Commission on or prior to the date of
issuance, will be legally issued and fully paid, and will not be liable
to further call or assessment;
<PAGE>
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
Advantage Marketing Systems, Inc.
November 8, 1996
Page 2
4. In the event of exercise of the Rights by the holders thereof to
purchase up to 2,148,191 Units comprised of 2,148,191 shares of Common
Stock and 2,148,191 1996-A Warrants from the Company in accordance with
the terms of the Rights, (i) such number of shares of Common Stock with
respect to which such holders exercise the Rights, when issued to such
holders against payment of the exercise price of the Rights and pursuant
to the Registration Statement as declared effective by the Commission on
or prior to the date of issuance, will be legally issued and fully paid,
and will not be liable to further call or assessment, and (ii) such
number of 1996-A Warrants with respect to which such holders' exercise
the Rights, when issued to such holders against payment of the exercise
price of the Rights and pursuant to the Registration Statement as
declared effective by the Commission on or prior to the date of
issuance, will be legally issued and fully paid, and will not be liable
to further call or assessment; and
In arriving at the foregoing opinion, we have relied, among other things, upon
the examination of the corporate records of the Company and certificates of
officers of the Company and of public officials. We hereby consent to the use of
this opinion in the Registration Statement and all amendments thereto, and to
the reference to our firm name under the caption "Legal Matters" of the
Prospectus which is included as a part of the Registration Statement and any
post-effective amendments thereto.
Very truly yours,
DUNN SWAN & CUNNINGHAM
A Professional Corporation
<PAGE>
EXHIBIT 5.2
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
2800 OKLAHOMA TOWER 405.235.8318
210 PARK AVENUE TELECOPY 405.235.9605
OKLAHOMA CITY, OKLAHOMA 73102-5604
November 8, 1996
Board of Directors
Advantage Marketing Systems, Inc.
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112-7293
Re: Warrant Redemption, Warrant Modification Offer and Exercise of Class A
Common Stock Purchase Warrants and Class B Common Stock Purchase
Warrants; Stock Rights Distribution and Exercise of Stock Rights
Gentlemen:
You have requested our opinion as to certain federal income tax consequences
of the following:
(i) the redemption (the "Warrant Redemption") by Advantage Marketing
Systems, Inc. (the "Company") of its issued and outstanding Class A Common
Stock Purchase Warrants and Class B Common Stock Purchase Warrants (the
"Public Warrants") and in connection with the Warrant Redemption the offer
by the Company (the "Warrant Modification Offer") to reduce the exercise
price of the Class B Common Stock Purchase Warrants and upon exercise of
the Public Warrants each holder thereof will become entitled to receive one
unit consisting of one share of Common Stock and one 1996-A Warrant (the
"Unit") (the "Warrant Modification Offer"); and
(ii) the distribution of non-transferrable rights (the "Rights") to the
holders of the Common Stock of the Company (the "Rights Distribution") and
upon exercise of the Rights each holder there will become entitled to
purchase one Unit (the "Rights Offering").
Reference is made to the Registration Statement on Form SB-2, and all
amendment thereto (the "Registration Statement") filed by Company with the
United States Securities and Exchange Commission (the "Commission") with respect
to the proposed offer for sale by the Company of (i) 1,050,470 Units in
connection with the Warrant Modification Offer and exercise of the Public
Warrants pursuant to the Warrant Modification Offer Prospectus contained in the
Registration Statement, and (ii) 2,148,191 Units pursuant to exercise of the
Rights in connection with the Rights Offering pursuant to the Rights Offering
Prospectus contained in the Registration Statement. Unless otherwise defined
herein, the definitions of terms used herein are the same as those defined in
the Warrant Modification Offer Prospectus and/or the Rights Offering Prospectus.
In connection with our consideration of the federal income tax consequences of
the Warrant Redemption and Warrant Modification Offer, and Rights Distribution
and Rights Offering, the opinions expressed herein are premised upon various
facts with respect to the Warrant Redemption and Warrant Modification Offer, and
Rights Distribution and Rights Offering and the Warrant Holders and Rights
Holders. In addition, the Company has made, on the date hereof, the following
representations and warranties to us with respect to certain factual matters, as
follows:
<PAGE>
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
Advantage Marketing Systems, Inc.
November 8, 1996
Page 2
1. That the Warrant Redemption and Warrant Modification Offer, and Rights
Distribution and Rights Offering will be made and conducted in accordance with
and as described in the Warrant Modification Offer Prospectus and Rights
Offering Prospectus;
2. That all Units will be offered for sale and sold in accordance
with and pursuant to delivery of the Warrant Modification Offer Prospectus
and/or the Rights Offering Prospectus, and all Public Warrants accepted for
exercise will be on or prior to the Redemption Date in accordance with the
Warrant Modification Offer Prospectus and all Rights accepted for exercise will
be on or prior to the Expiration Date in accordance with the Rights Offering;
3. That the Company will have duly performed, complied with and
satisfied in all material respects all covenants, agreements and conditions as
contemplated by the Warrant Modification Offer Prospectus and Rights Offering
Prospectus to be performed, complied with or satisfied by the Company at or
prior to the acceptance of the Public Warrants and/or Rights for exercise;
4. That each copy of the Certificate of Incorporation and the Bylaws
of the Company attached as and exhibit to the Registration Statement is a true,
correct and complete copy of the Certificate of Incorporation or Bylaws of the
Company as in effect on the date hereof and as will be in effect on the date of
acceptance of the exercise of the Public Warrants and the Rights;
5. That the Company has and will have all requisite power and
authority to consummate the Warrant Modification Offer as contemplated in the
Warrant Modification Offer Prospectus and the Rights Offering and as
contemplated in the Rights Offering Prospectus and all necessary corporate
proceedings of the Company have been taken to authorize the issuance and
delivery of the Units as contemplated in the Warrant Modification Offer
Prospectus and the Rights Offering Prospectus, and upon acceptance of the
exercise of the Public Warrants and Rights, such acceptances will be legal,
valid, and binding obligations of the Company enforceable as to the Company in
accordance with the terms and conditions of the Warrant Modification Offer and
the Rights Offering as set forth in the Warrant Modification Offer Prospectus
and Rights Offering Prospectus; and
6. That upon acceptance of the exercise of the Public Warrants and
Rights, there shall not have been the happening of any event which would cause
any statement of a material fact to be untrue in the Warrant Modification Offer
Prospectus and Rights Offering Prospectus or constitute an omission to state a
material fact therein or which would require to be stated in the Warrant
Modification Offer Prospectus and Rights Offering Prospectus or necessary to
make the statements therein not misleading in light of the circumstances under
which they were made.
We have reviewed and assisted in the preparation of the information in
the Warrant Modification Offer Prospectus and the Rights Offering Prospectus in
the sections entitled "Certain Federal Income Tax Consequences." To the extent
such information constitutes matters of law or legal conclusions, we are of the
opinion that it is correct in all material respects.
The discussion and the opinions set forth in the sections of the
Warrant Modification Offer Prospectus and the Rights Offering Prospectus
entitled "Certain Federal Income Tax Consequences" relate solely to the
<PAGE>
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
Advantage Marketing Systems, Inc.
November 8, 1996
Page 3
principal federal income tax consequences of Warrant Redemption and Warrant
Modification Offer, and the Rights Distribution and the Rights Offering with
respect to United States resident individuals and is based upon the existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
Treasury Regulations thereunder (including temporary and proposed regulations),
current official published Internal Revenue Service administrative
interpretations and existing court decisions on the date of the Warrant
Modification Offer Prospectus and Rights Offering Prospectus.
In preparation of our opinion, we have considered the standards of conduct
provided in Formal Opinion 346 (Revised) of the American Bar Association
Standing Committee on Ethics and Professional Responsibility issued January 29,
1982 and the guidelines provided in amendments to Circular 230, Rules for
Practice Before the Internal Revenue Service, 45 Fed. Reg. 58.594 (1980), Treas.
Reg. 10.33 ("Circular 230"). The standards and guidelines established by both
Formal Opinion 346 and Circular 230 apply only to opinions relating to an
investment deemed to be a "tax shelter," which is not applicable to our opinion.
Thus, in our opinion, the standards and guidelines of Formal Opinion 346 and
Circular 230 are not applicable to the opinions expressed herein and in the
Warrant Modification Offer Prospectus and the Rights Offer Prospectus with
respect to the federal income tax consequences of the Warrant Redemption and
Warrant Modification Offer, and the Rights Distribution and the Rights Offering.
However, we believe that an opinion has been provided on each "tax issue"
that, in our opinion, is "material" with respect to the Warrant Redemption and
Warrant Modification Offer, and the Rights Distribution and Rights Offering and
the federal income tax consequences of the Warrant Redemption and the Rights
Distribution and exercise of the Public Warrants and Rights. The discussion of a
tax issue in the Warrant Modification Offer Prospectus and the Rights Offer
Prospectus is not intended and should not be construed as an admission that such
item would be deemed "material" or a "material tax issue" for purposes of Formal
Opinion 346 or Circular 230.
Very truly yours,
DUNN SWAN & CUNNINGHAM
A Professional Corporation
<PAGE>
EXHIBIT 10.4
April 22, 1996
Mr. James G. Jervis
J&K Pharmaceutical Laboratories
Dear Jim:
The purpose of this letter is to set forth the terms of our agreement
regarding the manufacturing of certain products by J&K Pharmaceutical
Laboratories ("J&K") for Advantage Marketing Systems, Inc. ("AMS").
J&K has agreed to manufacture, in a full O.T.C. drug manufacturing
facility registered with the FDA, certain nutritional supplements for AMS
pursuant to our proprietary formulations. J&K has also agreed to work with us
to develop new and unique product formulations. All of our formulations,
including those developed with J&K's assistance, will remain our property and
J&K has agreed to maintain the confidentiality of AMS's product formulations.
J&K will maintain a forty-five day supply of those products which it
manufactures for AMS in its warehouse at all times from which AMS will be able
to request shipments from on a weekly basis. AMS will be invoiced on the date
of shipment and we have agreed to pay all invoices within thirty days of invoice
date.
J&K will maintain product liability insurance with an occurrence and
aggregate limit of at least $6.0 million from a Class A insurance company.
Advantage Marketing Systems, Inc., will be added to this policy as a named
insured.
J&K has agreed that it will not directly or indirectly (i) solicit,
canvass or otherwise contact or accept any business or transaction from any
independent distributor of AMS, (ii) solicit, canvass or otherwise contact or
accept any business or transaction from any former independent distributor of
AMS for a period of twelve months following such former independent
distributor's written termination as an independent distributor of AMS, or (iii)
take any action which shall cause the termination or curtailment of the business
relationship between AMS and any of its independent distributors, or (iv)
directly or indirectly, without the prior written consent of AMS, solicit,
entice, persuade or induce any individual or person who is an independent
distributor of AMS to terminate or refrain from continuing their independent
distributor relationship with AMS.
Mr. James G. Jervis April 22, 1996
J&K Pharmaceutical Laboratories Page 2
J&K has agreed to maintain strict confidentiality regarding our
relationship and not to disclose any information on this relationship without
our prior written approval.
If the foregoing accurately sets forth our agreement, please sign the
copy of this letter in the space provided and return it to me. We are looking
forward to a long and mutually rewarding association.
Sincerely,
/s/ Roger P. Baresel
ROGER P. BARESEL
President
RPB:bms
The above terms and conditions are agreed to and affirmed by me Clifford
S. Kerstetter, Jr. and J&K Pharmaceutical Laboratories.
/s/ James G. Jervis DATE: April 23, 1996
- ---------------------- --------------
Mr. James G. Jervis
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 33-80629 of Advantage Marketing Systems, Inc. on Form SB-2 of our reports on
the financial statements of Advantage Marketing Systems, Inc. and Miracle
Mountain International, Inc. dated March 29, 1996 (except as to Note 11, for
which the date is October 29, 1996), and June 21, 1996, respectively,
appearing in the Prospectuses, which are part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
November 8, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF COUNSEL
Dunn Swan & Cunningham, A Professional Corporation, hereby consents to the use
of its name under the headings "Certain Federal Income Tax Consequences" and
"Legal Matters" in the Prospectuses constituting part of this Amendment No. 2 to
Registration Statement.
DUNN SWAN & CUNNINGHAM
A Professional Corporation
Oklahoma City, Oklahoma
November 8, 1996
